Boston's commercial landlords squeezed by slump

Several Boston companies have renewed leases early to lock in discounted rents this year. One of the biggest deals involved Bank of New York Mellon, which extended a lease set to expire in 2013 for another five years. Occupying more than 300,000 feet, the bank is the largest tenant of the 41-story One Boston Place tower downtown.

Some firms are negotiating terms that allow them to give up space they might not need and cut their rent. Those that can't swing better deals are trying to sublease unused space. This year, about 3 million square-feet of space, much of it relinquished by tenants, has come back on the market.

That's helped bring down Boston's office rental rates by as much as 30 percent, on average, since 2007, according to Grubb & Ellis.

"The market is definitely not improving," said Steve Brodsky, managing director of Grubb & Ellis' Boston office.

Office vacancy is expected to hit 14.2 percent this year, up from 12.8 percent in 2008, according to Marcus & Millichap Real Estate Investment Services. That's still shy of the national estimate of 17 percent.

Major office property sales have slowed, though some high-profile buildings changed hands this year.

In September, Credit Suisse edged out more than a dozen other bidders to buy the 330,000 square-foot, Independence Wharf building, which overlooks the site of the Boston Tea Party.

The city's tallest skyscraper, the John Hancock Tower, sold at auction in March for just over $20 million, with the buyers agreeing to take on $640 million in debt.

New office construction has been limited, which has helped keep vacancy rates from surging even higher. Though there are some major projects under way that will add available space to the market next year.

The Fallon Co., a developer, is scheduled to open the 18-story ONE Marina Park Drive building in its waterfront Fan Pier project early next year. When completed, the 3 million square-foot Fan Pier project will also include retail and residential space, and a hotel.

The economy remains a key factor in a turnaround for the office market. As long as companies are shedding jobs, they're less likely to need more office space.

Unemployment in the Boston metro area, which includes Cambridge and Quincy, rose to 8.8 percent in September, the most recent data available. That was up from 5.2 percent a year earlier, but lower than the national rate which hit 10.2 percent in October.

"Boston is in better shape that the national average in terms of the impact of the recession," said Hessam Nadji, Marcus & Millichap's managing director.

That's little consolation to landlords that have lost tenants unable to hang on.

For tenants that continue to thrive, the downturn remains an opportunity to seize rental discounts now that may not be available in a year or two.

Sullivan & Worcester had more than two years remaining on its 10-year lease for five floors in a 41-story high-rise in Boston's financial district when it decided to test the market for a better deal.

The law firm shopped around and considered newly built office towers and subleased space. Ultimately, it elected to sign another decade-long deal in the same building, said Dianne Hertneky, Sullivan & Worcester LLP's chief operating officer.

"Our landlord made a compelling argument for us to stay," Hertneky said, alluding to the rental rate discount and other undisclosed incentives the firm got for staying put.

"A good economic deal in bad economic times makes a lot of sense," she said.