Greg Klemmer
February 2008

Boston commercial real estate in 2008 has started about where it left off in 2007 - an active office market concentrated in the obvious areas, sporadic industrial activity, and a very quiet investment market. Current activity suggests that the 2008 market will maintain this pace without a lot of momentum, but better than the economic indicators would suggest.

Software, defense, biotech and medical continue to be the economic drivers of this region. Most of the activity continues to be in the markets north of the Mass Pike but concentrated between from Wellesley north to Lexington. Waltham is ground zero of activity and the past quarter has seen no change while, at the other end of the spectrum, the North Shore has been very quiet but with significant deals in the pipeline. The industrial sector saw significant absorption but it was concentrated in a few deals. Buildings are seeing steady activity and it bodes well for the year. Investment sales have dropped off significantly with continuing credit crunch and underwriting changes with no abatement in sight.

Beginning with the industrial sector, the vacancy remains flat at 15% with just over a million absorbed in the past quarter. Contributing to this total in a significant way are very recent deals: Petco signing for 104,000 sf in Myles Standish Park, Taunton; L3 leasing 216,000 square feet at 2 Nemco Way, Ayer for their security business and US Gypsum moving to 234,000 SF at 50 Independence Way in Ayer, a relocation created by the development of Westwood Station. Spire Corporation signed a 144,000 sf lease in Bedford. This accounts for a majority of recent industrial activity. Currently, in this same market area, brokers indicate 45 requirements over 30,000 sf with nine seeking space in excess of 100,000 square feet. The average user continues to require less than 40,000 square feet. Lease rates remain between $5.75 and 6.50.

The South market is experiencing all time low vacancy rates. Myles Standish is at 1.7% with 5.8 M square feet; Walpole Park South is at 2.3% (460,000 sf) and Mansfield is at 4% (5.4 M sf). To help ease the tight market, 256 acres have been made available in Phase 4 of the Myles Standish. Not surprisingly speculative industrial construction is underway with Condyne starting 330,000 sf in Liberty Union Industrial Park and 600,000 in Littleton.

The office sector has been equally choppy. As mentioned, Waltham is a bright spot with it’s vacancy rate down to 11%. The Davis Companies and Boston Properties signed significant leases on new projects - National Grid leasing 312,000 sf at Waltham Woods and Phase Forward leasing 165,000 SF at 77 CityPoint. There is a pending lease of 85,000 sf at Hobbs Brook which is also in Waltham; the Middlesex County Superior Court will occupy 140,000-square-feet at Cummings new Trade Center Park in Woburn. Another division of the Middlesex Court relocation will occupy 50,000 sf at Dragon Court, Woburn.

There are office tenants in the marketplace but because of the abundance of space, they are taking their time with decisions. With an overall vacancy of 14%, the market appears stable. However, the 495 North market is close to 25% vacant, the North Shore is 17% and the Metro West is over 18%. Rental rates range from a high of $40 gross in Waltham to $21 gross on the North Shore and in Metro west. The 495 North market is closer to $18 gross.

The suburban investment sales include Concord Road in Billerica for $155 psf by KBS; Intercontinental’s purchase of the Locke Drive portfolio (290,000 sf) for just shy of $100 psf and the Littleton Distribution Center (240,000 sf) purchase by Condyne for $92 psf. Surprisingly, user sales were close to nonexistent. Other notable sales were in Woburn with the 56,400 sf Cambridge Road building ($88 psf) and the 55,000 sf 130 New Boston Street ($113 psf) while Flatley sold the 105,000 sf 580 Main Street in Bolton ($132 psf). A 30,000 sf industrial building recently sold in Woburn for $103 psf. Industrial buildings are commanding prices regularly between $85-100 psf.

Not surprisingly, speculative construction activity has slowed compared to years past but not as much as expected. Deliveries for office product are down to 1.47 million feet in 2007 from 2.33 and 1.61 million feet in 2005 and 2006 respectively. Notable projects in addition to the previously mentioned Trade Center North, 77 CityPoint and Waltham Woods are the 65,000 sf 138 Conant Street in Beverly and the 180,000 sf at 5 Wall Street in Burlington. There is no question there is an air of uncertainty in the marketplace but current activity suggests that things are far from at a standstill. 2007 was a record year for many and while 2008 will no doubt be a fraction of that, it will be better than the economic bad news would suggest.

Greg Klemmer
3RD QUARTER 2007

The Greater Boston real estate market has seen a couple of good quarters by many barometers considering the uncertainty related to global issues. Sales continue to outpace all deal types with investment sales leading the way. Vacancies have decreased slightly for industrial space. Suburban office leasing has seen a considerable pickup in activity, mostly Waltham/Wellesley, prompting new construction. Leasing of North Shore office space has been somewhat sluggish.

Any discussion on suburban real estate needs to start with investment sales highlighted by the Equity Industrial portfolio $515 million ($46 psf) sale included 27 properties spread over seven different states. Another major portfolio sale included 10 buildings in Cherry Hill Park, Beverly and Danvers and two in Forge Park, Franklin totaling 654,000 sf plus land for $71.55 million sf (over $100 psf). The 134,000 square foot former Saucony property in Peabody was leased last October to ADP then sold in July 2007 for $12.9 million. KS Partners purchased the Fordham Road, Wilmington complex for $26 M.

Users were prominent as well. Instrumentation Labs purchased 180 Hartwell Avenue in Bedford, a 400,000 sf R&D building for $29 M ($72.2 psf). This property was spun-off as a by-product of the major Raytheon office lease in Woburn several years ago. IL had signed a long term lease and after lengthy "negotiations" purchased the property. Weir Valves bought 106,000 sf in Ipswich for $6.74 M ($63.6 psf) built in 2002 for $13 M. Weir's Salem property is under agreement to an institutional user.

There were significant leases that deserve mention. The regions' largest was the IBM office lease of 490,000 sf in Littleton. Surprisingly, there was competition (Raytheon) for this large block of 495 office space. Industrial leases with IRobot (150,000 sf-Bedford), Merrill (90,000 sf - Tewksbury) and FedEx (180,000 sf - Northboro; 142,000 sf - Billerica; and 88,000 sf - West Bridgewater) highlighted their respective sectors. Beacon Power leased 103,000 sf of industrial space in Tyngsboro; while Sacks leased 34,000 sf in Wilmington and Sacco leased 30,000 sf in Woburn.

The largest north suburban office deals have been at the renovated former TASC building in Reading - Keurig (37,000 sf) and Sentinal Benefits (31,000 sf). The overall vacancy rate for Eastern Massachusetts' office space is down slightly to 11% with the corresponding industrial market at 13%. The suburbs north of Boston have an office vacancy of 20% with an average rate of $22.50 on completed deals while the industrial vacancy is 14%. There is one project under construction at 138 Conant Street in Beverly, MA. The Connolly Partnership is underway with a 65,000 sf first class office building, with occupancy scheduled for August 2008.

That is the good news. Straw polls taken recently with brokers had interesting results. Many felt the first two quarters of 2007 were very good with an up tick in activity coupled with the closing of many deals that really began 9-12 months ago. Despite that, new activity has come to a halt with many buildings having limited to no showings. Contractors indicate a concern over the next 6-9 months and architects are equally concerned over the lack of new projects. This can be confirmed by a recent poll taken by SIOR.

The Summer 2007 Commercial Real Estate Index compiled by SIOR posted the steepest quarterly decline since SIOR began its indexation project in late 2005. The index showed the weakness as broad-based with slower leasing activity caused by a softening in the local and national economies, with the credit crunch, brought on by the sub-prime mortgage problems, as a contributing factor. The index was based on replies from 367 SIOR participants who provided their views on market conditions in their respective markets in late July and early August. The industrial market was the hardest hit with the office market fairing well, especially in the Northeast.

Based on these findings the concerns are founded but certainly not dire. The technology sector is doing well with new telcom and internet applications driving innovation and real growth. The specialty manufacturers continue to grow because we have the best machinists in the country. Biotechnology continues to attract the best companies in the world and our universities continue to provide talented graduates while their research provides cutting edge cures and new companies. Solve the lack of affordable housing and the positives outweigh the negative.

128 North Greg Klemmer
JANUARY 2007

A lot has happened on 128 North recently.  Despite the falling housing and condo market and the Iraq war concerns, gas prices have fallen and the stock market continues to improve.  At the same time, the commercial market activity had a strong showing. Tenants and buyers have been actively looking while both users and developers closed on a number of projects.

There are at least 835,000 sf worth of deals currently in the market for both office and industrial space. This is more activity than we have seen in over a year. User/ buyers are increasingly competing with tenants and the quality space is in short supply. The option for these companies, with limited existing space, becomes build new or renew/wait. There has been no recent new construction, but renewals have been plentiful. National Development has renewed 250,000 sf of tenants recently in Cherry Hill Park, with the largest renewal being Osram Sylvania's 169,000 sf in two buildings. PFPC renewed in Lynnfield for approximately 185,000 sf.

The user companies that absolutely needed new space found alternatives in a variety of ways. The larger companies bought older manufacturing buildings that required major renovations. Wakefield Distribution paid $7.2 million ($46 psf) for 156,000 sf in Centennial Park, Peabody and are raising the roof to 40'. Bradford & Bigelow, another user, bought a 96,000 sf manufacturing building in Newburyport for $38 psf and will make major improvements for their pre-press and printing operation.

ADP leased the entire building at 13 Centennial Drive, Peabody - the 134,164 SF former headquarters of Saucony. In addition, Magellan Aerospace has left Middleton for 81,000 Sf of state-of-art manufacturing space in Haverhill. Both moves are to higher quality space and expansions.

Consistent with recent sales activities nationwide, investor sales continued to exceed user sales on a dollar per square foot basis, for both vacant and full buildings. Investors paid $7.8 M ($58 psf) for a vacant headquarters style building in Centennial Park; $16.8M ($60 psf) for a vacant 280,000 sf shell office/R&D renovation in Danvers and $99 psf for a vacant office building in Reading. The differential between investor sales of vacant buildings and user sales in these cases was close to $20 psf, before any tenant improvements. The general premise is that the market is getting tighter and rates are easing up slightly with no new construction planned (see graph below).

However, it is more likely reluctance among many investors/developers not to compete on the fully leased property sales. A 226k sf fully leased office building in Middleton, 35 Village Ave, sold for $119 psf while several fully leased industrial properties sold for an average of $100 psf. A 188,000 sf food storage building, occupied by US Food Service, sold for $86 psf. As indicated, these are higher prices than the aforementioned user sales.

The bullishness could be attributable to a slight rise in lease rates. In the past year, lease rates have risen from $20-25 gross for Class A space in Reading/Wakefield while remaining flat further north in Beverly/Danvers in the $17-19 gross range. Industrial rates have remained flat except for a few outstanding properties that have achieved a premium price. An example of the former is a recent renewal in Danvers: 69,000 sf at $6.25 NNN. The same building leased for $6.50 in 1986 and then $5.60 in 1996. Effective industrial lease rates have gone down over the past 20 years but show signs of finally improving.

The conversion of older or functionally obsolete industrial sites to retail has been another trend. The former Skyworks (130,000 sf) and Vernon Plastics (172,000 sf) buildings in Haverhill are both being demolished for new big box retail stores. Two other industrial sites in downtown locations are in planning for major retail developments, pending the relocation of existing 100,000 and 80,000 sf industrial spaces.

Overall, the market for investment sales and industrial activity is relatively strong while the office leasing market continues to lag behind. The trend that should be noted is the conversion of properties into non-traditional uses that will put pressure on available supply and impact future commercial rents.

2005 Industrial Real Estate Overview
MARCH 2005

The industrial real estate market is picking up steam. Tenants are looking for space to lease; users continue to seek industrial properties for sale and investors are voracious in their appetite for fully or heavily leased industrial space, institutional or otherwise.

At the same time, the vacancy rate continues to climb, up slightly from 18.7% in the 3 rd Qt '04 to 19.2% mid 1 st Qt '05. The largest new vacancy is the 301,643 SF Future Electronics property in Bolton and 210,000 SF in Leominster , both for sale. Of the 36 properties listed since 1/1/05 and over 50,000 SF, 14 are available for sale. Of the 365 industrial properties with vacancy and over 50,000 SF regionwide, 25% are available for sale. If there is a real strength to the market, it would continue to be this 25% of the market – properties available for sale.

Interest rates more than fantastic business growth is continuing the trend. Up until the end of 2004, there was little to no leasing activity but properties for sale continued to see not only activity but deals at relatively high prices. Stacy's Pita Chips bought the 183,000 sf Sealy Corp building in Randolph for $4,870,000; FW Webb paid $67 psf for a 65,700 SF metal panel building in Woburn; a large biotech company is rumored to be paying $25 million ($100 psf) for their 240,000 sf heavily improved property in Metrowest; and on the North Shore there are two properties under agreement for $75 psf on over 205,000 sf of industrial space; and this follows last years DeMoula's paying $50 psf for 469,000 sf of very dated distribution space in Wilmington. There are many other examples of users paying $90-100 psf for smaller (sub 40,000 sf) industrial buildings. Ownership, and its tangible benefits, is driving these rising prices.

Good news for Landlords with vacancy is the activity has picked up substantially. Big and small tenants have been in the market to lease. No showings on a 203,000 sf listing in Haverhill before New Years, three since then. Perennial tire kickers look like they will land in 240,000 sf of leases north of Boston while the south markets are more active. A perennial SIOR stalwart has brokered close to 400,000 sf in Mansfield alone since the 4Qt 04 including 204,000 sf. to Medline, 70,000 sf to Dana Barros Basketball School and 48,000 sf to Gloves Inc. Finally, after a valiant leasing effort, Crown, Cork and Seal (85K) and Mattress Giant (63K) have taken the last 148,000 sf at Aegean Drive , Methuen . Interestingly, or depressingly, sale prices are at all time highs while some lease rates are back to early 1990's levels and in some cases less than mid 80's. In one example, the proposed lease rate of $5.75 nnn for 70,000 sf of nice manufacturing space is the same as the lease rate paid in 1984 on a build-to-suit in the same building.

Thus is the dichotomy that is the manufacturing sector. The same building would cost $80-90 psf turnkey to build today. Construction and land costs continue to rise. Manufacturing businesses and jobs continue to leave Massachusetts . Consolidations, China and the overall cost of doing business in MA has lead to many more plants emptying than being built. Many of those vacated are functionally obsolete and suitable only for alternate and better uses. However, there are certain specialty manufacturers and food processors that need to be here. If existing product works, rents are in the $5.50-6.50 range. If not, $7-8.50 NNN for retrofitted space and even higher on a build-to-suit basis.

Build-to-suit activity is active. Dacon Corp.'s has current b-t-s projects including 225,000 sf 3-story R&D facility for Texas Instruments on their Attleboro site; Christmas Tree Shops' 257,000 sf distribution center and Conroy Development's 200,000 sf in Bellingham of which half is leased to the 99 Restaurants. Ian's Natural Foods has a 100,000 sf food plant pending in Haverhill .

Industrial properties are trading actively with investors as well. Cap rates are as low as 7.13% for fully leased well located properties, more typically in the 8-9.5% range. The following sold in the past four months to institutional investors: 125,000 sf (9.5 %) in Rockland ; 330,000 sf (7.13 %) in Taunton ; 153,000 sf (8%) in Tewksbury . Private investors are getting involved as well. Vinco bought a 50% leased 78,700 sf older industrial building in Woburn in 2003 for $56 psf. With the balance leased within the first nine months, the property was sold for $79 psf, a 9% cap for a 30 year old tired industrial building. All types of buyers are looking.

Overall, there is a lot of space available but the feeling is the market is very healthy and the deals are beginning to substantiate this.

SEPTEMBER 2004
Things are getting better. It is with neither the economic forecasting tools available to an Alan Greenspan nor the economic theory of a John Maynard Keynes that breeds such optimism. It is simply chatter. The chatter of others, showings, the ringing of the phone, the responses to mailings. Since Labor Day, activity has increased substantially. Given the quiet of the summer, this is very encouraging.

The year has not been a bust. Far from it. But there has been no consistency to the market and the summer was extremely quiet. The continued bright spot has been sales which outnumber leases substantially. If the market is bifurcated, a beautifully overused real estate word, one gets a clearer sense of the current real estate market on the North Shore and where it is heading.

The investment market has seen the largest volume of deals and dollars with sales of the 320,000 sf Centennial Drive , Peabody , again ($42.3M), the 184,800 sf Tower in Danvers ($23.3M), and the 260,000 sf Verizon building under agreement. Smaller investment sales included Ferraz Shawmut in Newburyport ($6.1M); Brimbal Avenue , Beverly ($4.14M); First Ave , Peabody ($4.9M). The average office investment sale was $122 psf.

The only thing slowing the user sale market is lack of buildings. The recent sales have been 64,500 sf on Main Street, Georgetown ($62psf); 31,500 sf on Centennial Drive ($68.25); 36,000 on Highland Ave ($52.57); and 30,000 on Opportunity Way in Newburyport ($43 psf). The 130,000 sf 40 Parker is scheduled to close in October and 46,000 in Wakefield in January. The average sale price for the industrial sales has been $62 psf.

Industrial leasing has been slow but registering a pulse. Medtronics moved out of Cummings, Beverly into 70,000 sf of office/R&D in Cherry Hill Park , Danvers . This forced Petra Fashions to lease 69,000 sf of distribution space in Centennial Park , Peabody . The activity has picked up recently with 240,000 sf of requirements coming through 3 Technology Drive , Peabody in the past two weeks. There are another 410,000 sf of requirements looking elsewhere, some more fervently than others. Average lease rates for industrial space has been $6.75nnn. Vacancies hover around 12% but that is very misleading. High bay distribution space has three options over 50,000 sf, only one over 24'; three under 50,000 sf. Manufacturing requirements are so specialized that true availabilities are misleading. A list of buildings derived at by square footage will show eleven availabilities that are quickly reduced to 2 or 3 real options. Manufacturing rates range from $5.00 nnn in outer markets to $7-8.00 nnn along Route 128.

The office market has been quieter still, but here is where the increase in activity has been felt the most. For example, there was one serious showing in August at 100 Endicott Street , Danvers but four since Labor Day, with requirements totaling 135,000 sf. Add to that Draeger Medical Systems looking for 120,000 sf and the North Shore market can be considered on fire. ScanSoft has been in the market, but looking closer to Burlington for 100,000 sf. Vacancies are roughly 19% and average lease rates are $18.00 gross. There has been a total of 193,000 sf of net absorption this calendar year with a majority coming in deals less than 10,000 sf. Blocks of space available tell a very different story: there is one space over 200,000 sf; 2 over 100,000 sf; 4/50-99k; 5/30-49K; and 147 spaces under 30,000 sf.

Cautious optimism is the way most are looking at not just the North Shore market, but most markets. Iraq , terrorism, oil prices, interest rates and the overall economic recovery are all obviously going to affect whether we can sell or lease space. Put that way, it should throw cold water on our sense of self-importance. But being at the whim of all of these and able to affect nothing, we can only put ourselves in the best position to succeed once the optimism becomes justified and it is moving in that direction.

NORTH OF BOSTON
As seen in New England Real Estate Journal, February, 2004
by Greg Klemmer, SIOR, Klemmer Associates, LLC

The real estate market north of Boston can be broken down pretty easily – brokers are making money selling properties these days, not leasing them. Of all the deals being done, sales dominate by a margin of 4 to 1. This is true whether the market is the Inner Suburbs, the North Shore or the Route 93 corridor.

The overall vacancy rate hovers between 10 and 12 %, and this includes some very questionable properties. A look at the charts below shows availabilities for different product types in the different markets. One can see the huge variance between the 93 market and the North Shore. North Shore industrial prospects continually feel that the market is tighter than they expected. The reason for the dearth is that not much quality industrial space has been built in the past twenty years. Flex space is even tighter for the same reason. This is not true along Route 93 from Woburn to Andover and Lawrence. The Route 93 corridor has been a much more developed area and consolidation over the past several years has taken it toll. Space is readily available, primarily in the flex properties. Where rents were approaching $13 NNN for flex space three years ago, today those same landlords are aggressively offering space in the $6.50-8.00 range. Overall, vacancies are increasing and rents are falling.

However, counter intuitively, the market for industrial buildings for sale has not been hotter. Whatever comes on the market sells and generally at prices that are high water marks for a market. Recent North Shore industrial sales: Centennial Park, Peabody: 48k manufacturing ($75 psf); Northway Park, Peabody: 35k manufacturing ($65 psf); two Peabody build to suits over $90 psf. The most sales have been in the Inner Suburbs with 66,000 sf in Chelsea selling for $86 psf (extra buildable land); 40k in East Boston for close to $50 psf; and two under agreement - 70k for around $50 psf in Chelsea and 40k in Everett for $85 psf. Credit goes to Mark Gottesman for all of these sales and thirty years in the market. Oddly, there have been few 30,000 sf + sales along Route 93. ALL of these sales were to users. Simply, the demand is so high from users (interest rates are so low) that they easily outbid investors/developers. Sale prices today are starting at $50 psf and quickly get to $75 in some locations, less over 100,000 sf.

Large blocks of distribution space are starting to come available. Clarion Partners’ 629,000 sf in Billerica; C&S Grocer’s 475k in Andover; 80k and 115k in Centennial Park Peabody; 100k in Amesbury; not to mention the 222k remaining in Woburn and 145k in Methuen. The NY Yankees, aka CBRE, have a virtual stranglehold on the 100k + warehouse listings, six at last count. Asking rates continue to start at $5.75 psf for decent space with state-of-art space getting over $7.00 nnn. The larger blocks start under $5.00.

Meanwhile, office has been getting a little better. A big assist goes to Raytheon taking 470k at MetroNorth after National bought the complex on spec. Raytheon took another 150,000 sf in Burlington. Strauman is close on 100,000 Sf (office/flex) in Andover and Gordon College took 35k in Beverly. However, again, the biggest activity has been with sales: 100 Endicott in Danvers sold for $15M (320k sf); the Tower in Danvers is under agreement (184k Sf); as is 10 Centennial Drive, Peabody (320k) and 55 Cherry Hill sold for $120 psf, vacant (54k SF). Another 70,000 Sf Beverly building is under agreement for $70 psf. Lease rates have bottomed out at $11 NNN for good quality space including a good tenant improvement package.

Is it getting any better? It seemed so a few months ago but not anymore. There seem to be more listings which outweighed tenant activity. The companies in the market vary by industry but it does seem that they are from the well discussed industries – medical device, bio sciences, and food. Properties will continue to sell and the highest quality buildings will lease.

NORTH SHORE MARKET UPDATE
As seen in New England Real Estate Journal, September, 2003
by Greg Klemmer, SIOR, Klemmer Associates, LLC

The prolonged market doldrums has produced many sobering explanations. While problems with market fundamentals have existed for several years in most sectors, it seems as though positive momentum is building and 4th Qt 03 should be the beginning of positive forecasts, especially on the North Shore.

Not unlike any other market, the North Shore market is made up of every major real estate sector–industrial, office, residential and retail. Each sector has seen its problems but activity has been increasing steadily and it appears to be having some traction.

The sector that has shown the most activity has been the life sciences – whether it is doctors groups, biotech and medical research or medical device manufacturing. There is an estimated 750,000 sf of requirements currently in the market with 60% of these being medical/life sciences related.

Concrete examples of this recent boost to the North Shore has been the sale of several buildings to medical groups. 4 Centennial Drive, Peabody, a 37,000 sf office building sold for $132 psf, and will be home to a group of muscular skeletal related doctors groups. This group also bought a 4.3 acre parcel across the street for $1.1 million for parking and a future ambulatory facility.

North Shore Orthopedics bought a 50,000 sf medical building, which formerly housed Blue Cross Blue Shield, located adjacent to the North Shore Mall for $100 psf. This facility will be renovated into surgical suites, a rehab facility, and offices.

The industrial market is also showing life. 1st quarter leasing of existing product saw Harvey’s and Zone Perfect combine for 90,000 sf of warehouse space in Danvers; then Beacon Sales took 30,000 sf in Peabody and the lone R&D lease was Kaiser Systems leasing 25,000 SF in Peabody.

Build-to-suits have also contributed to the industrial sector, on both a user and lease basis. This July, Expeditors leased 79,000 sf of distribution space in Centennial Park in a 160,000 sf facility currently under construction; Prattville Machine built 40,000 SF of manufacturing; and Kortec is building a new 100,000 SF state-of-the-art manufacturing facility in Ipswich. A bit further away in Haverhill, on the heels of Analogic leasing and fully renovating 203,000 SF, Hans Kissel and General Mills are building a combined 223,000 SF of food related buildings for food prep and distribution, respectively. Recent approvals were granted for a 40,000 sf facility for Summa, a manufacturer of sophisticated printers for outdoor signs, in Centennial Park.

Lease rates continue to be in the $5.75-7.00 nnn range for distribution space and closer to $8.00 nnn for manufacturing space. R&D space is hard to find but when available is leasing for $10-12.00 nnn (compared to $7.75-8.00 in Wilmington). Properties for sale are commanding as much as $65-70.00 psf. The build-to-suits of these specialty buildings have been close to $100 psf. In a very strange juxtaposition, vacancy rates for industrial space have increased from 5% in 1998 to 10.5% today, but average rates have also increased from $5.50-7.50 nnn, with recent softening. And while there are 16 industrial opportunities in the 5-20000 sf range, there are only eight between 20-50k and four over 50,000 sf.

The most heavily chronicled collapse has been the overall office market and the North Shore’s office market has felt its share. The vacancy rate has gone from 8% to 23% since 2001. Lease rates have fallen from a high of $20.53 to 17.22 per square foot. Major contributors to the current vacancies are Cummings Center (400,000 SF), Comverse (100,000 SF), Harvard Mills (140,000 SF), and over fifteen units in the 20-50,000 square foot range. There are 80 spaces available in the 5-20000 sf range, while only four opportunities over 50,000 sf. Overall absorption has been 150,000 sf, with notable leases being Countrywide Home Loans (18k),Allstate Atlantic (12k), ESRI (14.5k) and Brookwood (12.7k).

With a solidification of pricing and a heightened level of activity from all sectors, there seems to be reason for optimism. Not unlike elsewhere, quality sells – both with tenants and buildings - and there is still a preference to own. World affairs excepted, late 2003/early ‘04 should be when the markets began to equalize and regain positive footings.

NORTH SHORE MARKET UPDATE
As seen in New England Real Estate Journal, March, 2003
by Greg Klemmer, SIOR, Klemmer Associates, LLC

Is the market really th ? - You need to be specific.

The North Shore is made up of many different submarkets – the various sectors include industrial, office, retail buildings or land – and the terms under which a property is available – for sale or for lease, as an investment or for a user. So, once again, you need to be specific.

While no sector is completely immune from the weak economy, there are some bright spots. The industrial sector on the North Shore has shown some recent life. Harvey’s and Zone Perfect have combined for 90,000 square feet of warehouse space in Danvers; Prattville Machine recently completed a 40,000 SF manufacturing building in Peabody’s Centennial Park; and Kortec is building a new 100,000 SF state-of-the-art manufacturing facility in Ipswich. A bit further away in Haverhill, on the heels of Analogic leasing and fully renovating 203,000 SF, Hans Kissel and General Mills are building a combined 223,000 SF of food related buildings for food prep and food distribution, respectively. An encouraging aspect to these deals is that each one is an expansion, rather than an effort to lower rent or to consolidate. There are also a combined 210,000 SF of requirements searching for solutions.

Lease rates continue to be in the $5.50-7.50 nnn range (based on age and quality) for distribution space and closer to $8.00 nnn for manufacturing space. R&D space is hard to find but when available is leasing for $10-12.00 nnn. Properties for sale are commanding as much as $65-70.00 psf. In a very strange juxtaposition, vacancy rates for industrial space have actually come down from 2000, according to CoStar, from 20.2% to 12%. What we see does not corroborate those figures, however. We have 153,000 SF of new listings in Centennial and Northway Park, Peabody alone.

The most heavily chronicled collapse has been the office market and the North Shore’s office market has felt every bit of it. To put things in perspective, in 2000, 1.05 million gross square feet was leased (747,000 net square feet) but in 2002, there was a 551,000 SF leased, but a negative 224,000 net square feet leased. The vacancy rate in that time has gone from 8 % to 18 %. Lease rates have fallen from a high of $20.53 to 17.22 per square foot. As an example, Edgewater Office Park had lease deals in the mid $30’s in early 2001 while lease rates are now in the low $20’s. Major contributors to the high vacancies are Cummings Center (400,000 SF), Comverse (100,000 SF), Harvard Mills (140,000 SF), and over fifteen units in the 20-50,000 square foot range. In addition, there are several more large blocks coming to market in the not too distant future. While large blocks of space are available and prices have come down sharply, this has presented opportunities for tenants with leases coming due.

Metcalf & Eddy recently signed a lease for roughly 85,000 SF at Edgewater Office Park. This represented less space but of higher quality and at an incredibly competitive rate. Epsilon leased 100,000 square feet of new office space with the same landlord, FM Global, at roughly the same low rate.

While lease rates are coming down and vacancies are going up, it has not had the deleterious effect on the investment sales sector as one would expect. There remain tremendous sources of funds for real estate investment. Cash flow from credit tenants with decent term attracts investors. The most recent example is the sale of the 320,000 SF 10 Centennial Drive in Peabody. This property was purchased for $19M in 1999 from Avnet Inc. by Berwyn Properties, who had a tenant in hand, Synventure, a sister company. With Synventure leasing 120,000 SF and Avnet leasing back 100,000 SF, this was a purchase with 66% of the property leased. The ensuing repositioning included upgrades to the building, further subdivision, increased parking, as well as, 100,000 SF of additional leasing. By attracting quality tenants, Berwyn was able to sell this as a fully leased investment sale. Because of the quality of the work and tenant mix, this was sold for $38M, at a very competitive Cap rate of close to 9.75%.

Again, the real estate market may appear to be down but it really depends on the particular segment. I have no real predictions but, unlike the early 90’s, we see no great bargains on a sale basis and only office tenants are benefiting from this market. World events are having a great affect on mood and that translates into an understandable paralysis. Some companies will continue to fail; natural growth will occur for others; and most will do nothing.
We need something positive to lift the malaise and get us back on track for optimism and positive activity.

NORTH SHORE MARKET UPDATE
As seen in New England Real Estate Journal, February, 2002
by Greg Klemmer, SIOR, Klemmer Associates, LLC

If there was any ray of hope among those involved in the North Shore commercial real estate market in the past four months it was the Patriots Super Bowl win. Little else. While the office market continues to retreat, the industrial market plods along with the increasing showings and other signs of activity, but few deals.

It is a far cry from eighteen months ago when deals were frequent and activity almost mundane. Today, having any activity is good activity. It seems as though everyone is encouraged by the increased traffic during the past couple of weeks, mostly concerning industrial properties. Five industrial requirements have been out for over 780,000 square feet.

The office market is a different story. Predicting the absorption of office space to pick up by the end of the year is like last fall picking the Patriots to win the East. Vacancies continue to rise. The only large absorption of space was the 120,000 square feet in Middleton that Verizon decided to backfill internally. Other than that, large units of space have recently been added to the availabilities list, such as in Cummings Center, Beverly, where there is a total of 271,000 sf with the large units coming from Habama (21,000 sf), Collagenesis (40,000 sf), Gateway (40,000 sf) and Edgewater Office Park which has over 273,000 sf, including Building 600. 600 Edgewater continues to be aggressive in attracting the first tenants to its 160,000 sf brand new space with proposals in the low $20's.

The vacancy rate for the North Shore office market remains at 16%, including sublease space. Absorption has been lighter than at any time since 1992. Year-to-date, there has been 52,000 gross sf leased, with a net of -8,600 sf. This compares to 413,000 sf gross in 2001 (net -640,000 sf) and 1.4 million sf gross in 2000 and 973,000 sf net. While the giveback of space has slowed, the absorption is well below the pace of even a year ago, then the worst market in a long while. Things will get worse if Applied Materials decides to give back 180,000 of the 280,000 sf they leased this past fall.

Office rates continue to drop with the lowest rates being for sublease space at Cummings Center in Beverly. Sublease space is available for $9.50-13.00 gross while direct space is still in excess of $20.00 gross. Edgewater and surrounding office parks are quoting $20-23 gross while other sublease space continues to be in the mid teens.

Industrial rents and vacancies are anathema to their office counterparts. Industrial rates have averaged over $7.00 nnn while vacancies are less than 6%. Sublease space is less than .5% of the market. For buildings over 100,000 sf, the vacancy is still about 5.5% with rents closer to $5.50 nnn. With no corroborating evidence, purchase prices for industrial space seem to be over $55 psf, with little reductions in any segment. Because of the abundance of space converted to or demolished for office during the gold/office rush of the past twenty-four months and the lack of new construction, there is a shortage of decent industrial space. This has produced plenty of build-to-suits but, which tend to be smaller, sub 50,000 sf. This is a far cry from the activity seen in the southern Route 495/Taunton market where there have been over 2.0 million square feet of new buildings, some on spec.

The market on the North Shore will rebound this year. It may never return to the activity levels seen in the past two years, but understand that the North Shore never experienced the fever pace of leasing and sales that the Burlington-south markets saw. This is a market that tends to plod along, with no large upsides but no big downsides.

NORTH SHORE MARKET UPDATE
As seen in New England Real Estate Journal, October, 2001
by Greg Klemmer, SIOR, Klemmer Associates, LLC

495 North and the North Shore Maintain Stability

The North Shore market covers an area that runs north of Boston, east of Route 93 and continues eastward along Route 128 to Gloucester and north to Newburyport. This market totals just over 9,000,000 square feet of A and B office and over 21 million square feet of industrial space- one and two-story buildings built after. The 495 North market runs from Newburyport south along 495 and includes Lawrence and Andover. It includes 6.8 million feet of office (4 million in Andover alone) and 10.4 million of industrial space.
Like everywhere, activity has been slow, and this was true well before September 11th.
A snapshot of how the activity has slowed - net absorption on the North Shore in 2000 was 800,000 square feet versus negative 661,000 SF so far in 2001. The 495 market saw 540,000 SF of absorption in 2000, but still has a positive absorption so far in 2001 of 216,000 SF. Conversely, the hottest market, Waltham/Needham, had net absorption in 2000 of 2.78 million SF versus negative 2.3 million SF so far in 2001. The Waltham/ Needham office market totals 19.9 million sf of office space. Some first class projects have not had showings in four months.

Office lease rates peaked on the North Shore market at Edgewater Office Park, Wakefield with rates in the mid $30's. Rates are now in the low $20's for Class A office space. Class B space has an average asking rate of $19.00 psf. The overall vacancy rate for A and B space is hovering around 15%, with direct vacancies closer to 10%. Along Route 495 the vacancy is closer to 6%, and 9% including sublease space. Demand is weak and non-existent in areas. Requirements are primarily companies downsizing or at their renewal phase.

One of the larger deals done so far this year is the 280,000 square foot lease between Applied Materials and the team of Gilbane Properties and College Street Investments. Applied Materials is leasing the entire Sylvan Business Center in Danvers, a project that was well under construction as an office redevelopment. Despite the continued semiconductor glut, the overall economy, September 11th, and Applied laying-off 1000 employees, Applied Materials finalized this lease which is sure to give this area a big boost.
An important factor in this deal happening, was the willingness of Gilbane to undertake the project completely on speculation. As much as being in the backyard of its primary competition, Axcelis and Varian, Applied Materials felt comfortable that this was a credible project and one they could count on if the decision were made to make the move. Without Gilbane's early commitment to this project, this deal would not have happened.

The industrial market is somewhat brighter. Vacancy rates remain under six percent on the North Shore for single and two-story space and closer to 8% on 495. Rates continue to be around $6.50 NNN for warehouse space while manufacturing space is closer to $8.00 NNN, and flex space is in the $10-12 NNN range. Industrial sales are strong with distribution space selling for $45-60 psf and manufacturing space between $55-70 psf. Industrial listings continue to have showings and the smaller 30-60,000 sf buildings for sale are selling relatively quickly.

Demand continues to be strong for the quality projects. 200,000 square feet of high bay in Haverhill has had four full building users through it in the past two weeks. Aegean Drive in Methuen, a 230,000 square foot speculative distribution center developed by Tambone, continues to see activity from 50,000 to full building users. There are three companies contemplating 120,000 sf build-to-suit manufacturing buildings in Peabody. It is likely that all of these properties will be committed within the next two months. No one would say that about too many office buildings today.

Given the uncertainties of the nation, the crystal ball is much less clear. Office rates should hover where they are or drop a bit further, well off the peaks of the late 2000/early 2001 days of frenzy for office space. Industrial rates should remain steady, if not increase further. The North Shore will see less activity for the next year than the year past, but the underlying strength of this market- the stable, established companies- will keep the real estate market overall on solid ground for the foreseeable future.

NORTH SHORE MARKET UPDATE
As seen in New England Real Estate Journal, September, 2001
by Greg Klemmer, SIOR, Klemmer Associates, LLC

The North Shore Remains a Stable Niche Market

This article on the North Shore is written on behalf of the visiting SIOR's from around the country who may be interested in learning the various vagaries of our niche markets. It is also written with a heavy heart, as we are only a week removed from the atrocities leveled against us by terrorists. I pray for those hurt, those killed, their families and the rest of the country. At the same time, I am heartened by the resilience of our neighbors in New York, the heroism of the fire fighters and policemen, the patriotism of our country and the outpouring of sympathy and support from around the world. No telling what we will be thinking come the weekend of the SIOR convention, October 26-27th.

The North Shore market covers an area that runs north of Boston, east of Route 93 and continues eastward along Route 128 to Gloucester and north to Newburyport. This market totals just over 9,000,000 square feet of office space-buildings over 25,000 sf and built after 1970- and over 21 million square feet of industrial space- one and two-story buildings built after 1960 and not including flex space.

The North Shore Market, like markets around Boston and the rest of the country, for that matter, has an abundance of new space on the market, predominantly office sublease space. But because the North Shore area did not experience the hyper activity that the mainstream markets did, i.e. Waltham and Needham, the fallout has not been as bad.

As a frame of reference, the Waltham/Needham office market totals 19.9 million sf of office space. Net absorption in 2000 was 2.78 million SF versus negative 2.3 million SF so far in 2001. Conversely, net absorption on the North Shore in 2000 was 800,000 square feet versus negative 661,000 SF so far in 2001. The North Shore is half the market but experienced roughly one-quarter the activity, up and down.

Office lease rates peaked on the North Shore market at Edgewater Office Park, Wakefield with rates in the mid $30's. Rates are now in the low $20's, with asking rates of $25.00 psf for Class A office space. Class B space has an average asking rate of $19.00 psf. The overall vacancy rate for A and B space is hovering around 15%, with direct vacancies closer to 10%. Demand is weak and non-existent in areas. Requirements are primarily companies downsizing or at the renewal phase.

The industrial market is somewhat brighter. Over the past several years, industrial space has been reduced by millions of square feet throughout metro Boston by demolition and/or conversion to office space. Not surprisingly, the remaining industrial sector remains solid. Vacancy rates remain under six percent on the North Shore for single and two-story space. Rates continue to be around $6.50 NNN for warehouse space while manufacturing space is closer to $8.00 NNN, and flex space is in the $10-12 NNN range. Industrial sales are strong with distribution space selling for $45-60 psf and manufacturing space between $55-70 psf. Industrial listings continue to have showings and the smaller 30-60,000 sf buildings for sale are selling relatively quickly.

Consistently, the North Shore build-to-suit market is quite active. Permitted land sites are being sought for several large requirements ranging in size from 100,000 sf to 172,500 sf. The lack of existing space, the fact that they are fully permitted and the continued demand for first class quality space has made build-to-suits the only alternative for many local companies. Rates for build-to-suit space range from $7.00-7.50 for distribution space and $8.00-9.00 NNN for first class manufacturing space. Permitted land parcels in Beverly and Rowley/Ipswich have seen similar activity. Land costs are $13-16 per buildable square foot for industrial land and around $20 pbsf for office development.

Speculative construction is limited to two projects-the 280,000 sf reconstruction of the former OSRAM SYVANIA facility in Danvers, MA into first class office space (Sylvan Business Center) and the 160,000 sf office building being built in Edgewater Office Park, Wakefield.

Given the uncertainties of the nation, the crystal ball is much less clear. Prices will hover where they are or drop a bit further, well off the peaks of the late 2000/early 2001 days of frenzy for office space. Industrial rates should remain steady, if not increase further. The North Shore will see less activity for the next year than the year past, but the underlying strength of this market- the stable, established companies- will keep the real estate market overall on solid ground for the foreseeable future.

NORTH SHORE MARKET UPDATE
As seen in New England Real Estate Journal, February, 2001
by Greg Klemmer, SIOR, Klemmer Associates, LLC

North Suburban market shows signs of continued strength

The North Suburban commercial market has seen its share of failing companies and downsizing caused by the economy and mergers. While this has put sublease space onto the market and slowed some deals, the mood has been mollified, yet the overall activity level has not abated.

The North Suburban market consists of roughly 12 million square feet of office space in the towns from Wakefield and Wilmington to Beverly, along Route 128. There are 250 buildings with almost 823,000 sf currently available, a 7% vacancy. In 2000 alone, close to 700,000 sf were absorbed.

Several significant sales of properties have showed the continued interest firms have in the area. The largest of these was 10 Centennial Drive, Peabody, a 320,000 square foot office, R&D and warehouse property bought by Berwind Property Group for $19,000,000 ($60.00 psf). Berwind leased 100,000 sf to Avnet, the seller and current occupant; approximately 120,000 sf to Dynisco and they still have 70,000 square feet available. Four Technology Drive, Peabody, an 83,000 sf office/distribution headquarters site, was sold to Combined Properties for $8.4 million. 75 Sylvan Street, Danvers recently sold to a partnership of Gilbane Properties and College Street Investments. This is a 300,000 sf former manufacturing facility that will be dramatically converted to all office space.

The sale price of these buildings ranged from $20.00 psf to $100.00psf. What they all have in common , however, is that they are all going to be upgraded and marketed as first class office buildings and will lease in the $17-20.00 NNN range when completed. These all currently have a large, if not all, industrial component, but will be eventually converted to office space. This is an ongoing trend that has finally made it to the North Suburban market; a trend that started around 1997 in Needham and Waltham and made its way north along Route 128. The reason for this trend is obvious. The office sector is the driver of the recent surge in commercial real estate.

Office rates in the North Suburban market peaked and hovered in the $16-18.00 gross range for the last half of the nineties. Beginning in 2000, this office market got hot. The overall market has seen Waltham rents climb to $70 psf and average in the $50's; Burlington rents have risen to the $40's; and Wakefield has seen rents now in the $30's. Following this trend, the North Suburban market finally saw rents climb to an average of $23.00, with some examples of rents in the $30's. Examples are Oxford International's lease of 48,000 sf at Cummings Center, Beverly, Groove Network's expansion at Cummings and Lodestar's lease of 23,000 sf at Two Corporation Way, Peabody - deals being done in the $23-24.00 gross range.

What is encouraging is that this activity has not slowed down. There are requirements in the marketplace for over 1,000,000 square feet. Of these requirements, 800,000 sf is for office space and it excludes around 240,000 sf of requirements that withered because of the technology downturn. The limitation of the market continues to be the same one that has plagued most markets for the past several years-a lack of large blocks of space. Of all of the available space, there are only two existing blocks over 100,000 sf; and two blocks over 50,000 sf; the balance of space is in units smaller than 36,000 sf.

It is with this market dynamic in place that encouraged the development team of Gilbane and College Street to undertake the Sylvan Business Center in Danvers. This project will offer close to 290,000 sf of first class office space in a combination of one and two story space. One of the attractive elements of the building is the unique but flexible layout that allows for easy subdivision, down to units of 10,000 sf, while accommodating the 200,000 sf user as well. The modern upgrade design of Symmes, Manni provides for a "brick and beam" atmosphere, if desired, as well as typical first class amenities including ribbon windows, full service cafeteria and health club.

Overall, absorption should continue at a steady, less hectic pace. Prices will probably remain in the mid $20's for North Shore space and average closer to $30.00 in the Wakefield to Route 93 area. The options for the larger tenants will continue to be the Achilless heel of the market.