Operations will remain tight in the urban core as retailers expand to premier locations in Boston, while stagnant building activity and an uptick in demand will allow operators to backfill under-utilized space in the suburbs. As businesses expand payrolls in the Financial District, residents will migrate toward major employment hubs and entertainment districts in surrounding areas.
As a result, global and national retailers will expand or relocate from older centers in peripheral neighborhoods to newer, redeveloped infill properties in Boston. Prime shopping districts in Back Bay, including Newbury Street, Commonwealth Avenue, and Boylston Street will garner the most consideration this year as tenants lease quality, street-level store fronts with high visibility.
As available space shrinks in the submarket, vacancy will drop to a metrowide best of 3.4 percent this year, giving owners enough leverage to raise rents. Meanwhile, muted construction and large lease signings will support positive net absorption in third-ring suburbs such as Bristol County and Merrimac Valley submarkets, reducing vacancy an average of 100 basis points this year.
Solid retail sales and job growth encouraged tenants to move forward with expansions, underpinning a 60-basis-point decrease in vacancy over the past year to 6.5 percent. In the prior 12 months, supply-side pressures drove vacancy up 30 basis points. Positive net absorption of 120,000 square feet was logged in the metro’s neighborhood/community center sector over the past year, pulling down the average vacancy rate 30 basis points to 6.7 percent. In the previous year, vacancy remained flat.
Leasing activity for newer power centers outperformed all asset classes in the past year, as muted construction activity supported positive net absorption of 170,700 square feet, reducing vacancy 120 basis points to 4.9 percent. Builders will deliver the least amount of new space on record this year, combining with solid demand to push down vacancy 40 basis points in 2011 to 6.1 percent.
A sharp upswing in tenant demand prompted owners to raise asking rents 0.5 percent in the past year to $21.11 per square foot, the first year-over-year increase since 2008. Effective rents followed the same trend, ticking up 0.5 percent in that time to $18.88 per square foot. Despite the improvement in rental rates, concessions remained near peak levels in the second quarter at 10.6 percent of asking rents. By year’s end, asking rents will rise 1.3 percent to $21.35 per square foot, while effective rents will climb 2.2 percent to $19.26 per square foot. In the prior 12 months, asking rents ebbed down 0.1 percent, and effective rents retreated 0.8 percent
As the local economy recovers at a brisk pace, institutional capital will flood the metro as investors look for long-term stability and passive income. In a flight to safety, REITs and foreign investors will acquire single-
tenant properties net leased to a national chain for long-term revenue streams and capital preservation. These risk-averse buyers will take advantage of the low interest rates and expand their portfolios in premium locations inside of Route 128.
As bidding intensifies, first-year returns will slightly compress in the second half, averaging in the high-6-percent-to-low-7-percent range. In the multi-tenant arena, sales velocity will modestly pick up as local investors target strip centers with mom-and-pop tenants in Middlesex and Norfolk counties for higher potential upside. Performing shopping centers with a strong grocery anchor will command yields in the low-to-mid-7-percent range, while unanchored, in-line space will trade above 8 percent.
— Robert Horvath and Todd Tremblay are senior associates in the Boston office of Marcus & Millichap Real Estate Investment Services