Office Insight - Jones Lang LaSalle

Office Insight
Boston . Q2 2012
Tight pockets in the market, but business
owners are cautious
Key market indicators
Supply
12-month
forecast
158,542,669 sf
Economy
Boston has had an unemployment rate below that of the United States for the
last 20 years. What makes this time in history unique is that with Boston
posting an unemployment rate of 5.7 percent and the U.S. pegged at 8.2
percent, the spread between the two ( at 250 basis points), is the widest it has
been over this time period by a factor of three. Year-to-date, the state of MA
has added 37,100 jobs, indicating that the recovery is picking up once again
after the 11,000 jobs added in all of 2011. While that is encouraging, the
recovery in employment remains concentrated in the high-tech and healthcare
sectors, while the more traditional Boston sectors like financial services and
legal services continue to find their ground. The lack of hiring in these sectors
creates some uncertainty in Boston’s recovery story.
Supply
Demand
Pricing
Direct vacancy rate 14.7%
Total vacancy rate 20.1%
Under construction
4.8msf
Leasing activity 12 mo. % change -4.0%
YTD net absorption
-272,151 sf
12-month overall rent % change 4.6%
Class A overall asking rent
$34.30 psf
Class B overall asking rent
$24.08 psf
In addition, the Associated Industries of Massachusetts Business Confidence
Index dropped by 8.5 points in June to 48.3, its second largest monthly
decline in its 21-year history. Business owners continue to display trepidation
given the turmoil in Europe and the election season in the U.S. The index is
20 points above where it was in 2009, but the recent plunge denotes a nonlinear
recovery.
Market conditions
Greater Boston area fundamentals tightened with the vacancy rate dropping
by 30 basis points and rents rising 0.5 percent overall. The availability rate did
increase marginally as a few tenants listed their space as “future available”.
State Street listed their 400,000+ square feet in the Financial District as
available given their build-to-suit project that is planned for the Seaport
District. And in East Cambridge, Monitor put approximately 150,000 square
feet on the market as well.
The current macroeconomic backdrop is creating an environment where
tenants value flexibility in lease terms, efficiency of space use and are
strategic about location selection. This translates into a bifurcation in the
marketplace with submarkets like Cambridge, the Seaport District and the
high tech Waltham/Burlington corridor outperforming due to industry
concentration. Most other submarkets are recording only modest
improvements.
Net new supply, net absorption and total vacancy
sf
Leasing Historical activity asking 12 mo. vs. vs. effective sublease rents space
sf
4,000,000
3,000,000
2,000,000
1,000,000
0
-1,000,000
-2,000,000
-3,000,000
-4,000,000
20,000,000
16,000,000
Net new supply Net absorption Total vacancy
2008 2009 2010 2011 YTD 2012
Leasing activity
Sublease space
22%
21%
21%
20%
20%
19%
19%
18%
18%
17%
17%
Outlook
Overall, asking rents are up 4.7 percent year over year in Greater Boston, a
pace that exceeds historical norms. Whether the sudden plunge in the AIM
Confidence Index is a trend or a “blip” remains to be seen. Fortunately
Boston’s industry composition should protect the market on the downside as
we continue to navigate these uncertain times.
12,000,000
8,000,000
4,000,000
0
2008 2009 2010 2011 YTD 2012

Jones Lang LaSalle Americas Research • Boston Office Insight • Q2 2012 2
Tenant perspective
Rent growth continues to be relegated to key, hot submarkets like
Cambridge and the Seaport District. Areas north of the city like Burlington
that are in the high tech corridor are exhibiting rising rents and high levels
of net absorption as well. The South continues to lag as it contends with
large blocks of space once used as back office Financial Services space.
Tenants are truly selecting space and submarkets that meet their
objectives from a branding and talent attraction standpoint if they can
afford the space. As vacancy drops in key submarkets, demand is spilling
into neighboring areas but some tenants like State Street Bank, Liberty
Mutual, Ironwood, Vertex and Biogen are all choosing to build their own
space in tight submarkets versus occupying existing buildings in looser
areas. We are also starting to see spec office space in the construction
pipeline (fully financed by developer) but a testament to the belief that
tenants will pay a premium for new space.
Landlord perspective
Asking rents rose only 0.5 percent in the second quarter but landlords in
the various submarkets are exposed to very different set of dynamics.
Landlords continue to play offensively in the healthiest submarkets like
Cambridge and the Seaport District. In the suburbs, 128/Mass Pike and
the high tech corridor in the north continues to exhibit landlord favorable
conditions. The first speculative office space is being built in Burlington
speaking to the bullish sentiment that tenants will chose location and
newer space over older space in secondary or tertiary submarkets.
Landlords in these outer suburbs are struggling to attract tenants and look
to create an urban feel in a suburban environment wherever and
whenever they can. Troubled assets are also an issue in the outer
suburbs with almost 10 percent of the space in 495/Mass Pike for
example (equaling over 1.3 million square feet) in some form of trouble.
Class A overall asking rents
Class A tenant improvement allowance
$ psf
$70
CBD
Suburbs
$ psf
$70
CBD
Suburbs
$60
$60
$50
$50
$40
$40
$30
$30
$20
$20
$10
$10
$0
2008 2009 2010 2011 Q2 2012
$0
2008 2009 2010 2011 Q2 2012
Class A free rent
Class A blocks of contiguous space
months
9
8
7
6
5
4
3
2
1
0
CBD
Suburbs
2008 2009 2010 2011 Q2 2012
# of blocks
90
80
70
60
50
40
30
20
10
0
60
20
50,000 -
100,000 sf
CBD
25
10
100,000 -
200,000 sf
Includes vacant existing blocks and available blocks
Suburbs
5
4
> 200,000
sf

Jones Lang LaSalle Americas Research • Boston Office Insight • Q2 2012 3
Property clock – current market conditions
Submarket leverage – market history and forecast
Submarket 2010 2011 2012 2013 2014
Landlord leverage
Tenant leverage
Back Bay
Financial District
Seaport District
Cambridge
128 Mass Pike
495 Mass Pike
495 North
North
Northwest
South
Landlord-favorable
conditions
Balanced
conditions
Tenant-favorable
conditions
Completed lease transactions
Tenant Address Submarket Sf Type
RSA, security division of EMC 174 Middlesex Turnpike, Bedford Northwest 328,232 Renewal
Blue Cross Blue Shield 101 Huntington Avenue Back Bay 330,000 Relocation
Red Hat, Inc. 314 Littleton Road, Westford 495/North 175,000 Renewal w/ Build-to-Suit
Aveo Pharmaceutical (Lab) 650 East Kendall Street East Cambridge 126,065 Relocation
Children’s Hospital Boston Landmark Center Back Bay 111,000 Sublease
LogMeIn 320 Summer Street Seaport District 101,821 Relocation
EnerNOC One Marina Park Drive Seaport District 100,000 Relocation
Conformis 28 Crosby Drive, Bedford Northwest 90,000 Relocation
Sybase, Inc. 15 Wayside Road, Burlington Northwest 62,805 Relocation w/ Contraction
Top completed sale transactions
Address Submarket Buyer / Seller Sf Sale Price $ psf
451 D Street Seaport District Shorenstein Partners/Rockpoint 496,000 $115,000,000 $232
13 Building portfolio Healthcare Trust of
America/Stewart Healthcare
Bedford Business Park Northwest The Davis Companies/Boston
Properties
371,000 $100,000,000 $400
470,000 $62,800,000 $133
Greater Boston methodology: Inventory includes all Class A, B, & C office properties, excluding all condo, medical and owner occupied buildings

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