As seen in Banker & Tradesman 

Summer homes are closed up for the season, the sun sets earlier, and the habitual “back to business” mentality has kicked in.  This year, however, is different. 

We will still be commuting home in the dark and hunkering down for the winter, but today we are also facing an uncertain economy and disruption across global financial markets.  Last year at this time many of us were speculating on how the turmoil in the credit markets would affect commercial real estate market in Boston. Well, the good news is that thus far Boston is a bright spot in a nation filled with uncertainty. 

The Greater Boston region continues to record job growth at a slow and steady pace. Our unemployment rate of 4.8% is well below the national average of 6.1%, and the second lowest of 30 major metropolitan markets.

Steady growth in office-using employment is having a favorable impact on the real estate market. While the U.S. lost office-using jobs at a rate of - 0.8%, Greater Boston added jobs at a rate of 0.9%. Growth primarily stemmed from the professional and business service industry, with robust gains in accounting and computer system design positions.  

A recent BusinessWeek article described New York as the stone in the puddle that ripples across the county. Fortunately for Boston those ripples have translated into the arrival of very little new space and healthy investor confidence.

Boston’s diverse employment base and a financial services industry concentrated in mutual funds, asset management, and insurance is partly responsible.  Approximately 30% of the downtown Boston office market is occupied by the financial services sector, of which nearly 3% belongs to the investment banking industry. For comparison, investment banks comprise approximately 10% of the office market in Manhattan and 6% in Northern New Jersey.  

Real estate fundamentals in Boston are strong.  Vacancy at 6.9% remains lower than the 10-year average of 7.4%, and tenant demand is in tact.  A lack of new construction has proved tremendously beneficial to landlords during this cycle compared to the slowdown of 2002.  There are four construction projects currently underway totaling 1.7 million square feet.  With the recent signing of KPMG’s 120,000 square feet lease at Two Financial Center, 36.5% of Boston’s new supply is pre-leased.  

Concern regarding the future of highly leveraged landlords has been partially overshadowed by the emergence of international investors, rich in cash, looking for opportunities to obtain quality Boston assets.  Recently a group of German investors, GLL Real Estate Partners, purchased 200 State Street and 70 Franklin Street.  In addition, earlier this year Irish investor Synergy Financial purchased 4 Liberty Square and has 100 Franklin Street under contract. 

It is difficult to predict how long it will be before liquidity is restored to the credit markets and the economy stabilizes. The next few months will be a time for carefully measured real estate decisions.

Fortunately for both tenants and landlords, Boston continues to outperform almost every other office market across the country even in these most uncertain economic times.