Spring into Savings by Conducting Lease Audits Now

April 7th, 2014

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After a cold and seemingly never-ending winter, spring is finally here. As a tenant, that means receiving your annual operating expense reconciliation statement from your landlord. A year earlier, your landlord started to bill you for your share of the estimated 2013 projected costs (i.e., cleaning, security, maintenance, etc.), and the reconciliation statement that you will shortly receive is meant to reflect any adjustments (usually an increase) in those projections. Regardless of your lease structure (e.g., net, gross, etc.) it is important to review these statements and, based upon the language in your lease, determine if the expenses being billed to you are accurate.

There are many ways in which landlords attempt to pass additional expenses along to tenants, but one of their more common practices is when they “grow” the building in which your company leases space. Landlords rarely increase the size of the building due to actual construction; rather they simply increase the rentable square feet in the building because this is the easiest way to create value for them. Unfortunately, this comes at the expense of the tenants in the building.

For example, in 2008, P. Stevens Associates of Boston performed an analysis of 51 buildings in the Boston/Cambridge marketplace (“Why Owners Grow Office Buildings and How Tenants Pay”). Between 1997 and 2007, the weighted average was 5% growth, with one building growing by over 30% and many others over 20%.

A change in property management can also be a red flag for tenants. While the management fee for a property is typically negotiated as part of the lease, it is not uncommon for landlords to pass along additional fees or a fee at a higher rate than had been agreed to. Without a proper review of reconciliation statements, this increase would go unnoticed.

The Need for Audits

Since so much can change on the ownership side during the life of a lease, an important first step in minimizing your future exposure is to conduct a base-year audit of the expenses incurred by the landlord during the first lease year. This will help establish an official baseline against which subsequent years can be compared. Plus, having a baseline will make it easier to determine if future audits are necessary. If 2013 was the first lease year for your company, the only opportunity that you will have to perform a base year audit is right now!

In short, it is very common for tenants to assume that what the landlord has billed them for operating expenses and taxes is correct. However, more often than not, this proves to be incorrect. The impact of erroneous billings by landlords can easily equal six figures or more over a lease term, so prudence suggests that tenants have a professional review their leases and expense reconciliations to determine if an audit is advisable. Cresa can provide you with this expertise at no cost, so tenants have absolutely nothing to lose.

For more information, please contact us at 617-758-6000.

John Coakley

 

John Coakley
Vice President
jcoakley@cresa.com
617.758.6039

John represents a variety of local and national tenants, helping them implement their real estate needs with a focus in Cambridge and Boston’s inner suburbs. Through an intimate understanding of the local market and an international platform, John and his team have the resources to service both corporate clients and young, growing Boston-based companies. With a focus on emerging technologies, John and his team’s responsibilities include business development, project support, due diligence, quality control and daily coordination on behalf of their clients.
 

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Top 10 Factors in Contact Center Location Strategy

September 5th, 2013

By Mitch Jacoby

Having completed more than 25,000 seats of contact center projects in North America, Cresa’s Location Planning group has developed a keen understanding of vital factors driving successful contact center location strategy.  Contact centers (also known as “Call Centers”) can be a Business Process Outsourcer (BPO) which contracts agents to end-users for specific functions such as customer service, technical support, account billing, reservations, and the like.  In-house contact centers or, “captives” operate as internal agents for banks, healthcare companies, or wireless phone providers.  Here are several key factors driving contact center location strategy -

1.     Labor cost
This is the most significant driver for contact centers.  Think of the value of $1.00. If you save $1.00/SF on a 50,000 SF lease, you save $500,000 over 10 years.  The impact of $1.00/hour in labor savings for 500 contact center agents is $10M over the same period, or 20 times more!

2.     Saturation
This critical indicator measures the number of people employed within a particular industry or business sector as a percentage of all employed persons.  For basic contact center projects, 2% saturation or greater is indicative of escalating wages and high turnover.  Saturation below 2% is representative of cost effective labor, lower turnover and greater employee loyalty.

3.     Attrition
Tied to saturation, companies experience increased employee turnover at saturation greater than 2%, while improving employee retention below 2%.  We have seen contact centers experience 100% annual turnover or more, essentially replacing the entire employee population every year!

4.     Competition
It is vital to understand who the direct and indirect competitors are.  Your company may be the proverbial “800 pound gorilla”, a well-recognized company with a strong brand, and consequently, you attract the greatest number and best employees.  Conversely, you may be the low-end of the competitor scale and become a “feeder” for other area employers.

5.     Labor availability
Companies must be sure there is adequate population from which to recruit and hire.  This is true for both the initial location decision and beyond, since existing employees will attrition and new ones must be hired to replace them.  It is also important to regularly monitor the labor pool as new employers enter/exit the market.

6.     Real estate availability
Except in cases of “remote” or “at home” agent programs, a building is necessary.  Contact centers frequently opt for shopping center, flex and single-story office space with typical occupancy metrics of 100 SF/person or less.  In the example above, a 500-person contact center would typically require 50,000 SF.  Moreover, expanded cooling and power capacity is also required in these buildings.

7.     Parking
The greater headcount as compared to typical office space requires more intensive parking, typically accommodating 6 to 10 parking spaces per 1,000 SF of leased space.  This is also dependent on average daily occupancy and shift staffing.

8.     Incentives
Incentives are often thought to be the “icing on the cake”.  Once optimal labor pools are identified and labor savings are calculated, statutory and discretionary incentives should be negotiated for multiple states/communities to maximize economic benefits.  As well, it is crucial to quantify the benefits for which a company actually qualifies, as well as determining whether incentives are cash-based and fungible, or tax credits from which a company my never benefit.

9.     Time Zone
Companies often spread their work by time zone to save money and avoid paying overtime.  Also, in order to meet customer demand, companies will place contact centers in varied time zones.

10.  Multi-lingual
To support the numerous languages their customers speak, contact centers prefer to hire native speakers of Spanish, French, German, or Portuguese for example.   In North America, a wage premium is frequently paid for multi-lingual workers who speak, read, and write.  Further analysis of labor availability and market wages is required for multi-lingual workers.

When undertaking a contact center project, it is most vital to focus on labor cost, saturation, and competition, as this delivers the greatest value to our clients.

 

 

 

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Changing Commuting Patterns in Cambridge & Boston

July 17th, 2013

July 17, 2013

John Coakley

By John Coakley

The recent real estate boom in Cambridge and Boston is attributable in large part to established tech companies either expanding their existing footprints or establishing a presence for the first time.  In either case, the motivation behind this urban focused land grab is the recruitment and retention of top talent.  Neither Google nor Microsoft had a presence in Cambridge before 2007.  They now occupy nearly 700,000 SF in Kendall Square between them.  Other tech giants like Akamai and Amazon also have sizable blocks of space, which total nearly 500,000 SF.  These 4 users alone represent more than 10% of the entire Cambridge office market and they are all competing for the same talent coming out the area’s top universities, namely MIT and Harvard.  As the tenant mix in Cambridge has changed significantly over the past decade, so has the mix of commuters.  With the largest concentration of young people, ages 18-34, in the country (36.46% compared to 23.34% nationally according to 2010 Census data), an increasing percentage of the Bay State’s workforce are depending on alternate forms of transportation for commuting purposes.  In addition to the MBTA subway and bus lines, commuters are walking and biking using expanding car and bike sharing services like ZipCar and Hubway.  In Boston, as surface parking lots are traded for new office and residential developments and the population grows, there continues to be strong demand for commuter parking.  On the high end, parking in Downtown Boston can eclipse $500 per month.  Across the river in Kendall Square, however, a number of parking structures are actually undersubscribed.  With a typical parking ratio of 1 space per 1,000 square feet leased, many Kendall Square tenants are pushing back on the requirement to lease those spaces.  An indication of the importance of proximity to the MBTA Red Line in Kendall Square is the distribution of space availability.  For buildings within ¼ mile of the Kendall/MIT Station, availability is 0.1%.  For buildings within ¼ and ¾ mile there is 4.3% available.  I guess when you are competing for top talent in Kendall Square, just having access to public transportation isn’t enough…it’s a matter of feet.

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BOMA 1996 vs. 2010 – Who wins and loses

June 21st, 2013

June 21, 2013

By Jack BurnsJack Burns - HiRes_white background

I recently participated in a CoreNet Global workshop about the new Building Owners Management Association (BOMA) 2010 standard. The BOMA Standard has been the generally accepted method for measuring office space for almost 100 years, and was recently updated for the first time in 14 years and released in January 2010. BOMA developed this new standard in conjunction with the International Facility Management Association (IFMA), but BOMA is primarily a landlord’s association, so the end result has more benefits for the landlord than the tenant.

There aren’t many leases that use the new 2010 version of the standard.  That is because buildings currently utilizing the 1996 standard must re-measure their entire building, including all the tenant spaces.  This is an impossible task in an existing multi-tenant office building.  However, the new standard is being used in new construction and in older buildings that have been completely renovated. When the new standard was launched I was skeptical, knowing that it was likely to benefit the landlord and not the tenant. Though this may be partially true, the new standard does have benefits for both parties. Under the 2010 standard, the building’s square footage could increase through the new measuring standards, and thus usable square foot (USF) measurements for tenants may increase.  Some of the increase is caused by how full floor tenancy versus multi-tenancy measures work.  In the 2010 version, there are two options – legacy Method A and Method B.  Method A is very similar to the 1996 version in how buildings and tenant spaces are measured.  Under Method A it is unlikely that a tenant will see much of a difference, if any at all.  Under Method B, full floor tenants won’t see much of a difference, but smaller users on a multi-tenanted floor are likely to see an increase in the amount of rentable square feet (RSF) versus the 2010 Method A or the prior 1996 version.  The new 2010 version allows landlords to adopt a “market standard” load factor, which permits a landlord to show a lower load factor for marketing purposes.  The RSF for the building doesn’t change, but a greater amount of square feet are applied to the tenant spaces.

Tenants need to be aware that there are significant changes in the method of the BOMA measurement standards1996 vs. 2010, and A vs. B.  As a tenant, you will see little impact if your landlord is using either the 2010 Method A or the 1996 version.  If you are a full floor user in a multi-tenanted building your best option is a building using 2010 Method B.

If you’re entering into a lease in a new location, make sure you understand what standard is being used and make sure it is identified in the lease.  The lease should state the RSF and USF for the premises along with the total RSF for the building and the USF/RSF factor.  The tenant should have the right to confirm the measurement in accordance with the defined BOMA standard.  Make sure the landlord does not have any rights to re-measure the original premises at any point in the lease term or at a point of expansion, or renewal.  Never agree to a so called “modified” version of the BOMA standard, because if you do, the landlord has full control over what is included or not included in the measurements.  Some cities, like New York, have local standards and typically include more RSF and USF than the BOMA methodology.  Local standards often measure to the outside of the building, including many spaces not included in the BOMA standard.

Always take the time to have the space measured before you sign the lease, and I don’t mean a simple CAD plan.  Pay an architect to go on site, confirm the plans, and perform a true measurement.  At $30/SF for a five year lease, each square foot is costing you $150.  There have been many cases where the plans and the actual space are not the same, in some cases over a 1,000 square feet different, so this can add up to a substantial amount of money over the term of the lease.

If you have a lease expiring soon, make sure you understand the following: 1) whether or not the standard of measurement in the building has changed since you signed your original lease and how it affects you, 2) review your lease and make sure it is not subject to measurement, and 3) if you plan on renewing your lease, make sure all your terms and conditions are agreed upon before your notice date is due. If your lease has an extension option that clearly states that the extension is under the same terms and conditions except for rent, then you are protected.  If you miss your notice date you may find out that the square footage of your new lease for your old space may be larger due to re-measurement under the new standard, and this can be easily avoided.  I know of one situation where the new method of measurement will result in a 2,000 SF increase in the size of the space simply due to re-measurement.  Make sure you understand your lease, and that your real estate advisor is working closely with you to keep you out of harm’s way.

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What’s all the Fuss over the Workplace

March 20th, 2013

Jack Burns - HiRes_white backgroundMarch 11, 2013

Jack Burns

A few weeks ago Marissa Mayer, the new CEO of Yahoo!, decreed that all of the company’s remote workers must now come to the office and be “collaborative.” Based on the outcry, it seemed as if the world of the remote working was dying.  That is not the case.  There are so many examples of success in remote working – just as many as there are for businesses where everyone is expected to work together under one roof.  Yahoo! Is going through an adjustment period where they need to be more innovative if they hope to survive against the likes of Google, Facebook, and others.  Marissa’s decision may be supported by Quarta’s research that appeared in an article by Ben Waber — February 28, 2013.  The research done by MIT and IBM proved that collaborative efforts in software development were more productive in co-located operations than not.  It is a bold experiment by Yahoo!  As they look to reposition themselves as more collaborative and innovative.  I do not think for a second that Marissa will abandon the work-life balance needs of her staff, but getting all her folks together will allow her to test the ability of Yahoo! to rise again.  There is a risk that many of those remote workers will leave and seek employment at other companies.  Good for them.  In the end they were probably not loyal Yahoo! workers anyway and were on the fence regardless of the new policy.

I recently visited a web development firm in San Francisco where the staff works together every day in teams.  They have breakfast together every day, play ping pong, shoot baskets, and collaborate on innovative solutions for their clients.  They never work from home and always work in teams with a buddy system.  It was fascinating to see the activity and the excitement in the air.  For this company the culture was for everyone to work together side by side driving solutions for their clients in real time and with great success.  For them, remote work would defeat the way they run their business.  Folks who work there understand the drill and accept that it’s like a 9-5 job with lots of benefits.

However, let’s face reality – this approach does not translate well for most companies.  Now, we are a global workforce collaborating with workers with different cultures and languages, on a 24/7 basis.    We also have to consider work-life balance issues and allow parents and caregivers the time to be active in their family’s day to day activities.   I have written before how we cannot just come up with a standard workspace and assume it works for everyone.  It does not.  The same holds true for remote workers vs. on-premises workers.  Larger companies have the challenge of managing the work style of many more people.  I believe businesses need to experiment with different solutions within their operations to find the style that suits their organization best.  Business leaders in those firms should be able to drive team based cultures with different workplace and work style platforms to achieve success.  This would lead to smaller independent operations tethered back to the organization for support, but allowing the team to generate its own culture under that of the greater enterprise.  As our population ages in North America we are faced with a shortage of good knowledge workers.  We need to create work style solutions that attract stay-at-home parents, caregivers, retirees, students in order to keep or bring these individuals back into the workforce.

I applaud what Yahoo! is doing and hope they succeed.  This bold new step may allow the company to become more productive and at the same time more lean.   In the end every company, large or small, needs to encourage collaboration for all workers.  Technology can help, but face-to-face meetings and discussions are not as good on a screen as they are in person.  I am energized when I hear about new approaches to working that are being tested by innovative companies.  I caution corporate America not to look for instant results as sometimes bold changes in work style and the workplace take years to figure out.

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Workplace Strategy: Long Term Effects

March 18th, 2013

 

 

 

 

 

Jack Burns, Managing Principal, Cresa Boston

Originally posted March 11, 2013

I was listening to the radio on the way to work the other day and heard how the New England Journal of Medicine was releasing the results of a behavior study.  The results were taken from tracking and analyzing ten years’ worth of measurements and indicators.  Ten Years!   So I began thinking about the hundreds of millions of dollars companies are sinking into developing their version of a “New Workplace Solution.”   Based upon what studies and evidence accumulated over what period of time?  I have seen firsthand new workplaces that have been designed, built and not used the way they were expected when the new workplace was first envisioned

The effort to create a connected and collaborative workplace is driving corporations to make significant changes in their workplaces and they are spending large sums of money in the process.  This is ironic, as this trend all started as a cost saving exercise in the first place.    Now it has become clear that we really should have thought about the social and collaborative nature of work before alternative workplace strategies were implemented, taking away individual work areas and providing cute names for our new workplace.  The early results achieved significant costs savings but at a price in the way we should work.

So I was just thinking – and I am sure others are on the same track – that we really should have encouraged our clients to collaborate – to study and research ideas and results with other companies and not rely solely on the design and furniture industry.  Like the ten year medical study, our industry needs to slow down and study the effects of the changes we have or will be making to the workplace.  In most corporations this is left to the Real Estate or Facilities departments which might hire some sharp consultant to lead the effort.  To be useful we need to pull together HR, IT, representatives (at all levels) of business groups in the companies along with the Real Estate groups to really study the long term results of the changes we are making to the workplace. Using 90 day, 180 day or 1 year surveys are necessary and these need to continue annually or as often as necessary to understand the impact.  It seems that when a company makes a big investment they want to know ASAP the results or the ROI on that investment.  The ROI on real estate and facilities costs will be there, but the long term effect on the productivity of the workforce is what we really need to understand.   Maybe it will take a ten year study to really understand the impact of all our new workplace strategy changes.

Cresa LLC, the nation’s largest corporate real estate advisory firm exclusively representing tenants, is headquartered in Boston.

Cresa is an international corporate real estate advisory firm that exclusively represents tenants and specializes in the delivery of fully integrated real estate services, including: Transaction Management, Project Management, Strategic Planning, Workforce and Location Planning, Subleases and Dispositions, Portfolio / Lease Administration, Capital Markets, Sustainability, Industrial / Supply Chain, and Facilities Management. With more than 55 offices, Cresa is the largest tenant representation firm in North America. Through its alliance with Savills, one of the world’s largest commercial real estate services firms, Cresa covers more than 255 locations in 40 countries. For more information visit http://www.cresa.com/.

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Cresa Market Forecast – Cambridge Office Market Update

November 27th, 2012

 

John CoakleyCresa Market Forecast

Cambridge Office Market Update: With Less Activity, Some Landlords Are Less Bullish; Tenants Advised to Beware of their Neighbors

John Coakley, Vice President

While areas of Cambridge are still considered to be among the hottest office markets in the area, leasing activity has slowed down.  After peaking in late 2011 and early 2012, deal velocity, especially for large requirements, has subsided with two consecutive quarters of negative absorption.   Looking ahead, we anticipate demand to remain at current levels for the next two quarters.  As a result, some landlords are not feeling quite as bullish as they did this time last year.

As leas­es expire, some area tenants continue to consider more competitively priced submarkets, including lower-level floors in the Financial District and the Seaport. Additionally, recent acquisitions have resulted in more space being added to the available inventory. With over 30% availability (and climbing), there continues to be a real opportunity for tenants in the Lechmere section of Cambridge. And with ownership of 2 Canal Park marketing the entire building (192,000 SF) on a direct basis, nearly 50,000 SF will be added to the market.

East Cambridge Still Hot

Although demand is relatively tepid compared to the end of 2011 and the first half of this year, the East Cambridge market remains healthy, with average asking rental rates for Class A space at $52/SF.  In Mid Cambridge, average rental rates for Class A space averaged an increase of $2.00/SF since Q2 and are now tracking at $42/SF. Asking rates for Class A space are lowest in West Cambridge at $34/SF.

The greatest demand may be in the heart of Kendall Square, where, for example, the 2M SF Cambridge Center complex is effectively 100% leased.  In the second quarter, Nokia and Amazon each leased large blocks of space in Kendall, ap­proximately 63,000 SF and 40,000 SF, respectively.

Although the availability rate in Kendall is at 13.2% with an excess of 200,000 SF available, more than half of that availability is one complex— Riverfront Office Park. Removing Riverfront from the numbers reveals availability in Kendall to be below 7%.  While leasing activity has slowed down, landlords have maintained the rents that are pricing out many of the smaller tenants, specifically in Kendall Square.

Cambridge has seen several large lab transactions in 2012, but these haven’t had a big impact on the leasing market. Six development projects are underway for tenants such as Pfizer, Novartis, and Biogen IDEC, so these requirements will not be absorbing any of the large blocks of lab space that have been sitting vacant. Additionally, we continue to see select office buildings converted to labs so the owners can achieve higher rents.

Takeaway for Tenants
Our advice for Cambridge tenants is to pay attention to who your neighbors are. Time and again, Cambridge companies find themselves forced to move when their lease expires so their landlord can accommodate another tenant.  So, it’s important to know what rights you have in your lease but also what rights your neighbors have as well.

As always, study the market and protect your interests!

For more information, please contact Cambridge market specialist John Coakley at jcoakley@cresa.com.

Cresa LLC, the nation’s largest corporate real estate advisory firm exclusively representing tenants, is headquartered in Boston.

Cresa is an international corporate real estate advisory firm that exclusively represents tenants and specializes in the delivery of fully integrated real estate services, including: Transaction Management, Project Management, Strategic Planning, Workforce and Location Planning, Subleases and Dispositions, Portfolio / Lease Administration, Capital Markets, Sustainability, Industrial / Supply Chain, and Facilities Management. With more than 55 offices, Cresa is the largest tenant representation firm in North America. Through its alliance with Savills, one of the world’s largest commercial real estate services firms, Cresa covers more than 255 locations in 40 countries. For more information visit http://www.cresa.com/.     

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Metrowest Market Goes to Extremes

October 4th, 2012

Dave Ross

 

 

Dave Ross, Principal

 

 

Office availability in the Framingham and Natick Route 495 Metrowest market is down to 6%, making it one of the tightest submarkets in Greater Boston.  Metrowest is a market of extremes, with Framingham and Natick much in demand for tenants, while the rest of the Metrowest area is still struggling with an availability rate of 36%.

In addition to Framingham and Natick, the Metrowest market includes Hopkinton, Hudson, Marlborough, Northborough, Southborough, Wayland, and Westborough.

Average asking rents in Framingham and Natick range from $20 to $27 per square foot for Class A buildings, about $5 per SF more than in outlying areas.

Companies looking for large blocks of space over 50,000 SF in Framingham and Natick had only six buildings to choose from a month ago, with no available space to accommodate a 100,000 SF user. That has changed somewhat as TJX plans to consolidate operations at its Marlborough campus, which will put Class A space back on the market (260,000 SF at 500 Old Connecticut Path in Framingham and 118,000 SF at Flanders Road in Westborough).

Framingham and Natick will remain highly desired locations, thanks to their access to amenities and close proximity to Boston.

In the outlying boroughs, two potential bright signs are Cavium, Inc. looking for 60K SF and Partners Healthcare, in the early stages in seeking 350K SF.

Overall, the absorption rate for I-495W will drop, and we’re looking at a generally slow recovery in Metrowest. Boston and Route 128 always recover first, and Route 495 is the last in line.

 

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Does Your Broker Really Represent Your Best Interests?

May 4th, 2012

Joe Sciolla

 

 

Joseph Sciolla, Managing Principal

 

 

This is a time when corporate America is still in a cost-cutting mode, even as the economy slowly recovers. It’s also a time when commercial real estate continues to be a company’s second-biggest expense, after labor costs, with millions of dollars at stake. In this environment, most companies are looking for creative solutions and aren’t satisfied with business as usual. They’re looking to save money, reduce risk, and add value. And they recognize they need to do this in a post-Sarbanes-Oxley world, where even the appearance of conflicts is not acceptable.

Which leads us to the million-dollar question: Does your real estate service provider really represent your best interests? Does your firm ensure objectivity and accountability as your trusted advocate? Well, if you have a dual agency arrangement, where your broker represents both you and your landlord, the answer to these questions is likely no.

The fact is, a landlord’s agent has a contractual obligation (and a financial incentive) to bring tenants to the landlord’s buildings. But if the broker’s incentives and the tenant’s interests are not compatible, conflicts of interest are inevitable.

The client-broker relationship is all about trust, which is based on transparency and full disclosure.

How can you protect yourself? Here is a checklist:

  • Ask for an account of all the brokerage firm’s relationships, listings, and asset/property management work with landlords, from the get-go, starting with the RFP (Request for Proposal).
  • Make sure you check for overt conflicts of interest (e.g., the broker has listings in other competitive buildings) or hidden conflicts (e.g., a firm is affiliated with a REIT that is looking to invest in income-producing properties that are also potential buildings for tenants).
  • Ask for full disclosure about compensation and commissions and expect to be informed if the broker is offered bonuses or discounts.
  • Be sure that your interests are protected in your lease in such matters as expansion, contraction, and termination rights as well as non-disturbance clauses in the event of new ownership.
  • Overall, insist on complete transparency…and ensure that your broker puts your interests first.

So, why are dual agency relationships still prevalent in commercial real estate, even when conflicts are prohibited by law in other professions? That’s a good question. Certainly, there are ethical firms that claim to be fair when working both sides of the fence. We at Cresa respect our competitors, some of whom are employed at dual agency firms. But we know that at the end of the day, you can’t adequately serve two masters.

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Metrowest Office Market Update: Q3 2011

December 27th, 2011

 

Dave Ross

 

 

 

Dave Ross, Principal

 

The Metrowest office market—including Northborough, Westborough,Marlborough, Southborough,Hudson, Hopkington,Framingham, Wayland, andNatick—is faring better than Route 495 Central.  However, the entire area is lagging behind most other Boston submarkets, as high availability and slow job growth continue to hinder any significant rent recovery.

Despite strong activity among small companies (10-30 employees) and tenants with space requirements of less than 8,000 SF in towns such as Southborough, Natick, and Framingham, office absorption remained negative, averaging 421,040 SF year-to-date. In addition, 75%-85% of transactions were lease renewals, which implies the area’s main hurdle is not recruiting talent but recruiting companies to move here.

Companies with space requirements of 15,000 SF- 25,000 SF are being considered large users and aggressively targeted. Landlords with large portfolios, previously marketing space for tenants in the 50,000 SF range, are now breaking up these blocks of space to attract smaller and mid-sized companies and offering more generous tenant improvement packages.

Despite favorable rental rates and landlord concessions, a full market recovery will likely not occur until 2014 or later. Much of the existing “flex”/industrial space in the Metrowest market that has been sitting empty for more than three years has not been improved since the 1970s and will probably never be leased.

Other Highlights:

The 5 million SF market of Framingham and Natick will continue to outpace the outer-boroughs in terms of greater rent appreciation ($3-$4 differential) and lower availability rates (10%) due to limited blocks of larger space, restricted market development, and the desire of small and medium companies to be situated near abundant amenities.

Total available (versus vacant) space increased to 36%, from 30% in Q2.

Average rental rates for Class B office and Flex/R&D space remained flat at $14.50 and $7.50, respectively, while rents for Class A office space increased slightly from $21.50 to $22.00/SF. While average rents have remained flat for the last three quarters, they may decline by up to 5% in the next 12-24 months.

In Marlborough, where vacancy is almost 40% , tied to Fidelity and Hewlett Packard, there is an opportunity to construct up to 3 million SF along I-495.

Recent Transactions: 

Tenant Address SF
ECC 33 Boston Post     Road,Marlborough 18,231 SF
Vasco Data 293 Boston     Post Road,Marlborough 11,804 SF
Mitsubishi Electric 150 Cordaville Road,   Southborough 15,867 SF
Vivox 2-4 Mercer     Road,Natick 7,300 SF

Largest Tenants in the Market: 

Tenant Requirement
TJX 800,000 SF
Arbor Health 150,000 SF
American Bio Analytical 40,000 SF
Big Band Networks – Flex 40,000 SF
Motion Technology– Flex 20,000 SF

 

Largest Contiguous Availabilities:

Building Address Available SF
400 & 300Puritan     Way,Marlborough 716,000 SF
4400 Computer Drive,   Westborough 382,000 SF
2 Results Way,   Marlborough 160,464 SF
35 Parkwood, Hopkington 159,796 SF
2 Cabot Road,   Hudson 110,000 SF
450 Whitney Street,   Northborough 109,384 SF

 

Takeaway for Tenants:

  • Overall, the Metrowest market will continue to see higher availability rates and lower rental rates in the outer boroughs, providing favorable market conditions and lease terms for tenants. Landlords will aggressively respond, offering greater tenant improvement packages and free rent.

 

  • Tenants that have strong, long-term business plans or leases that are expiring are advised to renew early and lock into long-term deals.  Because the market is generally still soft and multiple opportunities are available, tenants should explore the market and exercise their leverage in negotiations with landlords.

 

For more information, contact Metrowest market specialist:

Dave Ross: 617-758-6088, dross@cresa.com.

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