MARKET HIGHLIGHT, NOVEMBER 2005
BOSTON MARKET HIGHLIGHT
Boston Retail Market
This is a very exciting time for the Boston retail market, which comprises approximately 165 million square feet. Typically perceived as anything but exciting by the consumer, and difficult to penetrate and expensive by the retailers, the Boston retail market is exploding with new and redeveloped projects. More than 5 million square feet of new retail developments either are opening in 2005 or coming online in the next couple of years, including enhanced neighborhood shopping centers, mixed-use projects, lifestyles centers and new hybrid regional malls. These developments are located throughout the Boston market from the North Shore to the South Shore, from vertical urban projects to mixed-use suburban developments. Driven by low interest rates, retailer demand, and the fact that retail development is the highest payer per developable square foot at this time, creative developers are helping Boston catch up with the rest of the country in terms of the quality of its retail.
A sampling of the projects completed in 2005 includes:
Derby Street Shoppes in Hingham, Massachusetts — the SR Weiner-developed 400,000-square-foot, H-shaped lifestyle shopping center that has lead tenants more commonly found in malls including Crate & Barrel, Talbots, Smith & Hawken, as well as REI and Whole Foods Market.
Crossing at Walker Brook in Reading, Massachusetts — an exciting vertical hybrid power center built by Dickinson Development on the site of a former landfill that will feature a two-story, 230,000-square-foot Jordan's Furniture above a Home Depot, with periphery medium boxes such as Staples and Linens ‘n Things.
IKEA in Stoughton, Massachusetts — the long-awaited Swedish retailer of ready-to-assemble furniture will open its 350,000-square-foot site south of Boston on Route 24. The jury is out on whether the existing infrastructure can handle the tremendous traffic volume that IKEA will generate in addition to the current traffic being generated by Jordan's Furniture, Home Depot and Costco. Nonetheless, IKEA should do extremely well in this college-concentrated market.
A few of the developments slated to open in 2006/2007 include:
Natick Mall Expansion — this new 550,000-square-foot addition to the existing General Growth Properties Mall on the site of the old Wonder Bread factory will bring the first Nordstrom to the Boston marketplace, along with its second Neiman Marcus store. The site not only are these premier anchors, but also small shops will be linked to the existing mall through an open-air Main Street lifestyle center environment. Luxury condominiums will also be connected to the expansion as General Growth attempts to create a 24/7 environment.
Fenway Trilogy, Boston — Samuels & Associates will be enlivening the streetscape in and around the Fenway neighborhood with its $200 million mixed-use development. The project will consist of 576 residential units on top of 42,000 square feet of retail. This project, along with the existing Landmark Center and Fenway Park expansion/improvements should make this a year-round destination area.
Wayside Commons, Burlington, Massachusetts — With one of the most exciting projects under development, Patriot Partners is under construction with a 200,000-square-foot, true lifestyle project that will be tenanted with Hall of Fame retailers such as LL Bean, Coldwater Creek, Border Books, Capital Grill and William Sonoma's new contemporary furniture concept, West Elm. This project is visible from Route 95 and located on the site of the former Raytheon plant. It is sorely needed to meet the retail demands of this great office, residential and retail market.
These are just a few of the many new projects coming online in the near future. The list is too long to elaborate on each, but other projects on the drawing board include: New England Development's 600,000-square-foot Chestnut Hill mixed-use development across from the Chestnut Hill Mall; Eastern Development's 270,000-square-foot Linden Square neighborhood project in Wellesley; SR Weiner's new Dedham and Stoneham lifestyle projects; Fallon's Fan Pier Seaport project; John Drew's Wayside Seaport project; and Cabot, Cabot and Forbes hybrid mall joint venture with New England Development in Westwood.
Coupled with the continued expansion of Lowe's Home Improvement Warehouse, Home Depot, Target, and the addition of new retailers such as the Container Store and West Elm among others, it is an exciting time to be associated with Boston retail real estate. If the economy cooperates and all planned projects are completed, Boston retail will not only catch up but surpass the rest of the country and improve the area's quality of life.
— Theodore J. Chryssicas is a senior vice president with Meredith & Grew in Boston.
Boston Office Market
At close of third quarter there is positive news in Boston's office market. The area's economy continues to improve as does the commercial real estate market. Greater Boston's office market had a reduction in overall vacancy rates, with a slight increase in rental rates.
Boston's Central Business District (CBD) had a decrease in overall vacancy from 14.0 percent in the second quarter to 13.6 percent in third quarter. The Back Bay continues to outperform the Financial District in the third quarter, with 1.7 percent decrease in the overall vacancy rate and an increase of rental rates from $34.70 in second quarter to $35.76 in third quarter. Several small to mid-size leases contributed to the Back Bay's strong leasing activity in the third quarter, and Houghton Mifflin renewed its 326,000-square-foot lease at 222 Berkeley Street in the Back Bay.
In Cambridge and the Inner Suburbs, the overall vacancy rate for the office market remained relatively flat, as did rental rates. While the Cambridge vacancy rate held steady at 19.7 percent, with just a 0.1 percent decrease over the second quarter, the Inner Suburbs vacancy decreased 0.3 percent to 18.5 percent in the third quarter.
Suburban Boston showed a slight improvement with a decrease of less than 1 percent in the third quarter to finish with an overall vacancy rate of 22 percent. Possibly the biggest story of third quarter was the performance of the 128 South submarket. Overall vacancy rates decreased from 19.4 percent in the second quarter to 14.6 percent in the third quarter, a full 4.8 percent. This significant reduction can be attributed to two sizable leases — 107,226 square feet leased by Aviva Life at Batterymarck Park III in Quincy and Clean Harbors' lease of 104,000 square feet at 42 Longwater Drive in Braintree.
Tenants continue to explore the market well ahead of lease expirations and landlords of premier properties are becoming slightly more aggressive with asking rents. Barring any large amounts of space returned to the market, the Greater Boston office market will continue its steady road to recovery.
— Thomas L. Collins is the executive managing director and vice president of the New England Region for Cushman & Wakefield.
Northern New England Multifamily Market
Northern New England is one of the nation's most established, mature housing markets. This has led to spectacular returns for investors, but also a paucity of available land sites for new development. Developers in Massachusetts and New Hampshire have had to get creative by using state zoning programs, or by seeking out industrial and other sites for multifamily housing construction.
In Massachusetts, developers are using state laws (Chapter 40B, smart-growth zoning Chapter 40R), transit-oriented developments and local zoning that allows age-restricted properties. Currently in the Greater Boston area, there are approximately 7,405 market-rate multifamily rental units in 50 projects under construction with estimated 2005 completions of 3,720 of these units. Completions stood at 4,559 units in 2004 and 3,954 units in 2003, all according to Tom Meagher of Northeast Apartment Advisors. The production of rental housing has decreased because some developers have switched from rental to condominiums. There are 8,700 age-restricted condominium units and 39,500 un-restricted condominium units in the development pipeline, from early-state design to sell-out phase. Housing prices have soared with double-digit percentage increases per year. The rental rates have been stable, increasing only slightly in Class A properties. This has prompted state officials to continue their goal trying to create more housing and hopefully to mitigate political hurdles for new developments.
Chapter 40B is a state statute that enables local Zoning Boards of Appeals (ZBAs) to approve affordable housing developments under flexible rules if at least 20 to 25 percent of the units have long-term affordability restrictions, according to the Citizens' Housing and Planning Association (CHAPA) Web site. Also known as the Comprehensive Permit Law, Chapter 40B was also enacted to remove local political, zoning and permitting obstacles to ensure affordable development in all towns. Of the 2005 production, at least 2,000 units were permitted under 40B.
As part of Governor Mitt Romney's smart-growth plan, his administration has been a great proponent of smart-growth planning under Chapter 40R and rail transit-oriented sites. These sites are mixed-use developments in proximity to transportation. One of the first sites to be identified is in Ashland, Massachusetts. Since then, a number of sites have been rezoned with an overlay district. With the development of these projects, the towns are able to get state awards of $3,000 per unit for development and infrastructure improvements. There are about five overlay zonings that have been put in place to date.
The 40B Chapter has been in place since 1969, and there have been thousands of units created under this program over the last several years. Chapter 40R is newer and anticipated to produce thousands of units in mixed-used communities.
Although multifamily rental development is at or near record levels in Massachusetts, just north of the border in New Hampshire, the facts paint a very different picture. The development pipeline for multifamily is virtually dry, as developers have switched to building condominium projects. The only exception has been a handful of new Low Income Tax Credit (LITC) projects and a new luxury rental property in downtown Manchester.
The steady influx of Massachusetts' residents and others from points south has created tremendous demand for new housing, particularly condominiums and detached single-family homes. New Hampshire has experienced the strongest job growth of all the New England states. In the last 10 years, the job base increased by close to 50 percent in southern New Hampshire. This, coupled with the historically low interest rates for home mortgages, has fueled tremendous housing development in the Granite State.
It is simply a matter of economics — land for condominium development is worth considerably more than for development of rental housing, so land owners are taking advantage of the market and targeting their properties for condominiums instead of apartments. Towns and cities generally prefer condominium development because they generate more tax revenue than a comparably sized apartment project.
— Richard Robinson and Terence Scott are with the Nordblom Company, which has offices in Boston, Brookline and Burlington, Massachusetts.
Greater Boston Industrial Market
Although overall industrial vacancies in Greater Boston have increased slightly from 9 percent in June to 9.3 percent at the end of third quarter, they still remain lower than the vacancy rate of 10.2 percent, which was recorded for the same period in 2004. With leasing activity experiencing a slight uptick in the region's industrial sector, projected growth will be slow and steady and rental rates should remain relatively flat for the rest of 2005 and early part of 2006.
For the past couple of years, the majority of industrial activity has been driven by companies looking to purchase and occupy their own facilities. While purchase options are still hot, the supply of quality product is extremely limited. With an increasing demand for resources from other parts of the country and foreign countries, most notably China, construction costs for new facilities have skyrocketed, fueling a slight increase in demand for lease alternatives.
Facilities with easy highway access and rail-served facilities, though difficult to find, are becoming more in demand, as companies are trying to cut down on rising costs of fuel and transportation. These rising costs have caused some companies to reorganize their distribution locations as evidenced by The TJX Companies decision to vacate almost 430,000 square feet in three buildings in Massachusetts, and relocate these operations to a more efficient single location in Connecticut.
One of the newest trends in Greater Boston industrial market is the introduction of industrial and business condos concept on a large scale where developers are able to spread many of the “soft costs” associated with construction over multiple buyers. There are currently industrial condo projects under way in Raynham, Taunton and Mansfield, and Leggat McCall Properties recently announced plans to convert a few of the nine buildings that it had purchased earlier this year in Shawmut Park in Canton to industrial and business condos.
As mentioned, the current overall industrial vacancy rate in the Greater Boston area today stands at 9.3 percent. Vacancy in the Boston central core submarket is 6.9 percent; 8.6 percent in the Route 128 loop; and 11.1 percent along the Interstate 495 loop. Asking rents, which have remained relatively steady, in these submarkets are: $8.03 NNN, $6.16 NNN and $5.63 NNN per square foot, respectively.
Vacancy in the 90.33 million-square-foot flex/R&D market has dropped slightly to 16.9 percent at the end of the third quarter this year from 17.5 percent in the first and second quarters. Average asking rents currently stand at $10.08 per square foot for flex and R&D facilities and will continue to remain level.
There have been some recent significant industrial lease deals completed, such as Exel Logistics' recent lease of 67,500 square feet in the Myles Standish Industrial Park in Taunton and Bodek & Rhodes' recent lease of 132,500 square feet in Norton, with a few more leases in the 100,000-square-foot range that should be completed by year-end 2005. As a result, vacancies should decline steadily over the next few quarters, especially for newer, more modern high-bay distribution facilities.
— Jim Grady is a vice president with Boston-based NAI Hunneman Commercial.
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