NAI Hunneman Commercial, 70–80 Lincoln St. Boston, MA 02111 • T: 617 457 3400 • F: 617 457 3268 • www.NAIHunneman.com

While national economic indicatorspoint to the promise of recovery, commercial real estate in metropolitanBoston continues to cope with weakdemand and increased vacancies.On an aggregate level, the number of office deals done in the region, astracked by CoStar, shows an upwardspike in the first quarter of 2002.Total square footage of done dealsalso shows a slight upward trend. But other data reminds us of how faraway the Halcyon days of economic“summer” may really be.

Vacancy rates rise, but more slowlyVacancies increased in almost all submarkets for both Class A andClass B space during the first quarterof 2002. Downtown Boston showed arelatively large increase, registering9.4% for Class A space, up from8.5% the previous quarter. Vacancyfor Class B space remained unchangedat 9.7%. For most of last year, theDowntown market was somewhatinsulated from this recession by a relatively healthy tenant base, limitedlarge blocks of available space andconcentrated institutional ownership.Conditions and market psychologychanged in late 2001 when suchcompanies as State Street and Fidelityplaced large amounts of subleasespace on the market.

Early trends for 2002 in the Downtownmarket indicate that tenants can find

good deals for high-quality space aslandlords have become more aggressivein retaining existing tenants or signingup the few active requirements in themarket.

Showing activity is up in the first quarter as small and mid-sized firms

enter the planning phase for theirspace needs. As business confidence ina recovery grows, these requirementswill solidify and a Downtown market comeback in 2003 seems possiblegiven current vacancy levels.

c o n t i n u e d o n p a g e 4

Early 2002 Trends: a Glimmer of Hope?

NAI Hunneman brokers recognized at CBA awards banquet

c o n t i n u e d f r o m p a g e 1

Biotech, health careand defense providesome reliefIn the suburbs and Cambridge, Q1vacancy rates for office space alsoincreased but, in some cases, at moremodest rates than previous quarters.On Rte. 128, Class A vacancy wasestimated at 17.2%, up slightly from16.6% at the end of 2001. On theother hand, in the Rte. 495 submarket,Class A vacancies climbed to18.3%in March of 2002 from 14.6% inDecember 2001.

These submarkets thrived on venturecapital backed technology enterprises,so the fall from economic grace hasbeen predictably hard. So far thisyear, these markets continue to be tenant-driven with landlords offeringconcessions such as larger tenantimprovement allowances, flexibleterms, stepped rental rates, furniture,fixtures and equipment.

Demand from biotechnology, healthcare,and security sectors is the one brightspot for these submarkets. CambridgeClass A office vacancy rates did rise

1.5 basis points from December2001 to March of 2002, but somecomfort can be taken from the factthat the rate of increase has slowed.Early indications in the suburban andCambridge submarkets are that

were recognized as members of theCBA’s Multi-Million Dollar Club at thePlatinum level for sales in excess of$25 million. Executive Vice Presidentand Principal Steve James achievedGold Club level with sales of $15 to$25 million. Senior Vice PresidentRobert Tito, and Vice Presidents ChrisCurley, Carl Christie, Tom Aitken andJim Grady were recognized as members of the Silver Club with sales of $5 million to $15 million.

Cathy Minnerly: CBA Award as one of the top 5 Industrial Brokers

in Greater Boston

Several NAI Hunneman brokers wererecognized at the Commercial BrokersAssociation awards banquet held onMarch 21 at the Four Seasons Hotelin Boston. Executive Vice Presidentand Principal Cathy Minnerly washonored as one of the top five producers in industrial brokerage inthe Greater Boston market. Cathy’s484,000 square foot United Liquorsdeal was also in contention forIndustrial Deal of the Year. Cathy and David Ross, Senior Vice President,

increased defense-related spending,and re-focused venture capital fundingis starting to impact our regionaleconomy, a trend that should onlygrow stronger through the remainderof 2002.

NAI Hunneman Commercial, 70–80 Lincoln St. Boston, MA 02111 • T: 617 457 3400 • F: 617 457 3268 • www.NAIHunneman.com

METRO BOSTON REAL ESTATE MARKET UPDATE

M E T R O B O S T O N R E A L E S TAT E

MARKETUPDATE

3

2.5

2

1.5

0.5

0

Greater Boston Area* Office Leasing Activity by Quarter*includes Worcester area and southern New HampshireSource: CoStar 2001 Done Deals Report and Leasing Activity Report (1/1/02 – 3/10/02)

Q1 / 2001 Q2 / 2001 Q3 / 2001 Q4 / 2001 Q1 / 2002

OFFICE DEALS BY SQUARE FOOT

SQ

UA

RE

FEET

IN

MIL

LIO

NS

� DIRECT� SUBLET

350

300

250

200

150

100

50

0Q1 / 2001 Q2 / 2001 Q3 / 2001 Q4 / 2001 Q1 / 2002

NUMBER OF OFFICE DEALS

DEA

LS

� DIRECT� SUBLET

Financial District 20,926,370 1,868,186 $52 8.9% 11,930,920 1,315,875 $37 11.0%North Station/North End 1,797,516 74,519 $50 4.1% 1,595,986 90,097 $33 5.6%South Station/Ft. Point 2,632,935 320,531 $48 12.2% 4,505,587 463,584 $31 10.3%Charlestown 1,079,110 100,482 $34 9.3% 1,666,334 53,632 $28 3.2%Back Bay 7,207,090 790,670 $50 11.0% 3,465,145 333,640 $36 9.6%Downtown Boston 33,643,021 3,154,388 $50 9.4% 23,163,972 2,256,828 $33 9.7%

East Cambridge 7,417,573 1,763,890 $43 23.8% 1,086,710 77,018 $33 7.1%Central Cambridge 2,980,453 142,973 $42 4.8% 2,088,136 238,785 $32 11.4%West Cambridge 1,451,776 334,045 $41 23.0% 1,815,648 139,309 $34 7.7%Cambridge 11,849,802 2,240,908 $43 18.9% 4,990,494 485,424 $33 9.7%

Route 128 North 6,391,808 953,429 $29 14.9% 10,224,521 1,763,219 $21 17.2%Route 128 Northwest 9,513,420 1,381,315 $30 14.5% 8,176,825 1,403,900 $22 17.2%Route 128 West 15,884,332 3,351,765 $34 21.1% 12,473,076 2,179,092 $25 17.5%Route 128 Southwest 1,762,123 327,008 $27 18.6% 4,855,330 892,286 $21 18.4%Route 128 South 6,500,076 876,671 $26 13.5% 4,877,717 298,654 $20 6.1%Route 128 Loop 40,051,759 6,890,188 $29 17.2% 40,607,469 6,537,151 $21 16.1%

I-495 North 2,826,161 523,785 $21 18.5% 3,667,479 501,209 $19 13.7%I-495 Northwest 4,017,646 893,534 $22 22.2% 5,331,173 928,505 $19 17.4%I-495 West 6,912,506 1,102,753 $24 16.0% 7,594,545 1,041,502 $22 13.7%I-495 Southwest 621,155 83,804 $23 13.5% 1,475,070 161,771 $19 11.0%I-495 South 162,000 57,497 $22 35.5% 1,182,467 15,533 $19 1.3%

I-495 Loop 14,539,468 2,661,373 $22 18.3% 19,250,734 2,648,520 $19 13.8%

Metropolitan Boston 100,084,050 14,946,857 $36 14.9% 88,012,669 11,927,923 $27 13.6%* Vacant Space numbers and Vacancy Rate percentages reflect both sublease and direct space available.**Average asking rent includes both gross and net asking rents

Source: Co-Star, NAI Hunneman Commercial Company. Prepared: March 13, 2002. Disclaimer: The above data is from sources deemed to be generally reliable,

CLASS A CLASS A CLASS A CLASS A CLASS B CLASS B CLASS B CLASS BOFFICE SPACE VACANT AVERAGE VACANCY SPACE VACANT AVERAGE VACANCYSUBMARKET INVENTORY SPACE * ASKING RENT** RATE * INVENTORY SPACE * ASKING RENT** RATE *

Metropolitan Boston Office MarketConditions as of 2002 – Q1

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SPRING 2002

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NAI Hunneman Commercial, 70–80 Lincoln St. Boston, MA 02111 • T: 617 457 3400 • F: 617 457 3268 • www.NAIHunneman.com NAI Hunneman Commercial, 70–80 Lincoln St. Boston, MA 02111 • T: 617 457 3400 • F: 617 457 3268 • www.NAIHunneman.com

METRO BOSTON REAL ESTATE MARKET UPDATE

Boston DowntownOffice Market in 2002

• Tenants can find good deals for highquality space in this year’s tenant-drivenmarket. For example, 99 High Streethas some attractive sublease dealsavailable in the mid $30s.

• Landlords are offering concessionslike free rent and tenant improvementallowances to compete in the market-place and retain existing tenants.

• The already substantial amount ofsublease space on the market contin-ues to rise as companies continue tolayoff employees (ex. Fidelity put140,000 s.f. back on the market atthe end of 2001); vacant subleasespace accounts for nearly 43% oftotal vacant space.

• Speculative construction will be limited. Projects currently under con-struction that are due for completionin the next 12 months (i.e. 1 LincolnStreet and World Trade Center West)were heavily pre-leased but haveexperienced large sublease availabilities.The remaining few projects are notdue for completion until 2003 or 2004,when demand is expected to increase.

• Rents could fall another 5% to 10%in the first three quarters of 2002 with

sluggish tenant demand and risingvacancy as sublease space continuesto enter the marketplace.

• Tenant demand and transactionactivity should increase by late 2002as uncertainty in the marketplacediminishes and speculative construc-tion remains limited. Falling rents andrising vacancy should also stabilizeby late 2002.

Boston SuburbanOffice Market in 2002

Flexible space alternatives for tenants seeking campus location

• Like Downtown, the Suburban market is also tenant-driven; with rentslow and a glut of space, tenants havemore options to re-enter previouslyhigher-priced markets such as Cambridgeand Waltham where rents have fallenbetween 20%-30%.

• Landlords are becoming moreactively involved in lease transactionswhen they see a good credit tenant.In order to stay competitive, landlordswill need to offer concessions such astenant improvements, flexible terms,stepped rental rates and sometimesfurniture, fixtures and equipment.

• There is still a significant amount ofsublease space on the market due tolayoffs at companies like Cisco, EMC,Lucent and Nortel. However, companiesthat are doing well are exploring themarket for high-quality space at agood price.

• Declining demand in the technologyindustry has been somewhat bufferedby the strong demand in the biotech,security and healthcare sectors. Thesesectors should be able to absorb someof the space made available by thetechnology firms.

• Speculative construction will be limitedas there is no current financing on anyspeculative properties in the suburbs.Essentially, no new construction projectswill break ground in 2002 withoutprior tenant commitment. Currentoffice supply in the suburbs shouldremain steady for the next two years.

• Suburban rents could fall another 5%to 10% in the first half of 2002 beforestabilizing in the second-half of theyear. Recovery will depend heavily onstrong tenant demand and absorptionof sublease space, both of which arecurrently weak. Speculative constructionis almost non-existent, and transactionactivity is expected to pick up in thelatter half of 2002 as many high-techand financial services companies will need to expand again as theeconomy recovers.

Boston Industrial Market in 2002

175 CAMPANELLI DRIVE, BRAINTREE

United Liquors leased 484,000 s.f. in oneof the largest industrial deals of 2001

Compared to the office market,Boston’s industrial market has faredbetter and remains stable with rentalrates only experiencing slight decreases.

The market has essentially remainedstagnant, but stable. Most of the submarkets are experiencing lowsupply and soft demand. However,space has recently started to open up, especially in the suburbs.

• The industrial inventory in the Bostonand Inner Suburban area is mainlycomprised of owner-occupied buildings;thus, there has been little activity latelyas tenants are staying put due to theuncertainty in the economy. Supply hasremained tight, especially on a salebasis. Rental rates have slightlydecreased to $6.25 p.s.f. from $6.75 p.s.f. triple net for prime spaceand $5.25 p.s.f. from $5.75 p.s.f. for secondary space. Sale prices stillremain $60 p.s.f. to $65 p.s.f. forprime space and $40 p.s.f. to $45p.s.f. for secondary buildings.

• The space that is available is smallwith most transactions taking place inthe 15,000 to 20,000 square footrange. Rents range from $5.00 p.s.f.to $6.50 p.s.f.

• The New Hampshire submarketalso remains flat with very little vacantspace. Rents are being quoted at $5.50p.s.f. to $5.75 p.s.f. but landlordsmay only get $4.75 p.s.f. to $5.00p.s.f. Unlike the past, there is nowvery little differential in labor supplyand costs between New Hampshireand Massachusetts, so there is lessincentive for companies to relocate to New Hampshire.

• For the overall Boston industrialmarket, construction has been drivenby owner-user and build-to-suits, ensuringthat supply does not surpass demand.Demand for space has been moder-ate, keeping speculative constructionlimited in all industrial product types.There is currently only 500,000square feet under construction.

• Land costs remain higher thannational averages, making smallaffordable parcels for 20,000 –50,000 s.f. hard to find.

• Due to stable demand, the industrialmarket should experience an increasein activity by late 2002. Rental ratesshould remain steady in 2002.

• Manufacturing may be the onlyindustrial product type that could facea decrease in demand and rentalrates. Industrial leases will focus moreon smaller properties and shorterlease terms.

Residential Multi-FamilyMarket in 2002

335–355 FRANKLIN STREET, CAMBRIDGE

Multi-family investment properties like this 40-unit Cambridge building sold byNAI Hunneman remain in demand

• Despite the recent economic slump,Boston is still regarded as one of thestrongest multi-family markets in thenation. Boston is very tight as demandcontinues to outpace supply as homeprices reach the $300,000 range.The multi-family vacancy rate remainsaround 2%.

• Rental rates slipped downward forone year until approximately the startof 2002 but remain relatively highcompared to other markets.

• Supply has been extremely con-strained due to the high cost barriers to entry for new construction. It is difficult to build market rate housingbecause it is hard to make the financing

work. High cost of land and affordablehousing requirements limit multi-familydevelopment in the area.

• Boston should maintain its standingas one of the strongest markets in thenation as rents continue to be amongthe highest in the U.S., and vacancyrates should remain below 5%.

Investment PropertiesMarket in 2002

FIELDSTONE PLAZA, NEW BEDFORD

Demand remains high for grocery-anchored retail strip centers like this onerecently sold by NAI Hunneman

• Going-in capitalization rates (theratio of net operating income to saleprice) on office properties trendedupward through 2002 as the economyslowed and market rents graduallydeclined.

• Falling interest rates, however, keptvaluations fairly generous in 2001.The option of refinancing rather thanselling properties also provided ownerswith negotiating leverage.

• With office building sales activitysluggish in Metro Boston in 2002, it is difficult to accurately assess the fullimpact of 9/11 on property values. It is likely that cap rates will trend up 25 bp (0.25%) to 50 bp (0.5%)during the second quarter of 2002and stabilize once economic growthreturns later in the year.

303 CONGRESS STREET, BOSTON

Skyline views in an intimate Class A Jewel Box setting

SOLOMONPOND PARK,MARLBOROUGH

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