Boston’s office real estate scene is currently a tenants’ market, with record high vacancy rates and four consecutive quarters of negative absorption.
Vacancy rates have skyrocketed as large companies downsize, and subleasing rates have never been higher.
High-quality assets have been shielded from the worst of these slowdowns, but landlords may have trouble leasing Class B and lower properties amidst the low demand.
Boston is both the capital and largest city in Massachusetts, with a population of 693,062 as of 2023.
The median age is 32, and the median household income is $76,298. Boston proper is the central hub of the greater Boston metropolitan area, home to approximately 4.8 million people.
Boston has a typical Northeast Atlantic climate, with warm, mild summers and stormy, cold winters. Boston is known for its heavy snow and rain during the fall and winter. The city’s proximity to the ocean produces heavy fog during the spring.
In addition to being an important historical city, the Boston metropolitan area is the 12th largest economy in the world. Boston is a central hub for biotechnology, financial services, and medical research and also has significant venture capitalist activity.
Large companies with a major presence in Boston include General Electric, Liberty Insurance, Wayfair, and Vertex Pharmaceuticals.
Boston posted 927,000 square feet of negative absorption in Q4 2022, making the fourth consecutive quarter of negative absorption.
Overall absorption for Class A and Class B properties were both negative, though some submarkets, such as Seaport and East Cambridge, posted positive absorption.
The downtown Boston submarket alone was responsible for over half the negative quarterly absorption.
As a consequence of this negative absorption, vacancy rates have jumped higher than during both the 2001 dot-com burst and the 2008 housing crisis. Overall vacancy rates rose to 17.6%, with availability rates over 20% in some submarkets.
Submarkets with the highest availability rates include Charlestown, South Station, and North Station at 26.4%, 25.1%, and 21.9%, respectively.
The negative absorption and high vacancy rates mean the Boston office space scene is a tenants’ market. Renters have ample opportunity to negotiate favorable leases as landlords are struggling to fill space.
Average leasing rates fell slightly from $62.80 per square foot in Q3 2022 to $62.36 per square foot in Q4 2022.
Falling rental rates are due to city-wide low occupancy rates, giving tenants good leverage to negotiate favorable leasing terms with ample concessions. Average Class A rents were $69.73, and average Class B rents were $50.35.
Submarkets with the highest average asking rates were East Cambridge, Back Bay, Harvard Square, and Downtown at $81.01, $68.34, $66.26, and $64.52 per square foot, respectively. Generally speaking, rents this quarter decreased in urban markets and increased in suburban markets.
Given the low demand, leasing activity has been relatively slow in Q4 2022. As a consequence, subleasing activity is the highest it has ever been in Boston, with over 3.4 million square feet of subleasing space available. Subleasing space currently makes up about 30% of Boston’s available space.
Despite the high overall subleasing rates, a handful of Boston-based companies are increasing their office footprints, particularly in high-quality buildings in the suburbs. Specifically, about 90% of Cambridge/suburban space delivered in the past five years is committed.
Some of the most notable office space sales and lease transactions that took place in Q4 2022 include:
Sales in urban submarkets this quarter were notably low.
The Boston real estate market delivered about 560,000 square feet of new space in 2022, though net new supply figures were 275,000 square feet due to office-to-lab conversions.
These types of conversions could shore up office vacancy rates, but leasing slowdowns in the life sciences sectors could mean many of these conversions never deliver.
The Boston office space market ended the year with 3.6 million square feet of office space in the construction pipeline.
About 66% of this space is committed, but interest rate hikes and the growing construction costs may delay the delivery of a significant portion of these projects.
Demand for Boston office space is expected to remain static, and subleasing rates may rise as landlords struggle to fill space.
Despite the large construction pipeline, many of these projects won’t see delivery until at least 2025. The market will continue its meandering pace as the nation adjusts to inflation and high-interest rates.
In the meantime, tenants have significant leverage to negotiate leases and concessions. Companies looking to expand will find a favorable environment, though office-to-lab conversions might tighten the supply to an appreciable degree.
Whether office conversions will affect the office space market depends on lab leasing rates and construction delays.
Landlords are currently at a disadvantage due to the low demand and high vacancy rates. The near-term market will be characterized by flight-to-quality, so investors can best maximize returns by investing in high-quality amenities or capital improvements to attract long-term tenants.
Vacancy rates in the suburbs/Cambridge areas are generally lower, so they are the best areas to invest in new space.
As always, stay vigilant, do your research, and happy investing!
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