Westborough EDC hears presentation on pandemic’s commercial real estate impact

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Westborough EDC hears presentation on pandemic’s commercial real estate impact
Photo by/Dakota Antelman
A sign advertises land for lease in Westborough currently owned by Carruth Capital. Carruth recently gave a presentation to the Westborough Economic Development Committee on recent trends in the real-estate industry.

By Susan Gonsalves, Contributing Writer

WESTBOROUGH – The commercial real estate market has changed, with many tenants going virtual or downsizing. This trend has created a high level of uncertainty for both businesses and landlords.

That’s according to Brian Hunt, Senior Vice President of Property Management for Carruth Capital, LLC, a commercial real estate firm and one of the largest landlords in Massachusetts. 

Hunt’s presentation before the Westborough Economic Development Committee on May 6 touched on a number of trends the real estate industry experienced as a result of COVID-19 and its aftermath.

For example, using 2019 as a benchmark, transactions were down by 32 percent in 2020. They were projected to drop by 20 percent this year. 

In addition, the amount of square footage leased in 2020 decreased by 41 percent and dropped 32 percent in 2021.

“It shows we took a big hit for 2020, and even though we’re still down for 2021, it seems to be coming back a little,” Hunt said.

Rents, however, are trending in the wrong direction, Hunt said — with a five percent decrease last year and a 15 percent drop in 2021. 

Also trending the wrong way, he said, is the amount of net revenues generated from lease transactions. In 2020, those numbers were down 38 percent. In 2021, they’ve dropped 44 percent.

Thirty percent of lease terms are now under three years.

“I think it means we’re doing shorter-term leases, smaller square footage at lower rents, all not things commercial landlords want to see,” Hunt noted.

He highlighted a half dozen cases of tenants departing from the portfolio—talking about how each situation was detrimental. 

Some companies decided to stay virtual indefinitely, thereby eliminating real estate. Others downsized and moved closer to Boston, said Hunt. 

Businesses continue to be negatively affected by the pandemic, making tenants confused about how to carry on.

“That translates to ‘What are landlords going to do?’ ‘What is going to attract and keep [businesses]?’” Hunt added.

High tenant turnover could be ‘catastrophic’

Another urgent issue, Hunt said, is that with commercial real estate, tenants generally sign leases for three to five years. Every year, 20 percent of the portfolio rolls off as people opt not to renew. That situation could be made even worse by the current market climate.

“We could be faced with a doomsday effect where 40 or 50 percent of tenants come up for renewal at the same time,” Hunt explained. “If they decide to go, it can be catastrophic.”

Hunt said a major issue now is to identify ways to entice tenants and find out what they want. The landlord’s role, he said, is to create ways to give them what they are seeking.

“They don’t really know what they want, so it’s hard for us to appeal to something they can’t identify,” he said.

Bob McGuire, Managing Director of JLL, a real estate and investment firm, talked about the 495/Mass Pike market where Westborough sits. He noted a 37 percent vacancy rate as the highest his firm has seen in the suburbs. 

With companies leaving or downsizing, it presents a challenge, McGuire said.

Specific to Westborough, he outlined recent lease transactions for Park Place International, Malvern Panalytical, Lending Club, Marvell, Work Central, TDS, Mirick O’Connell and KPM Analytics. 

Westborough EDC hears presentation on pandemic’s commercial real estate impact
Photo by/Dakota Antelman
A building leased by law firm Mirick O’Connell peaks through trees in Westborough. Mirick O’Connell is one of several entities leasing space in Westborough that came up in discussion at a recent Economic Development Committee meeting.

Moves come with less square footage

Those aforementioned tenants are leasing a total of 260,000 square feet of space. While that’s exciting, McGuire said, Marvell moved from 100,000 square feet in Marlborough to 70,000 square feet in Westborough. Others did the same, making the move to town but renting significantly less space.

With tenants wanting shorter-term leases, McGuire emphasized, the result will be higher roll over and vacancies.

“We’re doing everything we can to keep the people we have,” he said. 

McGuire also observed that first-floor spaces with loading areas are particularly in demand. 

Also, the life science market is booming, with 20 million square feet east of Route 128 currently in development/planning stages. The demand is enough to fill space until at least 2024, if not 2025, McGuire said.

Amenities are the key

As companies adjust to a post-COVID-19 era, they will have to be mindful of spacing and cleaning protocols. In addition, health and wellness on-site, walking trails, food services, lobbies and other features are becoming more vital.

“Amenities, amenities, amenities…will help recruit more people to town,” McGuire said. “They are looking for reasons to move into a place that will be a great work environment.” 

Christopher Egan, President of Carruth Capital, LLC offered the town another piece of advice.  

He said that he looked over the Climate Action Plan that has circulated between a number of boards and suggested the town, “not be a first mover,” but instead be consistent with state regulations.

Westborough “can be put at a significant disadvantage to attracting businesses and new homes to town,” he said, if it tries to initiate measures ahead of time.

Egan added that EDC members and others should talk to state legislators “to change this Climate Bill a bit.”