THROUGH THE ROOF
RISE OF BOSTON OFFICE RENTS STUNNING EVERYONE

Author: By Richard Kindleberger, Globe Staff Date: 10/25/2000 Page: D1 Section: Business

Boston office rents, after increasing steadily through most of the 1990s, have exploded this year, stunning longtime real estate professionals with the ferocity of their rise.

A new threshold was pierced last month when a rent of $100 a square foot - four times what landlords could get for the best space when the market hit bottom in 1992 - was posted on the top two floors of One Post Office Square.

Close behind, the landlord of 222 Berkeley St. is asking $100 a square foot in rent for prime space, even though the Back Bay address until recently would have argued for a discount. One Beacon Street, built in 1972 and older than either of the others, is reportedly the third Boston tower to reach for the $100 mark.

James Hooper, a principal and downtown broker for Spaulding & Slye, was shocked at the jump in prices when he returned to town after being away this summer. "This market is standing on its ear," he said. "I can't believe what is going on out there."

The surge in prices comes against a backdrop of the lowest vacancy rate in 20 years - 1.5 percent for first-class office space, by one survey. With new space being developed at a fraction of the pace of the 1980s building boom, no one sees a big jump in available space anytime soon.

The market is so strong that rents have been undeterred by the high-technology upheaval that began last spring, said James McCaffrey, a senior vice president with Meredith & Grew Inc.

Even as the Nasdaq stock index was sinking 30 to 40 percent, he said, Boston rents rose 35 to 40 percent in nine months.

"Some of us predicted extraordinarily high growth rates," McCaffrey said. "But they're going up by the hour and the day rather than by the quarter and the year at this point."

Until recently, at least, the rise had not only brought rents to record levels but was still accelerating. Some brokers now say the increase has stopped in the past month or two, but others disagree.

Figures from Cushman & Wakefield show the current jump as the biggest in 20 years, even with the year not over. Average rents for first-class space rose to $60.30 a square foot through September, up 19.6 percent, from the end of 1999. The rise for 1999 was 13.7 percent.

The skyrocketing rent levels have landlords and brokers chortling, while tenants are blanching with sticker shock. Anyone looking to renew a 10-year lease that expires in the next couple of years is in for a special jolt. That tenant may have to pay for the good luck of having locked in a bargain-basement rent in the early '90s by now paying a record rate.

The rent surge cuts different ways. A few examples:

FleetBoston Financial's impending move out of One Federal Street had the building's manager, Mark Weld, salivating last February. Weld, of Clarion Partners, decided to go for broke and offer the top two floors for $70 a foot, then the outer limit for Boston office rents. He won't say how close he came, but eight months later he wishes he had the space back. He said he would now ask $100 a foot and get at least $90.

As chairman of CRESA Partners, a brokerage serving tenants, William Goade spends a lot of time these days feeling his clients' pain. Companies recoil in horror on hearing that the space they want costs $20 a square foot more than anticipated. After two months of licking their wounds or looking elsewhere, the tenants come back - only to find the rent has gone up another $5 or has been leased to someone else. They were upset before. "Now they're very upset," Goade said.

Tom Snyder Productions, an educational publishing firm, is bursting in its Watertown offices. Its president, Rick Abrams, began looking for a larger space a year ago only to be appalled at the rents. When he came back to the search this summer, the situation had gotten worse. "If a year ago I was choking at $27 a foot, now they're at $37 a foot," he said. As he looked over the next several months, rents rose $1 or $2 a month, he said.

Abrams was looking for a "funky, off-the-beaten-path" kind of a place that would appeal to his creative staff and cost less money. But rents outside of Boston have also spiked. A real estate executive cited space her firm offered at $30 a foot in a Burlington office park a year ago that is now priced at $50.

Cambridge is a special case. With a vacancy rate under 1 percent, its asking rents have broken through $60. "The rents in Cambridge have grown so high that there's a negligible difference now between Class A space in Cambridge and Boston," commented Frank Nelson, a senior director of Cushman & Wakefield. He called that situation unprecedented.

As high as its rents have become, the Boston area is not the nation's most expensive. That distinction goes to San Francisco, where the average rent on first-class space hit $74.44 at midyear, according to Cushman & Wakefield.

In an ironic twist, San Francisco rents fueled by the Silicon Valley boom are so overheated that some suburban landlords north of Boston have gone fishing for tenants there. In ads run in San Francisco, these landlords have touted the Boston area as a cheaper real estate alternative.

"It's actually comical," a Boston real estate executive said.

That's not much consolation to Boston tenants. Ted Oatis of the Chiofaro Co., owner-developer of International Place, sees firsthand the contortions that tenants go through to try to keep their real estate expenses under control. For one thing, he said, they squeeze the space allotted per employee, trying to make do with 200 feet per worker as opposed to the previous 250 to 300 feet.

Even though many companies want to be downtown, seeing the location as a valuable recruiting tool in a tight job market, some are beginning to buckle. In addition to making the Back Bay a mainstream corporate address, companies are venturing into the still-evolving South Boston Waterfront in hopes for a break on rent. Neighboring cities such as Chelsea, Somerville, and Medford are beckoning tenants, a trend Oatis believes is bound to intensify.

Although the $100-a-square-foot level has apparently only been asked and not achieved, Oatis said tenants have agreed to rents of more than $80 in several buildings. He declined to comment on reports that that includes International Place. But he predicted the two-tower office complex would achieve rents of more than $90 a foot before the end of the year.

Oatis argued that when adjusted for inflation and higher expenses, today's achieved rents are not higher than the level reached at the peak of the market in the late 1980s. As commonly quoted, rent rates represent gross annual rents, which include operating expenses, taxes, and insurance.

Nelson of Cushman & Wakefield disagreed about today's rents being comparable to rents reached in the 1980s. He said the high levels achieved then included large amounts of "free rent" as an inducement to tenants. Asked to reply, Oatis said that was true in some places but that free rent was limited at International Place.

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