A few months ago, officials with ViaSat, a satellite communications company with an engineering office in Marlborough, knew the lease on the company’s 23,000-square-foot office would be up soon, so they began looking for a new space.
The quality of their choices pleasantly surprised them.
For just about the same rent, ViaSat officials were able to upgrade to an even nicer, newer and more conducive space for the company.
“It was pretty much a no-brainer,” said Ken Gamache, general manager of Massachusetts operations for ViaSat, now happily located at 377 Simarano Drive in Marlborough, directly off Interstate 495.
ViaSat is not the only example of a business that has taken advantage of depressed rates for the highest-quality commercial office space. There have been so many that commercial real estate experts have coined the phrase “flight to quality.”
In a down market, which many commercial real estate agents say characterizes the nation and Central Massachusetts today, prices come down for not just the low- and medium-quality spaces, but the top-of-the-market spaces as well. If businesses can get good deals and move into nicer office buildings, many will.
Statistical View
The numbers back that up.
While many areas of the MetroWest commercial real estate market along the I-495 corridor have vacancy rates above 20 percent, the rate for Class A office space — the highest-quality space on the market — in the Natick and Framingham areas is less than 5 percent, according to Boston-based commercial tracking firm Richards Barry Joyce Partners. A low vacancy rate reflects high demand in the market. According to the RBJ figures, the I-495/Massachusetts Turnpike area had a 17.2 percent vacancy rate for Class B properties in the fourth quarter of last year, while Class A properties had a 12.9 percent vacancy rate. That 4.3-percent difference is about the market average across Greater Boston, RBJ found.
There’s a similar trend in Worcester, according to figures from the Worcester Regional Research Bureau, which in its 2011 Downtown Worcester Occupancy survey, found a 16-percent vacancy rate for Class A space in the city, compared to 26 percent for Class B space.
In response to the increased demand for Class A space, the gap between asking rents for Class A and B properties across Massachusetts is widening. In fact, in MetroWest, the gap between Class A and B rents grew from 19 percent to 28 percent in the final two quarters of 2011.
Other areas have a more striking contrast. According to Boston commercial brokerage Jones Lang LaSalle, Class A vacancy rates in the northern I-495 market are just a little more than half that of Class B. The Class A rate was 22.8 percent in the third quarter of 2011 while Class B’s was 38 percent.
Class A Space: You Know It When You See It
What exactly is a Class A space?
While there are industry standards established by such organizations as the national Building Owners and Managers Association (BOMA), identifying Class A space depends on the market. A Class A office building in Worcester, for example, will be different from a Class A office building in downtown Manhattan.
Basically, you know it when you see it, said Hank Amabile, a senior vice president at Grubb Ellis, the Boston-based commercial real estate firm that worked with ViaSat on securing its Marlborough lease.
Generally, Class A office buildings have nicer finishings and lobbies, as well as other amenities, such as food service in or near the building and perhaps a gym or other perks.
But Amabile has warned customers about gobbling up Class A space. In a few years, or perhaps sooner, those rents are likely to rise as market conditions improve. So, a tenant may be in for a rude surprise when he or she gets a notice from a landlord in a year or two about a hefty rent increase for that space, Amabile predicted. As for ViaSat, Gamache said he isn’t worried about that; the company has locked in a multi-year deal with options for extensions.
Worcester Region
The flight to quality is reflected in the Worcester market as well, said William Kelleher IV, of Worcester-based commercial real estate firm Kelleher Sadowsky. Some of Worcester’s Class A buildings, such as the Sovereign Tower and the office buildings along Front Street, he said, are attractive locales and can offer significant advantages compared to Class B buildings. For example, while a tenant in a Class B building might be able to save a few dollars on rent, it may not come with dedicated parking spots, which a tenant may have to purchase separately. When you add that cost, a tenant might as well just move up to the Class A space in some circumstances, he said.
According to the research bureau’s downtown occupancy study, the difference between Class A and B rents in Worcester is $5 per square foot, with Class A spaces leasing at an average of $11 per square foot and Class B spaces at $6 per square foot.
Kelleher said some of the newest buildings under construction in the city are expected to be premier Class A space. This could include the new building at Gateway Park on Prescott Street and the new Unum Building at CitySquare. These sites could create a marked contrast with other buildings in the city, further separating the Class A and B spaces.
Still, Kelleher said he expects owners of those new properties to be able to find tenants; they will be the nicest, newest buildings in the city and will be the hottest spots on the market when they’re available.