Boston: Boom times for office space
Source: Jones Lang LaSalle
Boston's Two Financial Center will be a modest downtown office building, a mere 12 stories tall, with some 215,000 square feet of office space. In June, developer Lincoln Property broke ground for the building, now rising on a former parking lot in the Leather District, a former industrial enclave on the edge of the city's Financial District.
The groundbreaking offered more proof that Boston is on the verge of a building boom, sparked by strong job growth and the end of the country's largest-ever public works project, the Big Dig, which buried a reviled elevated highway that divided downtown and opened up a mile-long ribbon of land that will be mostly green space.
Boston's last major office building broke ground six years earlier, in June 2001, before the Sept. 11 terrorist attacks and the ensuing economic downturn. The Two Financial Center groundbreaking, combined with an increasingly tight market for premium office space, buoyed hopes that new, larger commercial development will soon begin in Boston. Five or six major projects that could reshape the city's mostly low skyline have been approved or are under city review, and planning has begun on what could be Boston's tallest building.
"I really think the conditions are ripe for new development," said Brendan Carroll, research director for Richards Barry Joyce & Partners, a commercial real estate brokerage. "By most measures, this is pretty much the best market that we've seen since 2001."
Falling vacancies for office space and rising rents have fueled the upbeat outlook. In a recent analysis, commercial real estate firm Meredith & Grew reported that the Boston office market was enjoying "an ongoing recovery with nearly 4 million square feet absorbed since the vacancy rate peaked in the third quarter of 2004 at 17.2 percent." The vacancy rate for the second quarter of 2007 was 7.4 percent, according to data compiled by Jones Lang LaSalle. Rents have also increased dramatically. Meredith & Grew reported that downtown rents jumped by 43 percent in a six-month span, from $33.25 per square foot to $47.55.
"I think this will start the wave," said Lauren Picariello, research manager for the commercial real estate firm Jones Lang LaSalle.
John Cappellano, Lincoln Property's senior vice president for development, said his company was at the vanguard. "We're first in the ground, and we'll be the first to be completed. We're very confident the market is heating up," he said. "It's good timing." Two Financial Center is scheduled to open in January 2009.
The high-rise development planned for Boston could bring more than 3 million square feet of office space to Back Bay, the downtown Financial District and the waterfront. If even a significant portion is built, Boston -- a city known more for historic charm than tall buildings -- will look very different in a few years. Major projects include:
Russia Wharf, a mixed-use combination of new construction and historic restoration on Congress Street on the downtown waterfront. Three 19th-century buildings will be incorporated into the project. Developer Boston Properties, which also owns the city's mammoth Prudential Center, has plans for 500,000 square feet of office space in a 32-story glass-and-steel tower as part of Russia Wharf.
South Station Tower, a mixed-use development above one of Boston's main railway stations, with a 40-story, 1.3-million-square-foot office tower. Developer Hines of Houston expects to start construction this year.
Fan Pier, a new waterfront community with 1.2 million square feet of office space. Developer Fallon Co. projects groundbreaking later this year for the first commercial building, which is to have 500,000 square feet of office space.
One Franklin Street, the former Filene's building at Downtown Crossing. Developers Gale International and Vornado Realty Trust plan to turn the property into 600,000 square feet of office space, along with a retail, condominium and hotel complex. The project is under review.
A Renzo Piano design for Boston's Financial District would dwarf the others. The 1,000-foot-tall Trans National Place would soar 210 feet higher than Boston's tallest building, the John Hancock Tower in Back Bay. Nicknamed Tommy's Tower after Boston mayor Thomas Menino's challenge to developers to build taller, Trans National Place's proposed 80 stories would have 1.3 million square feet of office space. Last year, the city designated a developer, Trans National Properties, but review by the city has not begun.
On the drawing board in Back Bay is 888 Boylston Street, a 19-story office building that would add 439,000 square feet of space to the Prudential Center.
Optimism about Boston's future is fueled by strong job growth in the city's core industries: financial and business services, health care, higher education and biotechnology. Since 2004, Boston has added about 93,000 jobs, roughly half the number lost in the recession that began in 2001.
And the city is cleaner and greener after decades of construction chaos caused by the Big Dig. The old elevated Central Artery (Interstate 93), which sliced through downtown, was buried, and the Massachusetts Turnpike was extended under Boston Harbor to Logan Airport. A massive harbor cleanup has drawn both development and tourist cruise boats. Atop the now-underground highway, nearly 30 acres have been freed up to create the Rose Kennedy Greenway, a series of urban parks and gardens. Plans call for a YMCA, a history museum and an arts museum.
The downturn that began in 2001 hit Boston's office market hard. The situation worsened by the addition of 4.9 million square feet of office space between 2001 and 2004, after the economy had gone south.
Boston's housing market remained tight, however, and developers kept busy constructing condominiums and apartments while the office market languished.
(That early momentum in housing continues. Today, about 7.4 million square feet of residential space are under construction.)
Two Financial Center has been a microcosm of the city's shifting development scene. It was approved in 2000 as an office tower, but the original developers decided to switch to housing as the office market softened. Then, last year, Lincoln Property acquired the project and went back to office.
"They were responding to market conditions," said Kairos Shen, director of planning for the Boston Redevelopment Authority.
All the optimism, however, must be tempered with a note of caution.
Carroll of Richards Barry Joyce & Partners said that while office demand is strong in premium locations -- downtown, the waterfront, Back Bay, Cambridge and suburban Waltham -- it remains weak in other areas.
"We've seen a concentration of absorption in a few specific areas," said Carroll. "It is a flight to quality."
Shen agrees. "The big need now is for Class A office space. The remaining Class A that's available is in small chunks," he said. "It is fueling the market to build office space. We are seeing a series of projects in and around the downtown and the waterfront to fill this need."
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