Boston

Demographic Overview

Population: 3.4 million

Rate of Population Growth: 2%

Median Household Income: $62,495

Unemployment Rate: 4.6%

Retail Overview

2002 Retail Completions: 2.5 million sq. ft.

Retail Vacancy Level 2002: 7.1

Retail Vacancy Level 2001: 6.4%

Average Rent Per Square Foot 2002: $18.79

Average Rent Per Square Foot 2001: $18.42

Source: Boston Business Journal, The Boston Globe, Marcus & Millichap

The big story in Boston has been the Big Dig, the project that is burying the Central Artery, an elevated eyesore that cut the city off from its historic harbor. When it's finished in 2005, there will be 27 acres of new park space and developers are gearing up for office, residential and retail development around the new area.

Until then, Boston's retail real estate market will just have to live on food. That's right, Boston's market is in overdrive thanks to food. Grocers are pushing to meet the needs of long underserved customers in a region where stringent local controls leave few fresh opportunities for development. So, local supermarket chains are expanding and adding larger store formats, producing a continuous stream of construction and reconstruction projects.

“We're seeing pretty dramatic growth in the grocery segment,” says William J. Beckeman, a partner with Finard & Co., a third-party services firm in Burlington, Mass. “Over the past five years we've seen a 17 percent increase in [supermarket] space, adding 1.5 million square feet. Store size has increased by 9 percent.”

The expansion was kick-started by the failure of softgoods retailers, many of whose old stores are being reconfigured for grocers. So, instead of producing sky-high vacancies, the bankruptcies of Caldor, Bradlees and Ames, as well as cutbacks at Kmart, have provided long-sought room for existing retailers and entry points for new ones.

Shaw's Supermarkets is a prime example. Boston's No. 2 grocery chain, Shaw's bought control of 18 former Ames Department Store leases in New England. That's part of the chain's plans to open 30 new and replacement stores in the next three to five years. The chain, a subsidiary of Britain's Sainsbury, has also announced plans to upgrade, remodel and expand more than 90 percent of its existing 186 New England stores — at a cost of $1.5 million to $8 million each.

Not to be outdone, the market's leading grocery chain, Stop & Shop Supermarket Co., introduced the prototype for its super stores this November in Walpole, Mass. Six other Stop & Shop large-format properties are under construction, and there are plans for at least a dozen more.

The Quincy-based subsidiary of Dutch conglomerate Royal Ahold NV is also joining forces with Office Depot to offer more than 800 Office Depot brand products, initially in 15 Stop & Shops, with expectations of adding more locations.

The Office Depot deal is an indicator of the region's space problems. Office Depot gets to expand sales without having to find new space to squeeze into.

Finard data shows a relatively high vacancy level of 7.3 percent in the region. But Beckeman says that the number is misleading, because the recent bankruptcies threw so much product onto the market at one time. A year ago, he notes, the rate was 8.4 percent as a result of the Bradlees liquidation. Yet virtually all Bradlees space has been absorbed. Kohl's acquired 11 of the 105 vacated stores and Beckeman expects that additional demand by Kohl's, Target, Wal-Mart, Lowe's, Home Depot and the supermarket chains will quickly reduce vacancy rates.

After all, Beckeman notes, 4.3 million square feet of preexisting space was swallowed in 2002. At the same time, about two million square feet of that was newly built.

The Liberty Tree Mall in Danvers is a typical story. A 180,000-square-foot Ann & Hope discount department store adjacent to the 30-year old regional mall went dark in March 2001, and the complex's overall vacancy rate soared to 23.4 percent. The Ann & Hope site sold to Eastern Development Group (Liberty Tree, itself, is owned by Simon Property Group.) It then filled the location with a 120,000-square-foot Kohl's, which opened in October 2002. The remainder of the Ann & Hope is being demolished to make room for a 75,000-square-foot Stop & Shop, which cut the total vacancy rate to about 10 percent.

Beyond groceries, retail real estate continues to show resilience in Boston, despite trouble in other commercial sectors, including office. Many retail properties are collecting record-high rents.

On Boston's Newbury Street, vacancy is less than 4 percent; just 53,000 square feet were available on Newbury last September, recalls Tom Brennan, vice president of C. Talanian Realty Co. Inc. And, according to a third-quarter report from Grubb & Ellis, the best locations in this upscale stretch of shops are now commanding rents of $150 to $160 per square foot, comparable to rents in New York City's Flatiron district.

In the metropolitan area, average rents are $45 per square foot downtown, $22 per square foot in neighborhood centers, $23 per square foot in power centers and $50 per square foot in regional malls, according to Boston-based brokerage and management services firm NAI Hunneman. Throughout the metropolitan area and across product types, the average retail rent is $18.79 according to Marcus & Millichap, which places Boston on equal footing with Las Vegas, Portland and Seattle.

Investors are interested. In October 2002, Columbia, S.C.-based Edens & Avant, one of the nation's largest owners of grocery-anchored shopping centers, opened an office in Boston to manage and expand its regional portfolio. The company owns and operates 18 grocery-anchored shopping centers totaling 2.1 million square feet in New England. It has plans to grow to more than 6.2 million square feet.

Population trends favor aggressive investment plans. According to the Census Bureau, the greater Boston area is now home to 3.4 million people, with a projected growth rate of 2 percent through 2006.

Like other cities in the Northeast, Boston's robust population growth has been a consistent driver of economic development. So even if this grocery-anchored overdrive loses strength in the future, the demographic growth spells more need and more retail opportunities.