cluster like nothing else. Build an office building and you have one
office building. Build a second, and you may have enough workers in one
place to support a restaurant for lunch. The restaurant makes the
neighborhood attractive for a third office building, which brings in
restaurant #2 and a day care center, and now the neighborhood is on a
roll. It is at critical mass. It is "clustered up."
Offices cluster so much that, when they can't go out, they go up. They
become skyscrapers. Nothing else does that quite as much. Not retail.
Not apartments. Certainly not industrials. Look at the landscape of
offices in Greater Boston: a big cluster at the Financial District and
smaller clusters in Cambridge and suburban parks within a short drive
of where the bosses from the tenant companies live. Between these
clusters are broad seas where the only office space is in small
buildings that serve a very local population: Milton, Millis,
Arlington, Melrose, or Jamaica Plain.
Vulnerability to Vacancy
Office clusters get "the flu" in the form of high vacancy. In 2000,
vacancy hit Greater Boston hard. It hit the clusters far harder than it
did the sea of small buildings housing the local lawyers and
professionals that, in good times and bad, chug along. In two years,
REIS reported, vacancy went from 4% to 20%, and until recently it has
stayed there. Rents fell just as fast, by 33%. REIS forecasts that
vacancy will not drop below 10% in Boston for another five years. In
spite of all that, office prices have held steady. The National Real Estate Index reports office prices declining only 4% in Greater Boston since the rent peak five years ago.
Under conditions like these, investment in offices would appear to be a
risky proposition. A half empty building is likely to be a half empty
building for some time. The critical factor that has worked to prop up
prices is investors' willingness to accept increasingly lower rates of
The Korpacz Real Estate Investor Survey reports
the low end of the capitalization rate range in the Boston market
declining from 8.0% to 6.5% in three years. Korpacz reports the results
of a survey of participants, only some of whom are buyers. The buyers,
by definition, are the respondents at the low end of the range: they
are the ones willing to accept the lowest rates of return and, so, are
able to beat the competition and make the deal. The real test for a
rate of return is an analysis through Argus for
a property where cash flows and an actual selling price are available.
Analysis with data of this kind indicates rates of return at or below
the low end of published surveys.
The strength of the Boston office market is investors' faith in the
ability of the region to produce innovations that will grow businesses
and require offices. Boston traditionally has done that. When
innovation falters, Boston falters. When innovation attracts capital,
Boston succeeds. Boston's office clusters are at the "down" end of a
cycle. But investors take the long look. REIS cites the recent
acquisition of the Bay Colony Corporate Center in Waltham at $275 per
square foot, a high price in relation to the center's "depressed"
rents. REIS says, "The property was acquired for its long-term
potential, given that the Boston office market is poised for a strong
recovery." Investors looking at Boston see long-term success.
Eric T. Reenstierna, MAI