No more towering rents

Amid the crisis, office landlords offer deals to retain tenants

Real estate industry executives expect Boston office rents to slump further as law firms and financial companies shed employees and cut costs. (Pat Greenhouse/Globe Staff/File 2007)

Boston's sky-high office prices are coming back to earth.

Rents are falling in downtown towers, as much as 10 percent this past month, as the financial crisis and rapidly worsening economy hurt two mainstays of the city's office market: investment companies and law firms.

The decrease has put an end to years of rapidly rising rents as landlords, who increased prices repeatedly, offer deals to hang on to key tenants. In addition to lower rates, landlords are offering several months of free rent and other incentives to keep their buildings occupied, said real estate executives who market downtown space.

"The question right now is how far back we're going to go in the resetting of rents," said Andy Hoar, managing partner at CB Richard Ellis in Boston. "The outlook for 2009 is really grim."

His firm has found that average asking rents for class A space in downtown Boston have fallen $3, to $66.54 a square foot, since the end of 2007. Industry executives said they expect a steeper price correction in coming months as downtown companies shed employees and expensive office space to cut costs.

The financial markets' woes will result in 7,200 jobs lost at investment and insurance firms in Massachusetts through the end of 2009, according to a forecast by Moody's Economy.com.

The amount of sublease space, a key barometer, ticked up in Boston last quarter to 723,000 square feet, from 638,000, according to the real estate firm Colliers, Meredith and Grew. Though that is still relatively small, the increase is important because sublease space is often the first real estate to become available in a downturn.

"We've seen dribs and drabs of sublease space, but not a lot," said Bill Collins, a managing director at the real estate firm Jones Lang LaSalle. "Boston is not a headquarters city anymore. We're insulated somewhat by the diversity of our tenant base."

But Bob Richards, president of the real estate firm Richards Barry Joyce, said the isolated examples of companies putting up sublease space in the city could begin to snowball if economic conditions worsen. "If this continues another six months, we'll have some significant issues to deal with," he said.

The downturn is just appearing, and its full effects won't be known for months, once companies have made personnel decisions and reorganized their space. Real estate professionals are watching the financial services sector as a gauge of the market's direction. Those companies occupy 12.5 million square feet in Boston, roughly one-fourth of the city's downtown office space.

Fidelity Investments, with 1.8 million square feet, is reportedly weighing 4,000 job cuts companywide. The company has declined to comment. It has operations across the country.

Another major tenant, Bank of America, is reorganizing its Boston operations following the acquisition of Merrill Lynch. The combined company may shed jobs. Bank of America has said it is committed to maintaining employment levels in Massachusetts at about 8,000.

Law firms are also hurting, with many seeing a drop in business due to the sharp decrease in financial and real estate transactions during the past months.

Real estate executives do not expect the fallout to be nearly as severe as it was early this decade, when the collapse of dot-com companies and mergers of financial companies flooded the market with millions of square feet of sublease space. That caused class A rents to plummet to $37 a square foot by 2003.

In New York City, job cuts by financial services companies are expected to drive down rents by as much as 25 percent by 2011. While the impact in Boston is not expected to be as sharp, the city still hosts the operations of firms such as AIG, Merrill Lynch, Wachovia, and Lehman Brothers, all of which have been linked to the financial crisis.

Some firms have been looking to move back-office employees to the suburbs, where they can cut rental costs. Tod Brainard, a principal of Griffith Properties, which owns the HarborSouth tower in Quincy, said he has fielded inquires from more than 10 large financial firms interested in moving from Boston to the 206,000-square-foot building.

The mutual fund company MFS signed a lease at HarborSouth last summer after deciding to move some back-office employees from 500 Boylston St. in the Back Bay.

"If you're in a building that charges $60 to $80 per foot, why wouldn't you move into space that's half the price?" Brainard asked. "In the last week, I've had two large financial companies come through that were looking for over 100,000 square feet."

Casey Ross can be reached at cross@globe.com.