With a robust economy, beantown's commercial real estate veterans are enjoying good times once again.

Boston's commercial real estate market -- from office to industrial and multifamily to hotels -- has become so robust in the past 12 months that local real estate veterans have started comparing 1997 with the booming 1987. Fueled by one of the nation's strongest economies and lower employment rates, office vacancy rates have dipped below 6% in Boston and below 5% in some submarkets. Rents are rising 10% annually, pushing values of properties above replacement costs in some areas. Construction financing is back in Greater Boston, and construction cranes can be seen hovering over the skyline in many suburban markets. Downtown tenants, whose leases are set to expire in three to four years, seem alarmed as Boston has quietly turned into a landlord's market.

"We are seeing most larger tenants in downtown Boston exploring more options three to four years ahead of their lease termination date," says Aaron Davenport, director of research at Boston brokerage firm CB Commercial/Whittier Partners. "About 5.6 million sq. ft. of new office space has been completed since 1996 in Greater Boston. Of that, 2.4 million sq. ft. is brand new ground-up construction and the rest is rehab. Approximately 2.7 million sq. ft. of new office space is on spec and the remaining is build-to-suit."

During the second quarter of this year, Boston's availability rate slid to 6.3%, a 14-year low, according to Boston real estate firm Spaulding & Slye. This marks the eighth consecutive quarterly decline in Boston's availability. "If the economy holds up, we expect an exciting 1998 as well. All propert ies are back to replacement cost and some have already reached above replacement cost," says Jeffrey Swartz, a principal of Spaulding & Slye's Capital Markets Group. "Boston has become widely accepted as one of the best real estate markets in the country and is attracting both domestic and international investors. The investment community in Boston has become more broad-based, more aggressive and more optimistic every year during the past three years."

Even the giant Prudential Insurance Co. has put its mixed-use Prudential Center complex up for sale in what could be the largest real estate sale in Boston history. The 52-story Boston landmark, which includes 1.8 million sq. ft. of office space, 781 apartment units and 1.6 million sq. ft. of land, is expected to fetch more than $1 billion. "It is a very good time for owners of the property who are not long-term holders," says Swartz. "In the past four years, property values have gone up 50% for office, R&D and industrial."

But how long will this boom last? "It is just the question of how fast the market grows. There is no sign of its falling down," says William Cummings, chairman of Woburn, Mass.-based Cummings Properties, which is currently developing 1.39 million sq. ft. of office space in the Boston suburbs. "We are into a cycle that is going to last several more years. There is a real boom here."

Industry veterans say that between 2 million and 5 million sq. ft. of office space is currently under construction or on the drawing board in Greater Boston -- the eighth largest office market in the United States and one of the tightest in the country. "If they build all the space at the same time, we will have a situation like the 1980s in Boston. That is my prediction," says Richard Lundgren, president of Hunneman Commercial Co., a Boston-based real estate brokerage firm. "That is how we got overbuilt in the 1980s, and there is a good chance we can over build again on the office side."

"Boston-area companies continue to expand, resulting in their growing appetite for space," says Lundgren. "But the thrust today is going to be on developing smaller buildings, the 100,000 to 200,000 sq. ft. structures. Smaller buildings are less risky and easy to finance."

With the memory of the latest real estate depression still vivid in the minds of many, some people are starting to ask: Is this boom the beginning of a new cycle of oversupply? "I think that the attitude of developers and their suppliers of capital has been tempered by the 1989 recession and that new spec construction will be limited to premier projects in best locations developed by highly capitalized entities," says Stephen Lynch, executive vice president and principal at Boston-based Lynch Murphy Walsh & Partners Inc. "More projects are likely in suburban markets than in central business districts for two reasons. First, suburban rents have broken the $30 per sq. ft. barrier and now support new construction; and secondly, suburban projects can be economically developed in the 100,000 to 200,000 sq. ft. range, which is a comfortable size for today's investors."

John Hines, vice president of Boston-based Fallon Hines & O'Connor Inc., notes developers are currently in the process of adding close to 2 million sq. ft. of office space in Boston suburbs either through development or redevelopment. "You will see a big exodus of tenants from downtown to the suburbs. I don't see any new building coming in downtown Boston soon," says Hines. "There is continued strong demand for office space in Boston, and there does not appear any significant amount of commercial space coming on line in the Financial District or Back Bay areas. Boston's Financial District saw the delivery of only 28 State Street, a 580,000 sq. ft. office tower that was taken off the market in the early 1990s for redevelopment."

Despite the addition of 28 State Street, which reopened in April, vacancy rates in the 45.5 million sq. ft. Boston office market fell to 5.75% at the endof June vs. 7.4% a year ago, according to Boston brokerage firm Thompson Doyle & Co. Weighted average rents rose 13.39% to $29.61 per sq. ft. during the same period. Some sectors of the market, including Class-A towers, saw rents escalate by more than 20%.

"It is very difficult to find more than 25,000 sq. ft. of office space in Boston. Tenants are being forced to look outside of their preferred market," says Cathy Thompson, a principal of Thompson Doyle. "There is a lot of move towards the suburbs. You will see more construction in the suburbs and not in proper Boston. A lot of development is going on Route 128." According to a report from Thompson Doyle, the office market along Route 128 has become one of the most dynamic real estate markets for office space in Massachusetts. Escalating rents exceed $30 per sq. ft., and vacancies remain in the low single-digit percentile despite an increase in available inventory.

"The overall R&D vacancy rates in Greater Boston have dipped below 10% for the first time since the mid-1980s," says Steve Murphy, a principal at Lynch Murphy Walsh & Partners. "R&D rents have increased by 50% from the first quarter of 1995 to the first quarter of this year. We anticipate an approximately 6% annual increase in R&D rents in next few years. R&D space in Greater Boston totals 36.5 million sq. ft., ranking it among top three R&D markets in the country with California's Silicon Valley and Seattle's Silicon Forest."

"Despite the closing of some big retail stores, the Boston retail market remains healthy," says Bruce Kaufman, managing director of Finard & Co., a Burlington, Mass.-based real estate firm. "The vacancy that has been created by Lechmere in the Boston area will be filled up by other tenants. The local economy is doing great. Retail sales by large have been strong."

As a result, retail vacancy rates in eastern Massachusetts have edged up slightly to 7.8%, compared with 7.1% 18 months ago, according to Finard & Co., whose survey covers approximately 120 million sq. ft. of retail space in eastern Massachusetts. Target stores, a division of Minneapolis-based Dayton Hudson Corp., plans to open more than a dozen stores in New England, a vast number of them will be based in Massachusetts. CompUSA, Home Depot and Barnes & Noble are also planning new stores in Boston.

"The pendulum has swung. There was a lot of retail development during the early 1990s. Perception is that retail is overbuilt in the Boston area and that is why developers are shying away," says Kaufman. "Still some anchored grocery stores are being built."

Hotels have also become one of the most exciting investments as Boston has become one of the best markets, in terms of room rates and occupancy rates, in recent years. A large number of investors have entered the Boston hotel market lately. Pacific Eagle Holdings Ltd., a San Ramon, Calif.-based investment firm that represents a Hong Kong group, purchased the 326-room luxury Le Meridien Hotel in the heart of Boston's Financial District for approximately $100 million.

Rachel Roginsky, a principal with Boston hospitality consulting firm Pinnacle Advisory Group, notes that the hotel real estate market in Boston is at an all-time high. "Boston is a great market to be in today, but I think prices are too high," says Roginsky. "The recent sale of Le Meridien Hotel fetched a record price of $300,000 per room. Now we have passed the stage of acquisitions. Now we are in a hotel development stage where it makes sense to start buildings hotels."

"Approximately 1,000 rooms are currently under construction. Boston is considered one of the hottest hotel markets in the whole country," says Art Canter, executive director of Massachusetts Lodging Association. "There are between 2,000 and 3,000 hotel rooms in the planning process in the Boston and Cambridge markets. During the first six months of the year, hotel occupancy in Boston rose to 75.7% from 74.5% during the same period a year ago. Average daily rates increased to $154.45 per night from $138.18 during the same period, and values of hotel have gone up at least by between 20% and 40%."

Lawrence Curtis, associate managing partner of Boston-based Winn Development, observes multifamily housing markets have also become extremely tight in Boston due to several factors, including a lack of new supply because of difficult approval and zoning process. "The multifamily market has been extremely strong that I have seen in 15 years in business. You have no or little production for many years," says Curtis. "Rents have risen more than 10% every year during the last couple of years. Rent increases, however, have been much lower in affordable and elderly housing markets as compared with the general multifamily market."

Industry observers say the Boston real estate market is benefiting from overall growth in the economy, as well as from increasing competition for Boston properties from a wide array of investors, especially REITs and international capital. Pearce Coues, chairman and chief executive officer of MGI Properties, a Boston-based equity real estate investment trust, believes all types of REITs have been flocking to Boston. "REITs are really all over the country now," says Coues. "Boston has been under exposed. It's normal catch up, coupled with the fact that it's a very healthy real estate market."

Local real estate brokers and REIT professionals estimate that REITs have invested more than $2 billion in all types of Boston commercial real estate since 1992. Despite over-discounted pieces of real estate becoming hard to find, local as well as out-of-town REITs, are continuing to pour money into Boston's real estate market.

Chelsea GCA Realty Inc., a Roseland, N.J.-based REIT, engages in the development, leasing and management of upscale outlet centers nationwide. Earlier this year, the firm purchased 125 acres in Wrentham, 30 miles south of Boston, to develop a 550,000 sq. ft. outlet center. It's the first acquisition by Chelsea GCA in Massachusetts. New York-based Cornerstone Properties Inc. recently announced the purchase of Boston's two prominent office buildings -- 222 Berkeley St. and 500 Boylston St. -- tripling its Boston holdings to approximately 1.5 million sq. ft. The purchase is part of a portfolio of 10 office properties being acquired from a Dutch pension fund, Pensioenfonds PGGM, for $1.06 billion. Earlier, Cornerstone had acquired Boston's 125 Summer St. tower (661,815 sq. ft.) for $105 million.

"REITs have become very aggressive buyers all over the country and they're pursuing properties very aggressively while Boston's real estate market is hot as pistol," says Michael Sherman, managing director of CB Commercial/Whittier Partners. "The only thing scary is that the market is so good. A lot of capital is chasing very few properties. I think business will continue to grow in 1998, the real estate market will remain tight and we will see more activity."

Upendra Mishra is a Randolph, Mass.-based freelance writer who covers real estate issues and is a former real estate editor for the Boston Business Journal.

Boston, once a mecca for real estate investment trusts (REITs), seems to be regaining its traditional title as the REIT capital of the United States. Boston Properties Inc., Boston, completed its initial public offering in June, making it the largest offering ever completed by a REIT and raising a record $903 million. Industry insiders note there are at least two more Boston real estate firms that are planning to go public by early 1998. Boston real estate investors Josiah Childs and David Hewitt are planning to launch Boston Intercapital, which will serve as a diversified REIT and will be based in Boston. Cabot Partners, a Boston real estate advisory firm, is getting ready to form a REIT that would specialize in industrial properties.

"I think there are more real estate firms that are mulling over going public," says Pearce Coues, chairman and chief executive officer of MGI Properties, a Boston-based equity REIT. In 1996, Boston lost two REITs -- Copley Properties Inc. and Bradley Real Estate Inc. CopleyProperties was acquired by East Group Properties, a Jackson, Miss.-based office and industrial REIT. Bradley Real Estate, the country's oldest REIT, specializes in community shopping centers and relocated its headquarters to Northbrook, Ill.

Boston-based Americana Hotels and Realty Corp., a hospitality REIT, is currently operating under a plan of disposition of assets and liquidation approved by stockholders in 1988. Property Capital Trust, another Boston REIT, is presently under a business plan that calls for a disposition of the trust's investments in three to five years.