Jones Lang LaSalle
New Office Buildings for Boston?!
Zhigang Tang, Economis
tmailto:tztang@tortowheatonresearch.com
In March, two pieces of local news caught my attention. On March 4th, the Boston Globe reported on a proposal to build a 1,000-foot tall skyscraper (Building 1) in the city's Financial District. Additionally, the March 29th Metro—yes, I admit to reading the Metro—described another proposal, this one for a massive, 1.8 million square foot office and hotel skyscraper (Building 2) that would stand toward the back of South Station and the southern end of the bus terminal.
Given what I do for a living, two questions about these proposed projects popped into my head. Considering the still-suspect shape of the Boston office market, what kind of rent might these projects fetch? And, what effect will these buildings have on the rest of the market? With TWR's detailed building level data and some spatial econometrics techniques, we can do a brief analysis to answer these questions—and maybe they will reprint it in the Metro!
Operating on the theory that rents are spatially auto-correlated, we used the detailed building level data underlying TWR Peer Select to draw the asking rent surface area for downtown Boston. As one can see, rents are not evenly distributed.
The proposed new buildings are plotted as two dark dots on the map. A quick visual investigation reveals that Building 1 might expect an asking rent ranging from $30 to $35, and Building 2 should expect an asking rent between $25 and $30. In fact, they may get a bit more than that; our rent model tells us that for each year by which an office building in Boston is younger than the mean, a 0.13% premium can be added to its asking rent. According to TWR's building-level data, the average age of the buildings surrounding Building 1 and Building 2 are 30 and 35 years, respectively. Suppose the two proposed buildings are introduced into the market in 2006; the age-adjusted rent range for Building 1 should be from $31.17 to $36.37; for Building 2, from $26.14 to $31.37. Since new buildings always have better facilities, the actual rent ranges should be a bit higher than the theoretical ranges.
Now let's re-draw the rent map, supposing the two buildings ask the high ends of their rent ranges, i.e. Building 1 asks $36.37 and Building 2 asks $31.37. The new map shows that the two buildings will not significantly affect the current rent surface. The only small change we observe is that the southwest downtown area reinforces its status as a rent premium area. This analysis may be too optimistic, however; it assumes that the new buildings will not affect the market's vacancy rate.
Below are a few charts showing how the two projects will affect our projections of vacancy rate. One can see from the first chart that, were the two projects finished in 2006 (just for the sake of this article, as completion dates are obviously yet undetermined), the vacancy rate of Boston's office market would be about 200 basis points higher than our forecast. This would significantly affect the rent level of the market. According to our rent forecast model, if we had these two new buildings in the market, the average annual rent would be 5.1% lower than if we didn't.
Although the proposed projects would not change rent level contours or the location of rent premium areas, they would have negative influences on Boston's office market. Perhaps the developers have their own justifications for the projects. We, as economists, have our concerns and our ways of judging outcomes. Looking forward, market conditions are just not good enough to support two more massive office buildings.
New Office Buildings for Boston?!
Zhigang Tang, Economis
tmailto:tztang@tortowheatonresearch.com
In March, two pieces of local news caught my attention. On March 4th, the Boston Globe reported on a proposal to build a 1,000-foot tall skyscraper (Building 1) in the city's Financial District. Additionally, the March 29th Metro—yes, I admit to reading the Metro—described another proposal, this one for a massive, 1.8 million square foot office and hotel skyscraper (Building 2) that would stand toward the back of South Station and the southern end of the bus terminal.
Given what I do for a living, two questions about these proposed projects popped into my head. Considering the still-suspect shape of the Boston office market, what kind of rent might these projects fetch? And, what effect will these buildings have on the rest of the market? With TWR's detailed building level data and some spatial econometrics techniques, we can do a brief analysis to answer these questions—and maybe they will reprint it in the Metro!
Operating on the theory that rents are spatially auto-correlated, we used the detailed building level data underlying TWR Peer Select to draw the asking rent surface area for downtown Boston. As one can see, rents are not evenly distributed.
The proposed new buildings are plotted as two dark dots on the map. A quick visual investigation reveals that Building 1 might expect an asking rent ranging from $30 to $35, and Building 2 should expect an asking rent between $25 and $30. In fact, they may get a bit more than that; our rent model tells us that for each year by which an office building in Boston is younger than the mean, a 0.13% premium can be added to its asking rent. According to TWR's building-level data, the average age of the buildings surrounding Building 1 and Building 2 are 30 and 35 years, respectively. Suppose the two proposed buildings are introduced into the market in 2006; the age-adjusted rent range for Building 1 should be from $31.17 to $36.37; for Building 2, from $26.14 to $31.37. Since new buildings always have better facilities, the actual rent ranges should be a bit higher than the theoretical ranges.
Now let's re-draw the rent map, supposing the two buildings ask the high ends of their rent ranges, i.e. Building 1 asks $36.37 and Building 2 asks $31.37. The new map shows that the two buildings will not significantly affect the current rent surface. The only small change we observe is that the southwest downtown area reinforces its status as a rent premium area. This analysis may be too optimistic, however; it assumes that the new buildings will not affect the market's vacancy rate.
Below are a few charts showing how the two projects will affect our projections of vacancy rate. One can see from the first chart that, were the two projects finished in 2006 (just for the sake of this article, as completion dates are obviously yet undetermined), the vacancy rate of Boston's office market would be about 200 basis points higher than our forecast. This would significantly affect the rent level of the market. According to our rent forecast model, if we had these two new buildings in the market, the average annual rent would be 5.1% lower than if we didn't.
Although the proposed projects would not change rent level contours or the location of rent premium areas, they would have negative influences on Boston's office market. Perhaps the developers have their own justifications for the projects. We, as economists, have our concerns and our ways of judging outcomes. Looking forward, market conditions are just not good enough to support two more massive office buildings.
posted by Jones Lang LaSalle NJ News Blog at 2:25 PM
<< Home