Even as other parts of the economy show signs of life, the commercial real estate market in Boston will remain depressed, with a vicious cycle of falling rents and foreclosures preventing construction of new buildings that would create jobs.
The ongoing slump threatens to keep a broader recovery in check, as the industry is a significant contributor to the overall economy. New buildings bring additional property taxes to beleaguered municipalities, income to vendors that provide construction materials or office supplies, and wages that construction workers in turn cycle through the economy.
“It’s going to be a long process for the market to come back,’’ said Gus Faucher, director of macroeconomics with Moody’s Economy.com. “The economy can still plug along if commercial real estate doesn’t turn around right away, but it’s certainly going to be a big drain on growth.’’
The markers point downward. Rents for office space have dropped five quarters in a row. Average asking prices in Boston’s down town business district have fallen by nearly a third since the start of 2008 and are at $42.46 per square foot, according to CB Richard Ellis, a real estate services firm. Landlords are struggling to fill large empty spaces created by steep job losses during the past two years.
A survey released by the financial advisory firm Deloitte this week found that nearly 75 percent of real estate executives believe rents and property values will continue to fall in 2010. Most predicated a full recovery in two to three years.
Lower office rents make it harder for commercial developers to justify the costs of large building projects that would create jobs in the battered construction industry. Unemployment in the building trades is as high as 35 percent in some categories, and is unlikely to improve much during the next year, economists said.
Landlords are also struggling to collect enough rent to make their mortgage or debt payments. Long-term vacancies and falling rents lead to loan defaults and foreclosures. The foreclosure rate on commercial properties in the region has increased sharply during the past year, to 0.43 percent last month from 0.17 percent in March 2009, according to
And many in the industry expect the number of foreclosures to increase later this year, as loans come due on buildings that were purchased in the rising real estate market in 2005 and 2006.
“You’ll see a lot of distressed properties coming on the market in mid to late 2010,’’ said Robert Griffin, president of the New England region for Cushman & Wakefield. “The maximum exposure will be in high vacancy areas along [Interstate] 495, but you’ll also see that activity along Route 128 and in Boston.’’Continued...
But Griffin added that while the leasing market struggles, sales of commercial buildings are beginning to increase after two years of inactivity.
His firm this week closed on the sale of IBM’s 490,000-square-foot campus in Littleton, which was purchased by Wells Real Estate Funds for $94 million. Griffin said competition for the property was high, as pension funds, private equity firms, foreign buyers, and real estate investment trusts expressed interest. “There is as much demand as there has been in 30 years,’’ he said.
On the leasing front, however, the amount of empty space is growing. Lincoln Property Co. said the percentage of vacant office space in Boston and nearby suburbs jumped to 14.5 percent in the first quarter of 2010, compared with 11.7 percent the same period last year. And Lincoln predicted that number will continue to rise, with large chunks of space scheduled to be vacated at One International Place and other large downtown towers.
“Through the first quarter, it is still trending down and it feels like the market is going to hit the bottom in middle of this year,’’ said Mike Edward, senior vice president for Lincoln. “The real question everybody has is, how long will it take to come back? But I don’t think anyone really knows.’’
Ted Oatis, a partner at the firm that owns One International Place, the Chiofaro Co., was much more optimistic about his company’s chances of leasing the space coming vacant.
“The space coming available in 2011 is the best there is in Boston, and we have active proposals out that would more than fill it,’’ Oatis said. “We expect to have a large portion of the space leased before the end of the year.’’
Much of the vacancies in the downtown market are due to job cuts at big financial services firms. Other parts of the Boston-area market have fared better because they have concentrations of health care and biotechnology companies, which have avoided significant job losses. In Cambridge, for example, the rate of vacant space dipped to 10.4 percent last quarter, compared with 10.8 percent at the end of 2009.
“Nationally, Boston still looks pretty good,’’ said David Fitzgerald, of CB Richard Ellis, noting that the vacancy rate in Seattle is up to 20 percent. “But the market here is still heading down, and there is too much negative momentum to change that in the near term.’’
Casey Ross can be reached at cross@globe.com. 
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