Commercial Market AnalysisGrove Hall Development

Real Estate Investment & AnalysisSummer 2002 - Professor Yang

Robin DooleyBen Dooley

Tracy Peavey

Commercial Market Analysis

To provide a recommendation for the commercial aspect of the Grove Hall Development Project, it is important to first consider the strengths and weaknesses of the location. A resource in developing this analysis was Leo Downey of ELEO Realty and Management. Leo Downey is a commercial real estate agent in the Roxbury area. Downey possesses a strong familiarity with Roxbury and the surrounding areas, as he has been in real estate in this vicinity for approximately twenty years.

The following SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis highlights key points to consider for this project:• Strengths

– The recent development in this neighborhood, i.e. the new shopping center, will bring more potential customers to the area.

– The Grove Hall area is a busy section of Roxbury, which could reflect upon a large group of potential business clients and retail customers for the tenants in this location.

• Weaknesses– The Grove Hall area is one of the less desirable neighborhoods in Roxbury and Boston.– A parking deficiency exists in the neighborhood and is a significant concern that must be addressed to receive

community approval of the project.– Roxbury and Grove Hall exhibit a high and currently increasing crime rate.

• Opportunities– New construction will be desirable for retail and commercial tenants.– Many efforts are being put forth for this area, and in the future (i.e. five to ten years) the neighborhood may improve if

these investments address the Weaknesses above.• Threats

– Additional new development may minimize the current significance of the New Construction Opportunity.– The shopping center may actually detract traffic from this location’s retail space, due to the chains in the shopping

center and the established nature the shopping center will posses when this project is complete.

The next step in the commercial analysis is to determine the appropriate commercial and retail costs to apply to this project. For this historical market information for Roxbury and the surrounding areas is analyzed. The CoStar Group, Inc. was another resource utilized here. The CoStar Group develops databases, creates analyses focused on commercial real estate, and provides sales and rental comparison information for their clients. Their commercial database is comparable to a Multiple Listing Service, and is used by clients such as Real Estate professionals and other commercial service providers to locate properties and obtain specific information on tenants and services within those properties.

As detailed in Exhibit One, and obtained from The CoStar Group, the commercial vacancy rate in the Roxbury/Dorchester area varied from 6.60% in the first quarter of 1999 to 3.36% currently. Despite the recent reduction in vacancy, rental prices have decreased to 1999 rates. This pattern indicates potential tenants are not willing to pay a premium for this location. As prices decreased, so has the vacancy, indicating the market feels the lower prices more accurately reflect the price tenants are willing to pay. Over the past three years the average vacancy rate was 4.47%, with a standard deviation of 1.17%. The average price per square foot for the same period was $23.31, with a current rate of $20.83 and a standard deviation of $2.91.

Exhibit Two details vacancy and rental rates for the first comparable neighborhood, the Brighton/Allston/Fenway area. For the same period, the Fenway area’s average vacancy rate was 12.38%, with a standard deviation of 5.30%. The average price per square foot was $24.58, with a current rate of $25.65 and a standard deviation of $2.88. It is noteworthy that the rental rates in Roxbury/Dorchester are consistently lower than those in the Fenway area, despite the Fenway’s lower occupancy levels. This may be due to the variable levels of rent in Roxbury. According to Downey, pricing in Roxbury is very dependent upon the specific location. The Grove Hall area is currently determined as a less desirable and thus a lower rent section of this neighborhood.

Exhibit Three gives information on the second comparable neighborhood, South Suffolk County. From first quarter 1999 to present, the average vacancy rate was 15.46%, with a standard deviation of 2.82%. The average price per square foot for this period was $18.35, with a current rate of $21.25 and a standard deviation of $3.02. A map of the South Suffolk area is provided on the last page of this package.

Exhibit Four provides graphs simultaneously comparing the rental and vacancy rates for Roxbury/Dorchester and the comparable neighborhoods.

Aside from vacancy and rental rates, another consideration in the pricing of commercial space is the Class of space. As indicated below and seen further in Exhibit Five, the vast majority of commercial space in this area is Class C or below:

Roxbury/Dorchester 71.21% Brighton/Allston/Fenway 58.60% South Suffolk County 72.22%

Also seen in Exhibit Five is the impact Class of space has on the rate per square foot. Considering this, a premium cannot be demanded for commercial space rent within the Grove Hall Development Project, despite its new construction status.

Downey indicates retail pricing for Roxbury is also dependant upon location. This is further apparent in Exhibit Six, based upon information from The CoStar Group, which indicates that retail space in Roxbury currently rents at widely varying rates. Although the average retail rate per square foot is similar to surrounding neighborhoods, the minimum square foot rate is significantly less than both commercial and retail space in comparable areas. Downey estimates the retail rates for this location would be $10.00 per square foot. This presents a concern and is a consideration when developing the commercial/retail split of this development.

Recommendation:The recommendation for the commercial portion of the Grove Hall Development Project is to build the first and second floor space with certain initial retail tenants in mind, as these seem to be long-term clients. The rental income for this project will be calculated at $15.00 per square foot for retail space and $21.00 per square foot for commercial space.

Due to the variations in local demand, the remaining commercial space should be constructed as space that is convertible to residential space, in case the demand for commercial or retail space is not prevalent. This recommendation is presented considering the market analysis detailed above and in the attached exhibits, in collaboration with the other commercial market analysis team, and considering the following assumptions.

The initial tenant space accounts for 22,000 square feet of the available commercial/retail space with the following breakdown: School of Cosmetology: 6,000 square feet, market retail rental rate of $15 per square foot for income of $90,000 per

year Post Office: 10,000 square feet at $15 per square foot for an annual income $150,000 Day Care Center: 6,000 square feet at the commercial rate of $21 per foot for an income of $126,000 per year

Other possible tenants include Restaurant location, Small business offices (i.e. Apartment Management and Sales office) Other small retail location (i.e. Check Cashing or ATM Location)

If 40,000 square feet of retail or commercial are available, 18,000 square feet remain after the initial tenants. This may be filled with the above suggestions.

Consideration must also be made regarding the parking problem in this area. It is highly likely additional parking will need to be provided. If one to two spaces are required for every 1,000 square feet of commercial space, forty to eighty parking spaces must be created.

Exhibit One

QUARTERLY OCCUPANCY, VACANCY & RENT ANALYSIS

Submarket - Roxbury/Dorchester

  Existing Existing Vacancy Square Feet Percent Occupancy Average

Quarter Buildings Rentable Area w/ Sublet Occupied Occupied x 100 Rental Rate

Q1 1999 65 2,957,627 6.60% 2,762,404 93.40% 93.40 $ 20.48

Q2 1999 65 2,957,627 6.60% 2,762,300 93.40% 93.40 $ 20.21

Q3 1999 65 2,957,627 6.21% 2,773,995 93.79% 93.79 $ 21.04

Q4 1999 65 2,957,627 4.45% 2,825,954 95.55% 95.55 $ 21.49

Q1 2000 66 3,117,627 3.66% 3,003,657 96.34% 96.34 $ 21.21

Q2 2000 66 3,117,627 3.66% 3,003,557 96.34% 96.34 $ 21.25

Q3 2000 66 3,117,627 3.40% 3,011,732 96.60% 96.60 $ 21.25

Q4 2000 66 3,117,627 4.21% 2,986,299 95.79% 95.79 $ 26.88

Q1 2001 66 3,117,627 4.05% 2,991,254 95.95% 95.95 $ 26.08

Q2 2001 66 3,117,627 4.20% 2,986,587 95.80% 95.80 $ 28.37

Q3 2001 66 3,117,627 4.91% 2,964,687 95.09% 95.09 $ 26.36

Q4 2001 66 3,117,627 3.71% 3,001,914 96.29% 96.29 $ 25.00

Q1 2002 66 3,117,627 3.56% 3,006,484 96.44% 96.44 $ 25.94

Q2 2002 66 3,117,627 3.36% 3,012,744 96.64% 96.64 $ 20.83

               

Average     4.47%   95.53%   $ 23.31

Standard Deviation     1.17%   1.17%   $ 2.91

               

QUARTERLY OCCUPANCY, VACANCY & RENT ANALYSISSubmarket - Roxbury/Dorchester

Occupancy Rate

91.00

92.00

93.00

94.00

95.00

96.00

97.00

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Rent Per Square Foot

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Exhibit Two

QUARTERLY OCCUPANCY, VACANCY & RENT ANALYSIS

Submarket - Brighton/Allston/Fenway

  Existing Existing Vacancy Square Feet Percent Occupancy Average

Quarter Buildings Rentable Area w/ Sublet Occupied Occupied x 100 Rental Rate

Q1 1999 109 4,834,209 17.41% 3,992,445 82.59% 82.59 $ 19.94

Q2 1999 109 4,834,209 16.97% 4,014,074 83.03% 83.03 $ 19.57

Q3 1999 109 4,834,209 16.73% 4,025,406 83.27% 83.27 $ 21.29

Q4 1999 110 4,843,209 16.68% 4,035,168 83.32% 83.32 $ 22.33

Q1 2000 111 4,918,209 5.43% 4,650,927 94.57% 94.57 $ 22.89

Q2 2000 111 4,918,209 5.12% 4,666,410 94.88% 94.88 $ 24.67

Q3 2000 111 4,918,209 4.83% 4,680,548 95.17% 95.17 $ 25.86

Q4 2000 112 5,144,749 7.35% 4,766,699 92.65% 92.65 $ 28.15

Q1 2001 112 5,144,749 8.15% 4,725,224 91.85% 91.85 $ 27.11

Q2 2001 113 5,326,730 16.33% 4,456,810 83.67% 83.67 $ 27.96

Q3 2001 114 5,331,730 15.83% 4,487,564 84.17% 84.17 $ 26.78

Q4 2001 114 5,331,730 16.89% 4,431,413 83.11% 83.11 $ 26.16

Q1 2002 114 5,331,730 16.79% 4,436,463 83.21% 83.21 $ 25.77

Q2 2002 114 5,331,730 8.78% 4,863,555 91.22% 91.22 $ 25.65

               

Average     12.38%   87.62%   $ 24.58

Standard Deviation     5.30%   5.30%   $ 2.88

               

QUARTERLY OCCUPANCY, VACANCY & RENT ANALYSIS

Submarket - Brighton/Allston/Fenway

Occupancy Rate

76.0078.0080.0082.0084.0086.0088.0090.0092.0094.0096.0098.00

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Rent per Square Foot

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Exhibit ThreeQUARTERLY OCCUPANCY, VACANCY & RENT ANALYSIS

Submarket - South Suffolk County

  Existing Existing Vacancy Square Feet Percent Occupancy Average

Quarter Buildings Rentable Area w/ Sublet Occupied Occupied x 100 Rental Rate

Q1 1999 17 238,383 20.91% 188,545 79.09% 79.09 $ 15.50

Q2 1999 17 238,383 21.97% 186,007 78.03% 78.03 $ 16.17

Q3 1999 17 238,383 15.29% 201,945 84.71% 84.71 $ 14.00

Q4 1999 17 238,383 15.29% 201,945 84.71% 84.71 $ 14.00

Q1 2000 17 238,383 15.70% 200,945 84.30% 84.30 $ 14.33

Q2 2000 17 238,383 15.50% 201,445 84.50% 84.50 $ 19.31

Q3 2000 17 238,383 16.84% 198,234 83.16% 83.16 $ 21.83

Q4 2000 17 238,383 14.54% 203,734 85.46% 85.46 $ 21.87

Q1 2001 17 238,383 13.70% 205,724 86.30% 86.30 $ 19.58

Q2 2001 17 238,383 14.75% 203,224 85.25% 85.25 $ 17.33

Q3 2001 17 238,383 12.63% 208,283 87.37% 87.37 $ 20.50

Q4 2001 18 242,683 13.10% 210,883 86.90% 86.90 $ 20.63

Q1 2002 18 242,683 13.10% 210,883 86.90% 86.90 $ 20.63

Q2 2002 18 242,683 13.10% 210,883 86.90% 86.90 $ 21.25

               

Average     15.46%   84.54%   $ 18.35

Standard Deviation     2.82%   2.82%   $ 3.02

               

QUARTERLY OCCUPANCY, VACANCY & RENT ANALYSIS

Submarket - South Suffolk County

Occupancy Rate

72.00

74.00

76.00

78.00

80.00

82.00

84.00

86.00

88.00

90.00

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Rent per Square Foot

$-

$5.00

$10.00

$15.00

$20.00

$25.00

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Exhibit Four – Comparison of Three Sub-Markets

Occupancy Rates

75.00

80.00

85.00

90.00

95.00

100.00

Q1

19

99

Q3

19

99

Q1

20

00

Q3

20

00

Q1

20

01

Q3

20

01

Q1

20

02

Roxbury/Dorchester

Brighton/Allston/Fenway

South Suffolk County

Average Rental Rate

$10.00

$15.00

$20.00

$25.00

$30.00

Q1

19

99

Q3

19

99

Q1

20

00

Q3

20

00

Q1

20

01

Q3

20

01

Q1

20

02

Roxbury/Dorchester

Brighton/Allston/Fenway

South Suffolk County

Exhibit FiveAVAILABILITY AND VACANCY ANALYSISOffice Market Analytics

  Existing Direct w/ Vacancy          

  Rentable Sublet SF % with Total SF Sublet SF Max SF Avg% of Total

Building ClassBldg Area Vacant Sublet Available Available Contig Rate in Class

                 Submarket - Roxbury/Dorchester                A Class Totals (6 Bldgs) 1,164,408 - 0.00% - - - $ - 9.09%B Class Totals (13 Bldgs) 648,780 7,088 1.09% 16,828 - 8,000 $ 22.75 19.70%C Class Totals (47 Bldgs) 1,304,439 104,195 7.99% 102,295 - 18,000 $ 17.00 71.21%                 Totals (66 Bldgs) 3,117,627 111,283 3.57% 119,123 - 18,000 $ 20.83 100.00%                 Submarket-Brighton/Allston/Fenway            A Class Totals (4 Bldgs) 1,408,521 182,882 12.98% 251,882 169,011 69,000 $ 36.65 3.4%B Class Totals (44 Bldgs) 1,552,814 146,495 9.43% 196,045 15,142 60,000 $ 21.96 37.9%C Class Totals (68 Bldgs) 2,057,007 138,798 6.75% 452,298 - 265,000 $ 26.81 58.6%                 Totals (116 Bldgs) 5,018,342 468,175 9.33% 900,225 184,153 265,000 $ 25.65 100.00%                 Submarket - South Suffolk County                A Class Totals (0 Bldgs) - - 0.00% - - - $ - 0.00%B Class Totals (5 Bldgs) 31,268 - 0.00% - - - $ - 27.78%C Class Totals (13 Bldgs) 211,415 31,800 15.04% 29,300 - 12,500 $ 21.25 72.22%                 Totals (18 Bldgs) 242,683 31,800 13.10% 29,300 - 12,500 $ 21.25 100.00%                 Grand Totals (200 Bldgs) 8,378,652 611,258 7.30% 1,048,648 184,153 265,000 $ 24.63 100.00%

Exhibit SixFACE RENT ANALYSISRetail Rental Analysis

  Direct Space Sublet SpaceSubmarket Spaces Minimum Avg Rent Maximum Spaces Minimum Avg Rent Maximum                 Roxbury/Dorchester                Full Service - $ - $ - $ - - $ - $ - $ - Triple Net 6 $ 5.00 $ 34.58 $ 65.00 - $ - $ - $ - Other 6 $ 10.00 $ 11.86 $ 65.00 - $ - $ - $ - Roxbury Area Average   $ 7.50 $ 23.22 $ 65.00   $ - $ - $ -                  Brighton/Allston/Fenway                Full Service 2 $ 20.00 $ 27.29 $ 28.50 - $ - $ - $ - Triple Net 12 $ 15.00 $ 24.96 $ 40.00 - $ - $ - $ - Other 5 $ 25.00 $ 27.97 $ 28.50 1 $ 18.00 $ 18.00 $ 18.00 Fenway Area Average   $ 20.00 $ 26.74 $ 32.33 $ 18.00 $ 18.00 $ 18.00                  South Suffolk County                Triple Net 4 $ 18.00 $ 22.37 $ 30.00 - $ - $ - $ - Other 4 $ 17.00 $ 17.00 $ 17.00 - $ - $ - $ - S. Suffolk County Average   $ 17.50 $ 19.69 $ 23.50   $ - $ - $ -                  Grand Totals                Full Service 3 $ 20.00 $ 27.29 $ 28.50 - $ - $ - $ - Triple Net 22 $ 5.00 $ 25.19 $ 65.00 - $ - $ - $ - Other 15 $ 10.00 $ 16.60 $ 65.00 1 $ 18.00 $ 18.00 $ 18.00 Comparable Averages   $ 11.67 $ 23.03 $ 52.83   $ 18.00 $ 18.00 $ 18.00                  

Commercial Market Analysis - Resources

Leo Downey, Real Estate AgentELEO Realty and Management1568 Tremont Street, Roxbury, MA 02120617-730-9983

James C. RushtonCoStar Group, Inc.176 Federal Street, Boston, MA 02110617-748-0812www.costar.com