Industry Insiders: Office Lease Market Slowly Improving

PHOTO/MATT PILON One recent, noteworthy office deal in 2012 in Worcester was Siemens' move to this building in Gateway Park.

PHOTO/COURTESY Longview Corporate Center in Leominster has 54,000 square feet of space. Broker Tim Norton said that for the first time since it was built in the early 1990s, the building is full.

PHOTO/JACQUELYN GUTC Verax Biomedical signed a lease for 17,000 square feet of this building at 120 Bartlett St. in Marlborough last month.

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It's slow and steady as it goes for the commercial office market in Central Massachusetts, reflecting much of what's happening in the broader economy, industry insiders say.

Tom Kelleher, senior vice president of Worcester brokerage firm Kelleher & Sadowsky Associates, said the outlook for office leases is generally positive, as more businesses look for office space and others look to expand.

According to Colliers International, which tracks movement in the office and research-and-development spaces, net absorption of office space in the Boston suburbs — extending west to Worcester — had surpassed 2010 and 2011 combined by the end of the third quarter last year. The firm expected 2012 to end as its strongest year since 2007.

"I'm optimistic. I think a lot of nervousness is gone from the market," Kelleher said.

In MetroWest, Bret O'Brien, president of Greater Boston Commercial Properties Inc. in Marlborough, said he thinks 2013 will bring more of what was seen last year, which was gradual positive absorption — more tenants moving in than out.

"I think we're definitely at the point where things are getting better, but they're getting better very slowly," O'Brien said.

Tenants may be on the hunt for office space again, but not necessarily in the big pre-recession way they may have been before.

"What has happened is a much more open office," said Garry Holmes, president of R.W. Holmes Realty Co. Inc. in Wayland. "More companies doing away with the private offices (and) packing more people into less space, bringing down their need for office space overall."

Calling it a huge trend, Holmes said many companies say they're using less space for collaboration purposes, but it certainly also helps tame overhead costs.

William D. Kelleher IV, vice president of commercial brokerage at Kelleher & Sadowsky, said another part of that trend is tenants wanting common spaces like training facilities and conference rooms because they aren't used often enough for a single company to justify having its own.

Worcester: Driven By Development

But that doesn't mean there aren't companies leasing in a big way. Kelleher's firm was a broker in a deal last year that brought Siemens Industry Inc.'s Metal Technologies operations to a new building at Worcester Polytechnic Institute's Gateway Park, where it's leasing 41,000 square feet.

"I think we've seen sort of a remarkable amount of leasing activity over the course of the past couple of years," Kelleher said of the Worcester market, adding that leases remained fairly stable in the city even throughout the recent recession. He speculated that vacancy rates in the city are less than 10 percent and pointed toward downtown activity like the new CitySquare development and expansions and upgrades of the city's transportation infrastructure as key drivers in attracting and retaining tenants today.

He said major buildings in the area, like 100 and 120 Front St., are examples of buildings that are benefitting from the project. "We've seen multiple tenants in those two buildings extend on a long-term basis anywhere from five to 10 years, because I think they realize that that area in particular is going through a complete transformation," Kelleher said. New tenants added to 100 Front St. over the past year include World Energy Solutions and Target Corp.

Upbeat In MetroWest

Meanwhile, to the east, the Interstate 495 corridor was a powerhouse of commercial activity in 2012, with major players like TJX Cos. and Quest Diagnostics expanding into Marlborough. But brokers say that besides those deals, activity has been minimal.

However, O'Brien said he's handled leases for several staffing firms and mortgage companies recently, which, he believes, indicates a brighter future.

"That shows some positive signs in the overall economy in terms of the fact that they're even out there because, for a while, the mortgage companies were going out of business," he said.

Holmes said the biggest positive trend he's seeing is tenants, often smaller software or financial services firms, adding space to their leases in mid-contract as they hire more people.

"Two years ago, they were calling up saying they had too much space and saying they need to renegotiate the space," he said.

According to Colliers' data, vacancies in MetroWest dipped just barely from 29.9 percent in the fourth quarter of 2011 to 28.4 percent in the same period in 2012.

Holmes said he expects Class B leases in MetroWest to be mostly flat for the next 12 to 18 months because there's so much space available. However, he expects more activity for the pricier Class A properties.

"For the purpose of attracting and retaining employees, we are seeing more employers interested in the Class A buildings that offer a cafeteria, fitness center, and lockers and showers," he said, adding that companies that signed leases five years ago for Class B space can now move into Class A quarters for about the same cost.

He said there was positive absorption for 2012 and rental rates are starting to increase. According to Colliers, 495 west — which includes Hopkinton, Hudson, Marlborough, Maynard, Milford, Northborough, Southborough and Westborough — saw positive absorption of more than 193,000 square feet.

Holmes said software-related firms have been, by far, the most active in MetroWest. "Anything that's software-related has been so strong in MetroWest, and we're also seeing a little bit in terms of (the) medical device" market, he said.

North Central: Medical Office Destination

In North Central Worcester County, the major push has been in the medical field, brokers say.

An example of this is the 54,000-square-foot Longview Corporate Center in Leominster, which Tim Norton, president and founder of Apex Properties, the firm that handles the property, said is full for the first time since it was built in 1990. He said new tenants added late last year include Northeast Allergy, Allure Dental and a UMass Memorial Health Care physician's office.

Tom McNamara, owner and broker of Poirier Realty in Leominster, offered the same assessment of Class B space in the area, with the majority of demand coming from doctor's offices and home health care organizations.

Norton said he believes the movement results from health care laws that require everyone to carry insurance, putting a focus on preventative care and boosting demand for health care providers.

He said there are five major Class A buildings in the market, with 240,000 square feet of space and a vacancy rate of about 10 percent. But when it comes to Class B, McNamara said there's a lot of space to fill, but insufficient demand.

He said most of the demand he sees is for small businesses looking to lease 250 to 600 square feet, roughly the size of a living room. He said that if someone were to ask to see 1,000 square feet of space, he knows of at least 20 properties that could be shown, and for low prices, because demand isn't meeting supply. For example, he noted that the price at 151 Central St. in Leominster, former Leominster Credit Union's administrative offices, is only $7 per square foot, but the building covers 9,000 square feet.

"We haven't seen a great demand for large companies moving their offices here," he said, "which is strange because they could move here and put up some nice office buildings in our (office) parks" and have a cheaper cost of living in the area than to the east.

"You can get anything you want in Central Mass for $8 to $12 a square foot," he said.

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