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Office market makes modest gains

By Casey Ross
Globe Staff / October 8, 2010

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The Greater Boston office market is picking up after months of declines, but not enough that owners can raise rents or developers can begin construction of new complexes.

The average asking rents for top-rated space in Boston rose 50 cents a square foot in the third quarter of this year, to $47.48.

However modest, that is the first time in two years that rent went up, according to Richards Barry Joyce & Partners, a real estate services firm. Lease prices remain well below the peak of nearly $65 in the fall of 2008, but the uptick indicates the market is gradually recovering, specialists said.

“We’re seeing encouraging signs, and we’re very comfortable saying that things are no longer getting worse,’’ said Bob Richards, the firm’s president. “But there’s nothing to suggest we’re going to be riding out of this on the crest of a wave.’’

The slow recovery reflects the uncertainty in the broader economy. Many firms are beginning to grow again, but not at a pace that would spur developers to build new head quarters or other facilities. For that to happen, rents have to rise closer to prerecession levels so that developers could convince lenders there is sufficient income to justify financing their projects.

One positive sign is a steady reduction in the amount of cheap sublease space, whose availability puts downward pressure on rents.

Greater Boston now has 4.7 million square feet of available sublease space, down from 5.4 million square feet at the end of 2009, according to the real estate firm Jones Lang LaSalle.

That means most companies have stopped shedding space, and some are expanding and spending money to relocate.

Typically, during a strong market about 3 million square feet of sublease space is available.

There were also several telling leases signed recently. The largest of the year was Dassault Systemes, a French software firm that is taking 320,000 square feet in Waltham.

In Cambridge, Microsoft Corp. expanded by 113,000 square feet as part of a new research center in Kendall Square, and in Boston Liberty Mutual Insurance Co. expanded by 78,000 square feet.

Alex Dauria, a managing director for Jones Lang LaSalle, said demand for space reaches around the region. Companies looking for more room include the device maker Zoll Medical Corp. and the software firm Kronos Inc. Both are seeking more than 100,000 square feet.

“Companies are out there. They are active. And they are considering decisions about their real estate,’’ said Dauria, who specializes in the suburban market.

He said software makers and other computer technology firms are the most active tenants in the market, with about a dozen companies searching for a combined 465,000 square feet.

Eventually, demand from those and other companies will consume the existing supply and lead to construction of new office buildings. But the market has not yet hit that point; about 20 percent of the region’s office space is vacant.

Currently, most of the active construction projects are those that started before the recession. In Boston, for example, Boston Properties is completing a 31-story tower it began building in 2007. The tower will be mostly occupied by Wellington Management.

In the Back Bay, Liberty Mutual, which already added office space this fall, is expected to begin construction of a new headquarters by year’s end.

But other projects with large office components remain on hold, including the Filene’s redevelopment in Downtown Crossing. The owners of the site have put it up for sale, marketing the property for development of apartments and retail stores.

“You won’t see a lot of [office projects] starting up soon,’’ said Richards.

“Most of the growth is coming from the smaller users looking for 10,000 to 20,000 square feet. That doesn’t point to a need for new construction, but that’s the sector that’s going to lead us out of this economy.’’

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

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