Boston's landmark 14-story Battery-march Building probably illustrates best the rise and fall and the rise again of the local commercial real estate market.

The 277,000 sq. ft., tri-towered structure in the heart of the Boston financial district has changed hands four times since 1982 - $8 million in 1982; $32 million in 1986; $2.8 million in 1993; and approximately $5 million in 1994.

Boston's 120,000 sq. ft., 11-story Board of Trade building at 131 State St. was recently sold for $6 million - far below the $25 million the seller had paid for it in 1987.

At least two other buildings in town are currently in the process of changing hands for 50% or less of their values in the 1980s.

But that is not necessarily bad news for the Boston real estate market, industry analysts say.

"The good news is that those buildings could not have been sold two to three years ago," says William McCall, president of McCall & Almy Inc., a Boston-based real estate consulting firm. "It tooks like there are more properties for sale in Boston than we have seen at any one time. During 1992-93, it was very difficult to sell properties at anything but very discounted prices."

In fact, Boston's central business district is doing much better in terms of vacancy and rents than anyone might have thought, according to the global real estate network Oncor International. Boston ranks on several "Top 10 Lists" in Oncor's midyear report for the United States. Boston has the seventh-lowest vacancy rate and fourth-highest rental rate per square foot in the country. Charlotte, N.C., topped the list of office markets, with a central business district vacancy rate of a scant 5%, and Sacramento ranked 10th on the list. Boston came in seventh with 10.4%, the report says.

The highest central business district rental rates were in New York at $34 per sq. ft. a year, followed by West Palm Beach, Fla., at $31.36; Washington, D.C., $30; and Boston, $28. White Plains, N.Y., ranked 10th at $25.75 per sq. ft.

Strong fundamentals

Although demographics may be weaker as far as job growth and population growth are concerned, the real estate fundamentals are very strong in Boston," says W. Pearce Coues, chairman and chief executive officer of MGI Properties Inc., a Boston-based real estate investment trust that has invested approximately $10 million in Metropolitan Boston during the last three years.

The trust, which three years ago did not own a single property in Massachusetts, has divested about $25 million worth of real estate in other parts of the country and has gobbled up 20 buildings in the Boston area since 1992.

Coues and other industry insiders say that, although Boston has begun attracting investors from around the world after the recent turn-around following the crash of its real estate market in the lates 1980 and early- 1990s, Boston is not overshopped by national investors yet. In addition, the local economy is well-diversified and grounded with emerging companies and restricted land supply.

"We're not seeing any speculative construction in Boston, and it's not as easy to build here as 44 other markets," Coues says. "Our properties are doing very well here. In my opinion, rents have risen significantly and will continue to rise, but not at the rate of last year."

McCall of McCall & Almy says rents and property values in Boston have risen by at least 20% during the last two years, or 10% annually.

Some brokers say the increase in rents and values has been in the range of 30% during the last two years. They all, however, agree that following last year's torrid leasing pace, the Boston market has slowed down in 1995.

During the first half of this year, the 98 million sq. ft. office market in Boston, Cambridge and the immediate suburbs reported a net absorption of 1.4 million sq. ft. as compared with a mere 439,000 sq. ft. during the same period of last year, according to Boston brokerage firm Spaulding & Slye. Net absorption in 1994 was a record 2.5 million sq. ft.

For just the Boston proper market, the news is even worse. During the first six months of this year, the 44 million sq. ft. Boston office market posted a net negative absorption of 364,000 sq. ft., causing an increase in vacancy rate for the first time in three years, according to a mid-year report from Boston brokerage firm Lynch Murphy Walsh & Partners Inc. The vacancy rate stood at 11.8% at the end of June.

Data and vacancy rates from one brokerage firm to another may vary, but most brokers put Boston office vacancy rate at about 12%, unchanged from year-end 1994 and down from 13% at the end of June 1994.

Vacant office space in Boston proper is currently estimated at more than 5 million sq. ft., and speculation is that more space will be dumped as a result of an anticipated increase in sublease space inventory and corporate mergers.

Sublease space

Industry analysts say that upcoming sublease spaces, coupled with the scheduled return of the vacant 600,000 sq. ft. office tower at 28 State St. in the Boston financial district by the first quarter of 1997, could easily bring in excess of 1 million sq. ft. of additional space on the market.

That would slow the rise in rents that have ticked up by more than 10% during the last 12 months. Local brokers say that at least 21 different corporations in Boston are actively trying to sublease their space, totaling 490,000 sq. ft. In addition, Nynex Corp., one of downtown Boston's biggest tenants, is preparing to vacate and sublease at least 100,000 sq. ft. early next year at 125 High St. in a cost-cutting move. Some local brokers estimate that Nynex would dump as much as 200,000 sq. ft. more by 1997.

In addition, if the planned consolidation of the Boston offices of the Fleet Financial Group Inc. and the Shawmut National Corp. goes through, it would put an additional 225,000 sq. ft. more sublease space on the market.

Analysts say that although sublease space will restrain price increases, a lack of new construction and tenant demand will continue to support stronger rents in a pull-and-push scenario.

"We're moving into a very strong market," says Thomas Hynes Jr., president of Meredith & Grew Inc., a Boston-based real estate brokerage firm. "You do have inventory coming back on the market, but that will be absorbed. You will still have pressure for a new building."

He says the city has not seen any new building since the late-1980s when Boston entered one of its worst real estate recessions in history, and values of properties plunged dramatically.

Most industry insiders, however, insist that development of a speculative office building in Boston is still several years away. But if it happens, it will happen first in the suburbs.

Suburbs

"The market is more vibrant in the suburbs than in downtown," says Michael Sherman, president of Boston brokerage firm Whittier Partners. "There are developers that are looking at various sites."

Rents in suburbs that currently range between $20 and $28 sq. ft. could finance development of a new building, Sherman says.

For the Class-A tower market in Boston, rents for long-term commitments are between $30 and $35 per sq. ft. Analysts say that in order to develop an office complex in Boston, the rents must rise to at least $40 to $45 per sq. ft. and future building must be at least 50% preleased by creditworthy tenants.

"In the city, we are still $6 to $8 [per sq. ft.] away from the replacement cost. If the market tightens up, you would see rents rise," Sherman says. "In the suburbs, rents are already near replacement costs."

Rents at Bay Colony Corporate Center, an 829,000 sq. ft. office complex in neighboring Waltham, have reached $28 per sq. ft. - one of the highest rents in suburbs in the country, says Mark Roth, director of Cushman & Wakefield of Massachusetts Inc.

The Shorenstein Co., a San Francisco, Calif.-based real estate investment and development firm, recently purchased Bay Colony for $163 million from New York-based London & Leeds Development Corp., the U.S. real estate subsidiary of Britain's Ladbroke Group PLC.

It's the largest sale of real estate ever done in the suburban Boston market, and one of the largest suburban office transactions in the country so far this year.

Although the vacancy rate in the 43 million sq. ft. suburban office market inched up slightly this year to 11.8% from last year's 11.3%, rents continue to rise, Roth says.

The increase in the suburban vacancy rate was more a result of Wang Towers - a 1.4 million sq. ft. owner-occupied complex that was sold and came on the market for lease in Lowell - than a result of the slowing of the market, Roth says.

Rents in the suburbs have risen by up to 10% annually during the last two years, especially along Route 128, a 50-mile stretch that is known as "America's Technology Highway" and encircles Boston at a distance of about 10 miles.

"Major 'rightsizing' is pretty much over. You don't have DEC (Digital Equipment Corp.), IBM and Data General shedding space on the market anymore," Roth says. "The real estate in the Greater Boston market has far exceeded our expectations and certainly those of other real estate professionals."

Route 128

He adds that commercial properties lining north and southbound lanes of Route 128, which bore the worst of the recent real estate downturn, have come roaring back.

The face of new Route 128, however, has changed forever. It is no longer the same Route 128 that was once dominated by high-tech manufacturers. They're now gradually being replaced by health care, biotechnology, financial and banking services firms and backroom offices.

A number of mutual fund and financial services firms have lately begun to move their backroom operations to the suburbs from downtown Boston.

Putnam Investments, one of the country's largest money management firms, leased 250,000 sq. ft. of office space in Franklin last year. Later, Boston-based mutual fund giant Fidelity Investments bought two buildings in Marlborough, totaling approximately 730,000 sq. ft. of office space.

The Shareholder Services Group, the nation's largest full-service provider of a wide range of mutual fund services to investment organizations and banking industry, recently leased 300,000 sq. ft. of office space in Westborough.

But the boom in the suburban market has been caused not only by the gobbling up of space by financial services firms and others that have traditionally stayed in the central business districts, but also by the emergence of a new breed of high technology.

"While we don't have many businesses that move to Boston, we have many 17-year-olds who come to Harvard University and MIT (Massachusetts Institute of Technology) every fall and go on to start their own businesses," says Sherman of Whittier Partners. "It's an exciting place. We have a lot of start-ups here. We also have a lot of venture capital firms."

Research at MIT alone has led to the birth of more than 400 new companies in Massachusetts, according to published reports. There are more than 1,600 software firms in Massachusetts, and most of them are located in the Boston metropolitan area. Approximately two-thirds of these firms were established since 1980, according to the Massachusetts Computer Software Council.

R&D

Boston is also becoming a major center for research in biotechnology and other high-tech sectors, creating a huge demand for R&D and manufacturing space.

Kevin Hana, a director at the Boston office of Cushman & Wakefield, says R&D and the industrial market, which had lagged behind other real estate sectors until recently, has also been making a strong comeback.

Hana says R&D in the Boston area has seen a rental increase of about 15% over 1994 to between $6.50 and $7 per sq. ft. at present.

"The R&D market is very tight. There is a shortage of products, Hana says. "We're heading to a single-digit vacancy."

Of the 150 million sq. ft. of non-office and non-retail commercial real estate in Greater Boston, R&D accounts for 55 million sq. ft., followed by 48 million sq. ft. for warehouse/distribution and 45 million sq. ft. for industrial/manufacturing, Hana says.

Industrial

William Bailey, a vice president at Spaulding & Slye, says the industrial vacancy rate is about 2 1 %, down from 27% in the first quarter of 1994. In 1985, when industrial/warehouse inventory was only 37 million sq. ft., the vacancy rate was just 9%.

Bailey says that about 9 million sq. ft. of industrial/warehouse space was added to the market between 1985 and 1990.

"We're now starting to see build-to-its in suburbs, including an 82,000-sq. ft. facility in Framingham for Federal Express and a 125,000 sq. ft. facility in Franklin for BJ's Wholesale Club.

"Plus, there have been a number of lease transactions," Bailey says. "You have large national companies entering this market, and smaller firms have evaporated as a result of the recent recessionary period."

As a hub for the New England area, Massachusetts is attracting a lot of companies from across the country and, as a result, rents have started to go up. The average rent for an industrial/warehouse facility in Greater Boston is approximately $4 per sq. ft, up from $3.25 a year ago, and from a low of $3 per sq. ft. in the early-1990s.

Quality space has already been leased. The vacant space is the bottom of the barrel that has either awkward configuration, low clear heights or has inadequate loading facilities," Bailey says.

Retail

The activity in the retail real estate market, on the other hand, has virtually halted after peaking during the second half of 1994, says James Kour) (Jr., vice president of the retail investment brokerage division at Boston real estate firm Hunneman Commercial Co.

"We're dealing with a slowdown in the market. Prices are not moving and so investors are not in a hurry. They are a bit apprehensive," Koury says. "The occupancy level is still very high."

Koury says most regional malls are reporting 95% occupancy and an average rent of about $14 per sq. ft., up from $12.50 a year ago.

The nervousness among the investment community has been caused by the overall macro economic conditions in the region and bad economic performance by some regional retail giants.

"The number of jobs has not increased. On the other hand, tenants like Caldor are having tough times," Koury says.

Citing poor sales and debt, Norwalk, Conn.-based Caldor Corp., which has 126 stores, including 25 in Massachusetts, filed for Chapter 11 bankruptcy protection on Sept. 18. In June, Bradlees Inc., of Braintree, Mass., filed for bankruptcy protection from creditors.

"There has been increasing retail competition for a limited supply of disposable dollars," Koury says. "Financing is readily available, but if you have a tenant like Bradlees and Caldor, you don't have anyone to finance."

Koury says only four shopping malls, including Taunton's 1.1 million sq. ft. Silver City Galleria, have been sold so far this year in Massachusetts. This compares with the sale of 13 shopping centers in 1994, 12 in 1993, seven in 1992 and five in 1991.

In April, OTR Limited Partnership, an investment arm of the State Teachers Retirement System of Ohio pension fund, purchased the giant Silver City Galleria for $158 million - one of the largest single acquisitions of a shopping mall in the country in this decade.

Homart has been active in Boston's retail sector, opening its Natick Mall last October in Framingham and redeveloping the Shoppers World open-air across the street. The mall opened 100% leased. The second phase of the Shoppers World project is slated to open this month. Together, Natick Mall and Shoppers World create 2 million sq. ft. of retail space.

Of the four property sectors - office, retail, industrial/warehouse and multifamily apartments, office and industrial sectors remain strongest in Boston at present, savs Coues of MGI.

Multifamily

Some investors, including REITs, are showing some interest in apartments as well, he says, but that market lags behind office and industrial.

Avalon Properties, a New Canaan, Conn.-based equity REIT, recently acquired a 125-unit apartment complex in Quincy for 6.34 million, or $50,000 a unit.

In general, the Greater Boston commercial real estate market is probably not going to get stronger than it is now for some time, cautions Jonathan Davis, president of Davis Cos., a Boston-based real estate investment, management and development firm.

"I think the suburban market is likely to be more vital and likely to show more appreciation in the near future," says Davis, whose firm owns and manages 2.5 million sq. ft. of office and retail space in the Boston area. "I don't think that downtown is going for a shakeout either, but I don't think rents and property values are going to appreciates as much."