Key Takeaways
• Boston metro office availabilities are higher than in the Great Financial Crisis (GFC).
• Tenants often find themselves in the driver’s seat in lease negotiations.
• White-collar job growth continues.
• There is a dearth of institutional office investment sales activity in the city of Boston.
Boston Metro Office Summary
Office leasing fundamentals continue to favor tenants. The 19.7% availability rate in the Boston metro now exceeds its peak during the GFC and is likely to rise further. More than 36 million square feet was available at the end of the quarter, a new all-time high. The amount of sublease space here (nine million square feet-plus) has tripled from its pre-COVID level as companies have right-sized their footprints and/or tempered growth expectations amid economic uncertainty.
The market hasn’t turned, but there are indicators that it could be entering a new phase. For starters, the increase in available space was smaller during the second quarter than in the first quarter. Also, the amount of sublease space placed on the metro market was the lowest in more than a year, while new direct space offerings have expanded. This shift has happened while the three key office-using employment sectors in the Boston metro have each handily outperformed the U.S. benchmark over the past year. Although many firms here have a relatively high propensity to let employees work from home, the share of local job postings allowing remote work is shrinking, and more companies are enacting in-office work requirements for existing workers.
Historical Absorption, Deliveries, and Vacancy
There are plenty of leasing opportunities in Class B office buildings. About 30% of such space in the Downtown Submarket is available.
Economy
The Boston metro is adding jobs at an above-average pace. The 3.1% year-over-year increase (as of May) in local job numbers is stronger than the national benchmark and is also healthier than the metro’s peak growth rates during recoveries from the dot-com and GFC recessions. With more than 84,000 new jobs added over the past year, many employment sectors have more workers now than before COVID. Low unemployment and the large number of unfilled jobs have led to rising wages, helping consumer expenditures to remain buoyant.
There is positive news on the macroeconomic front. After 10 consecutive interest rate increases, the Federal Reserve held rates steady at its June meeting. The 4.1% initial read on year-over-year U.S. inflation in May was the first time it registered below 5% in about two years. And the stock market has climbed about 20% since bottoming out in the fall of 2022. If these metrics continue to move in the right direction, it could go a long way toward improving firms’ confidence and ability to expand their CRE footprints at a time of increasingly favorable leasing conditions.
The economy is not out of the woods yet. Numerous leading economic indicators still point toward a pending recession. Corporate profits have shrunk and venture capital flows have come back to earth, forcing some Massachusetts firms to lay off workers and shelve growth plans. ISM indices show that future orders for service goods are not as robust as they had been and that orders for manufacturing goods have dropped. (Locally, manufacturing was the only job sector that shrank over the past year.)
Banks are tightening commercial real estate lending standards, as property owners are trying to navigate rising cap rates, elevated vacancies, and weakened rent prospects.
GDP Per Capita of 10 Largest U.S. Metro Economies
GDP Per Capita of 10 Largest U.S. Metro Economies
Y/Y Boston Metro Job Change
Y/Y Job Change
Historical Absorption, Deliveries, and Vacancy
Boston
Widespread availabilities and generous concession packages make this a great time to be a tenant in Boston. Vacancies have risen in six consecutive quarters, and a record 13.8 million square feet, more than 20% of the office market, was available at the end of the second quarter. Effective rents have fallen because of significant tenant improvement allowances and free rent offered to attract and retain occupancy. With an availability rate approaching 30%, the Downtown class B segment continues to be the biggest drag on the market.
Sublease Square Feet
One Congress and Winthrop Center will deliver this year, resulting in Downtown Boston’s biggest supply increase in more than three decades. This is true on both an absolute basis (1.8 million square feet added) and as a percentage increase in inventory (5.3%). Unlike most recent projects these are multi-tenant speculative towers that will pull occupancy from numerous other properties. Owners of many aging Class A downtown properties have renovations in the works to remain competitive as musical chairs ensues.
Many firms continue to shrink their footprints, but some interesting deals are getting done. In one of the most notable space givebacks in the quarter, the restaurant payment-processing company Toast terminated its lease for 133,000 SF at 401 Park and will compensate the landlord about $16 million as a part of this process. Other companies such as Verizon and WeWork have also added space to the market. Less than three million square feet worth of tenants are actively seeking space in Boston. However, large leases by AthenaHealth and Berkshire Hathaway are plugging holes in some buildings. Announcements in the second quarter by law firm Covington & Burling, technology company AutoReturn and in the first quarter by toy manufacturer Lego continue to prove that Boston can attract new tenants.
Cambridge
Just shy of 15%, the availability rate in Cambridge is the highest in well over a decade. Available space here has increased by more than 900,000 square feet over the past five quarters, the worst such period since the dot-com bust. With numerous tech companies placing space on the market, sublease offerings account for more than half of the increase. Despite this, the overall availability rate is healthier here than in Boston or the Suburbs.
Office construction is limited in Cambridge. In this cycle, developers here have been more focused on ground-up lab projects and office-to-lab conversions, the latter of which can help office market fundamentals. In fact, office inventory here is smaller today than two years ago. (The most notable project underway is the conversion of 40 Thorndike, a former jail, to include more than 400,000 square feet of office space.) However, new buildings outside of Cambridge are competing for tenants and contributing to tenant churn. Several high-profile firms have departed (or will leave soon) for other locations, including the headquarters of companies like InterSystems, CarGurus, bluebird bio, and Pegasystems.
Cambridge remains attractive to highvalue-add companies. As evidenced by relatively low vacancies, high rents, and higher sales prices than in other parts of the metro, Cambridge, in particular East Cambridge, is one of the Boston metro’s premier office destinations. Recent activity by GE Vernova (58 Charles Street will be its new HQ), the Boston Dynamics AI Institute (a $400 million investment based at new headquarters space in East Cambridge), and Google (occupying a new 420,000-square-foot buildto-suit at 325 Main) is a surefire indicator of Cambridge’s ability to attract tenants.
Historical Absorption, Deliveries, and Vacancy
Availability Rate
Availability Rate By Class & Type
Historical Absorption, Deliveries, and Vacancy
Suburbs
With an overall vacancy rate only slightly above its historical average, the Suburban vacancy rate has held up relatively well. In fact, after a consistently higher vacancy rate than Boston for more than two decades, as of late 2022 the Suburbs had a lower vacancy rate than in Boston. That said, tenants active in the market have more 20 million square feet to choose from, more than 19% of the Suburban inventory.
Availability Rate By Submarket
Higher-quality assets are faring best. Given the macroeconomic factors in office leasing, the Suburbs have less occupied space now than they did pre-COVID. However, the Class A market has had less significant losses than Class B. In fact, occupancy in the top end of the market is about three percentage points above its long-term average, despite millions of square feet of availabilities and notable pricing discounts in the Class B segment.
New construction is nonexistent, but some landlords are investing in renovations. This includes about $5 million of updates announced at 111 Speen in Framingham, which has notable leases by Ai3 Architects and WorkBar in recent months. Ultimately, supplyside factors are helping to keep vacancies in check. Ground-up office construction, rare in the Suburbs over the past few years, prevents tenants from trading up and leaving backfill space. The large number of office-tolab conversions have also reduced competitive inventory and forced tenants to consolidate in remaining office stock. However, slowing lab demand could be raising the risk of shadow space. Instead of being fully converted, some buildings may wind up once again competing for traditional office tenants.
Investment Trends
Newer, high-quality assets are outperforming. Less than 6% of Class A space in the Seaport is available.
