Offices: 2001

We measure health in the real estate market by rent and price. By these measures, no sector of the Greater Boston market has regained more health since the crash of the early '90s than the office sector. Ten years ago, offices were sold at a fraction of their cost and their 1988 price peak. The Wang Towers, Lowell's signature complex, wasn't so much sold as given away. Today, by contrast, offices have far surpassed their 1988 peak. All that holds them back is the memory of their price pit of ten years ago.

Offices are not alone in their resurgence. Other sectors and niches within sectors have also performed well. For apartments, the market drop of ten years ago roughly halved the prices investors had paid in the late '80s for buildings from Allston/Brighton to the Route 495 suburbs. Since that decline, reportsMarket Sourceof the Appraisal Institute, from 1994 to mid-2000, Greater Boston apartment rents have increased by 110% and prices by 120%. In the luxury condominium market, a sub-sector, the Back Bay has seen top prices jump from $475 per foot in 1992 to more than $1,900 per foot today. The industrial sector saw its price peak in 1989 and its decline, similar in degree to that of apartments, in 1992. By 1999, industrials had still not returned to their 1989 peak. But industrials have benefited from demand in other sectors, which resulted in conversion of industrials to other uses like labs and offices. Conversion produced scarcity, and at some locations in the Mystic River Basin, where vacancy has approached 0%, rents for standard 18'-high concrete block space have more than tripled in less than a year. Only the retail sector has lagged. When the 1990 slump hit, rents for retail space declined only marginally. And during the long economic boom that followed, rents increased only marginally as well.Market Sourcereports a Greater Boston retail sector rent increase of only 35% from 1993 to 2000. Retail is overbuilt and has had a harder time than other sectors in becoming scarce.

No large sector has out-performed offices. Eight years ago, Spaulding & Slye reported, rent at the Dedham Executive Center, a good-quality 1974 complex on Route 128, was quoted at $16.00 per foot, gross; today the rate at the same complex is $33.00. Rents on Route 9 in Framingham and at the New England Executive Park in Burlington have increased by 160% in the same eight-year span. The increase for Class A buildings in the downtown Financial District is from 160% to 180%, as at 100 Summer Street, where a 1993 rate of $29.00 per foot has become $82.00 per foot in 2001. At Kendall Square in Cambridge, data from Spaulding & Slye indicate increases approaching 200%. These increases are calculated from gross rents. Increases in net rents, a better basis for derivation of value, are proportionately greater. The standard suburban office that could be bought for $50 to $75 per foot in 1993 cannot be touched for less than $200 per foot today.

Ten years ago, this writer advised that the then-current office market decline represented a historic opportunity for wealth formation. (When they are right about something, writers are allowed to toot their own horn.) Other observers at the time cautioned that the price peak of the late 1980s had been a "blip" or "hiccup." In retrospect, it seems that the hiccup was not the peak but the trough that followed. The natural state of the Boston real estate economy at times of strength in the high tech sector is a scarcity of work space. Scarcity means price increase. Unlike Dallas and Atlanta, we produce new space only slowly, and scarcity can work for an extended period to bump up price.

The change in the office market has been fueled in large part by the dot.com economy. Through mid-2000, investors seemed willing to give the new economy their faith. But beyond a certain level of price, investors appear skeptical. The decline of the dot.coms in 2000 was accompanied by a sharp decline in the volume of sales (but not price) in the urban luxury housing market. The volume of sales for office buildings similarly has fallen away. The volume drop can be explained in part by skepticism. It can also be explained by our collective memory of the trough from which we only so recently emerged.

Eric T. Reenstierna, MAI