Are Rent Prices Too High? Try Taking the Long View

By Mike Brown, Colliers Boston Research Intern, Winter/Spring 2018 | JUNE 2018

If you’re a tenant in today’s downtown market, it might seem that rent prices are higher than they have any right to be. You might yearn for the good old days when average office rents were around thirty dollars a square foot rather than fifty-five. Inflation, however, makes this judgment complicated; can we really be surprised that leasing space costs more money, when the buying power of a dollar consistently decreases over time?

Although objective comparisons might appear difficult here, hope is not lost. If we look at long-term trends in the market, we can get a sense of where a stable process of cost appreciation would be expected to land us and then compare that to where we are. The ultimate question we wish to answer is: Has rent growth truly outpaced inflation?

As a case study, we can examine historical average rents, in dollars per square foot, for Class A properties in the Financial District from 1990 onward. The graph below shows both the historical data and the long-term trend line we can extrapolate from it.

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Shifts in the market, of course, inevitably cause deviations from the long-term trend, so the extrapolated line cannot reliably predict what rent prices will be like next quarter, or even next year. It does, however, provide a baseline for tracking the length and magnitude of the economy’s fluctuations.

Think of the trend line as the path we would follow if long-term appreciation were the only force that caused rent prices to change. That’s as close as we can get to assessing the true, underlying value of a space that exists independently of the market’s chaotic mood swings.  Taking this view, the rent peaks recorded in 2000 and 2008 are simply not sustainable; the true value of commercial space in these cases was masked by the feverish demand of those who leased it. No matter how high prices soar, they can’t escape the reality of the long term.

Interestingly, the current state of the Class A market in the Financial District appears to be exceptionally average. Historical precedent tells us to expect volatility; as soon as a recession ends, another bubble is probably already on the way. But rent prices, so far, have yet to rise above the trend line.

Now, what does this mean for Class A tenants downtown? At the risk of sounding insensitive, we believe that rents are about as cheap as one can reasonably hope for. After 2010, rent prices grew steadily for the better part of a decade, but that doesn’t mean that their final peak was unusually high. Instead, they rose just enough to re-converge with the path of long-term appreciation. Rents haven’t been climbing a mountain so much as clawing their way out a pit.

If you’re a tenant facing a high price tag, this analysis probably hasn’t given you much comfort. But perhaps it can help you put things in perspective. Even if your budget is suffering, it’s not suffering as much as it could be. And even if the economy hasn’t treated you well, perhaps your landlord is being nicer than you think.

 

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