I just came back from Boston and visiting with an affiliate there. As he described the Boston Office market, he described a market not unlike San Francisco. Vacancies there are heading to single digits. New buyers have purchased office buildings and have pushed rental rates over twenty percent so far this year, while existing owners have kept rental increases more in check. Like San Francisco, Boston is not a cheap place to live or work in. As a result it’s once dominance as a headquarters town for insurance companies has changed dramatically. Just like San Francisco, firms have left one after another for cheaper office markets to do business.
Today Boston and San Francisco are known as “mature” branch office marketplaces. Both markets are still important financial centers with close proximity to world-renowned colleges and universities. They are also internationally known tourist locations, which carry weight in business circles for businesses needing to cover all major business hubs.
Yet, can companies pay office rents in a branch office market higher in most cases then their own headquarters? If a firm is located in Dallas, Atlanta, Chicago or Los Angeles that would be the case. Only New York has rental rates higher than San Francisco and Boston today.
Rents today for Class A office space on mid-level floors are now in the high sixties and low seventies in Boston. In San Francisco the rates are over fifty dollars. Both markets are asking $100.00 per foot for rare view space.
In the end, a business can only afford to pay six to eight percent of their total gross income on rent. Even if a business is successful, and if these businesses are coming off a high 20 to low 30 rental rate, signed three to five years ago and now will have to pay north of sixty dollars per square foot, businesses are going to have to rethink whether they can afford the same amount of space or have to reduce their next space needs. If margins are too way off, they may have to close their offices altogether or service these two markets out of a suburban marketplace.
Both markets have already seen more firms close their doors in this year than the last five years and the year is less than half over.
These markets are also planning major additions in office space over the next five years which will test whether these rents can continue to be achieved or whether rental rates will collapse once again with the face of higher vacancy rates.
I would bet that rental rates will decline starting in 2009; and, starting in 2010 don’t be surprised to see a major price drop back to more 2006 rental rate values. |
