BOSTON – While the Massachusetts economy is still in a downturn, the rate of deterioration has slowed considerably.  The state’s education, health services, professional services, as well as information sectors have remained relatively stable despite strong recessionary pressures from the financial services sector. 

Asking rates for office space continued to fall in 2009, but are leveling off.  With vacancy rates climbing to 9.5% in the Central Business District and 16.5% in the suburbs, there is no shortage of supply, allowing tenants with solid financials to take advantage of tenant-favorable conditions.  Significant transactions include Verizon’s 200,000 SF lease at 185 Franklin Street in Downtown Boston and 3Com Corporation’s 130,000 SF lease at 350 Campus Drive in Marlborough.

“Although the Boston market continues to slide, the rate of decline is showing significant signs of deceleration,” said Michael DiGiano, Executive Vice President of NAI Hunneman. “If this trend of decelerating decline continues, we can anticipate the beginnings of a stabilizing market in 2010, with more sustainable growth trends returning in 2011.”

The industrial market continues to trudge along as average asking rates have dropped to an average of $6.00/SF NNN.  Vacancy rates have hit their highest level since the first quarter of 2005.  One significant transaction is Best Buy’s build-to-suit lease of a new distribution facility at 140 Depot Street in Bellingham, totaling 238,370 SF.

The lack of liquidity continued to plague the investment market in 2009.  A majority of investment sales have been limited to smaller deals that can be locally funded.  The multifamily market remains relatively active; one of the largest deals in 2009 was the sale of a 90-unit multifamily portfolio in Arlington for $12 million.  Cap rates have increased to 7.5% for multifamily sales, 9.00% for office property sales and 9.5% for retail property sales.

The retail market has also felt the impact of the economic turmoil with the lower rental rates and significantly higher vacancy in the Downtown.  Super H-Mart’s 51,000 SF lease at 3 Old Concord Road in Burlington is one of the few deals that were completed in 2009.

Commercial real estate markets around the world experienced the full impact of the global economic recession in 2009, according to the 24th annual Global Market Report released by NAI Global.  Rising vacancy rates and declining rental rates were evident in virtually every market sector and geography, with weak demand and a growing supply of sublease space further eroding market fundamentals.

After a turbulent 18-24 months since the market peaked, 2009 marked a year where transaction volume nearly came to a standstill as corporate tenants waited for clear signs of recovery and investors remained on the sidelines waiting for signs the bottom has been reached. As the year progressed, government intervention in the form of stimulus packages in the U.S., Europe and parts of Asia took hold and by year’s end many markets had begun to stabilize. However, with U.S. unemployment topping 10%, consumer demand and spending power at their lowest levels in decades and international manufacturing and trade proceeding at a crawl, the global recovery will take some time to truly stimulate economic growth.

“The past year was extremely challenging for commercial real estate, and we don’t anticipate much new demand in 2010,” said Jeffrey M. Finn, President & CEO of NAI Global. “We’re working with our corporate clients to help them take advantage of the current tenants’ market to reduce their long-term occupancy costs. Many tenants are able to negotiate more favorable lease terms today in exchange for a longer commitment. This ‘extend and blend’ practice is a trend we see continuing well into the next 18-24 months.”

Investors who have been sidelined by economic uncertainty will see tremendous acquisition opportunities in the coming year as banks and financial institutions clean up their balance sheets and move more aggressively to dispose of commercial real estate loans and financially distressed real estate assets, said Finn.

“The recession has been over for six months and job growth is just months away, but the fact remains it will be impossible to predict what will happen next,” added Dr. Peter Linneman, NAI Global Chief Economist and Principal at Linneman Associates. “With significant tax, healthcare and regulatory proposals still in the offing, there is little clarity as to the ultimate outcomes or costs. We’re concerned with commercial mortgage delinquency rates as they have been on the rise and could keep the commercial real estate industry in neutral for several more months.”

While the United States, parts of Europe, the Middle East, Asia and Latin America experienced a deep recession, some economies survived 2009 nearly intact. Brazil, India and China all experienced a slowdown in economic growth, international trade and manufacturing demand, yet continued to post positive GDP growth for the year, far outpacing their neighbors and global trends. Brazil is looking for increased activity in the commercial real estate sector, specifically in big cities like Rio de Janeiro, which will soon host the World Cup and Olympic Games. At the end of 2009, China began to see a sharp rise in foreign direct investment in its manufacturing sector, and is expected to post 9% GDP growth in the coming year. India is positioning itself as a leader in logistics and manufacturing, and though commercial property markets will remain soft in the short term, significant growth is expected over the longer term.

U.S. Market Highlights

Office property vacancy rates are continuing to rise, and severe job losses have resulted in increasing shadow or sublease space along with tenant inducements. The national average vacancy rate for downtown/CBD Class A space reached 13.9% in 2009, an increase of 35% over 2008, while the national average rental rate for downtown/CBD Class A space fell 21.6% to $37.09/SF/YR. Class A office space in the suburbs did not fare much better as the national average vacancy rate rose from 13% in 2008 to 16.9% in 2009 and rental rates fell 4.6% to $25.11/SF/YR.

Industrial properties are also seeing an increase in vacancy rates as the slowdown in retail, manufacturing and international trade cut into demand and delivery of new supply pushed vacancy rates higher. The national average vacancy rate for bulk warehouse space topped 11.1% in 2009, the highest level in five years, and the national average rental rate dipped 1.3% to $4.57/SF/YR.

Multifamily starts have fallen 75% in the past six months and will remain low due to the shortage of available construction capital. The sector will take longer to rebound and will not see a recovery until late 2010.

Retail vacancies continue to rise across the nation, and construction has dropped nearly 50% from its 2007 peak. The national average vacancy rate in regional malls reached 7.1% in 2009, up from 5.6% in 2008, while the national average rental rate for prime mall space fell 10.6% to $32.76/SF/YR. The vacancy rate in power centers, a favorite of the struggling big-box retailer segment, soared to 9.8% in 2009, up from 5.9% in 2008, and the average rental rate fell 6.3% to $19.46/SF/YR.

“We believe we will see a slow stabilization across the office and industrial sectors in 2010, with multifamily and retail lagging further behind,” said Finn.  “We expect to see a great deal of churn across the industry as billions in commercial real estate mortgages come due in the next 18 months for properties that have lost significant value and occupancy since the market highs of 2006 and 2007. How the financial industry and investors adjust to and absorb these mortgages will determine how long it will take the industry to truly recover.”