The Boston office market turns in another solid quarter · • Seaport’s bid to be considered a...

Q2 2019 CBRE Research © 2019 CBRE, Inc. | 1

MARKETVIEW BOSTON DOWNTOWN OFFICE

Figure 1: Office Vacancy vs. Lease Rate

Source: CBRE Research, Q2 2019.

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Vacancy Rate: 6.2% Average Asking Lease Rate: $64.51

Boston Downtown Office, Q2 2019

The Boston office market turns in

another solid quarter

MARKETVIEW

The Boston office market had a solid second quarter, with positive absorption of 164,000 sq. ft. and vacancy falling from 7.2% to 6.2%. Perhaps the biggest story of the quarter was the dramatic growth in asking rents, which was almost entirely driven by the CBD. Rents in the CBD jumped from $63.26 per sq. ft. in the first quarter to $68.70 per sq. ft. in the second, pushing overall city rents up to $64.51 per sq. ft. This increase was largely due to some of the new construction in the submarket,

particularly the renovation at One Post Office Square. The first phase of this headline project is due to deliver in 2020, and the second, which features entirely new construction, is being planned for completion in 2021. New Class A development is the prime driver of swift rent growth but has been mainly seen in submarkets like the Seaport and East Cambridge where there is more room to build. The new additions to the CBD have resulted in 16.8% rent growth year-over-year in that submarket.

Quarterly Absorption163,613 SF

Vacancy6.2%

Availability13.7%

Sublease1.3%

Under Construction4.6 MSF

* Arrows indicate change from previous quarter



With 4.6 million sq. ft. of space under construction, including projects like Winthrop Square and One Congress, it is very likely that rents will keep growing at a healthy clip in the near future.

CBD

• The CBD had the strongest second quarter of all the Boston submarkets, boasting 383,000 sq. ft. of positive absorption. This leasing activity corresponded with a substantial drop in vacancy, which fell from 7.8% in Q1 to 6.1% in Q2. This is the lowest vacancy has been in the CBD since 2008.

• One building stole the show in the Boston office market this quarter, and it was 100 Summer Street. The building saw 233,000 sq. ft. of leasing activity and had three of the quarter’s top deals. Half of this was the quarter’s largest lease, 117,000 sq. ft. taken by WeWork in a continuing expansion of the coworking company’s Boston empire.

• With coworking taking over an increasing amount of traditional office space, some landlords are getting into the game themselves and putting vacant space in their properties to good use. This quarter, Tishman Speyer opened the first Boston location of the company’s coworking brand, Studio, in 27,000 sq. ft. at 125 High Street.

BACK BAY

• Asking rents in the Back Bay continued to climb in the second quarter, breaking $70.00 per sq. ft. for the first time ever. This represents 9.1% growth year-over-year and validates the market’s resurgence in recent years, despite the rise of the Seaport. Vacancy also continued to compress, and fell to 5.5%, making it once again the lowest of the downtown submarkets.

• Although Back Bay posted 232,000 sq. ft. of negative absorption in the second quarter, the bulk of that was not due to tenants moving out. Over 211,000 sq. ft. of space was put on the sublease market in a prime example of defensive leasing, which is when a company intentionally leases more space than needed and subleases the extra portion, banking on future expansion. This is a common strategy used by tenants in high-demand markets like East Cambridge to hedge against shrinking vacancy rates and ensure themselves a chance to grow. Its proliferation in Back Bay demonstrates the strength of the market.

• Back Bay’s largest lease of the quarter was a renewal and expansion by Charlesbank Capital Partners at 200 Clarendon Street, totaling 43,000 sq. ft.

SEAPORT

• The Seaport had a solid quarter, with modestly positive absorption of 59,000 sq. ft. and vacancy tightening to 9.2%. Asking rents remained relatively flat at $66.24 per sq. ft.

• After making waves with their announcement of building a new state-of-the-art headquarters in the Seaport in 2016, GE’s plans evolved significantly. This quarter, the company sold their Fort Point property to a JV of Alexandria Real Estate Equities, National Development and Charles River Realty for $252 million. GE will still renovate and occupy the historic Necco warehouses as their new headquarters on a 12-year leaseback, but the parking lot that was to become their ground-up building will become home to a new use.

• Adjacent to the GE sale site, Gillette sold a 6.5-acre lot to local developer Related Beal. The site could potentially host more than 1 million sq. ft. of office and lab space.




Figure 2: Market Statistics

• Seaport’s bid to be considered a viable life science alternative to Kendall Square continued in the second quarter. 645 Summer Street, Seaport’s newest lab property, inked a 38,000 sq. ft. lease to tenant Akouos. The Brookline-based biotech is a

gene therapy company that develops solutions for hearing disorders. Alexandria’s recent investment in the area also underscores the growing interest in building lab here.

Boston Office BldgsTotal

Sq. Ft.Available

(%)Vacant

(%)Sublease

(%)Quarter Net Absorption

YTD NetAbsorption

Avg Asking Rent $ (Gross)

Central Business District 184 38,856,032 16.0 6.1 1.3 383,148 563,017 68.70

Class A 45 29,068,453 17.8 5.5 1.2 289,452 439,250 71.34

Class B/C 139 9,787,579 10.5 7.8 1.6 93,696 123,767 52.15

Back Bay 75 15,008,985 8.3 5.5 2.2 (232,414) (41,450) 70.12

Class A 21 10,192,552 8.4 4.3 2.7 (212,716) (65,522) 75.58

Class B/C 54 4,816,433 8.2 7.9 1.0 (19,698) 24,072 59.12

Seaport 73 13,771,204 13.5 9.2 0.8 59,233 204,585 66.24

Class A 15 6,416,877 13.0 8.0 0.7 (13,430) 93,616 73.85

Class B/C 58 7,354,327 13.9 10.2 0.9 72,663 110,969 59.04

Fenway/Kenmore Square 21 2,137,967 9.0 2.8 4.1 0 (80,298) 52.62

Class A 2 899,379 9.8 0.0 9.8 0 (88,298) -

Class B/C 19 1,238,588 8.4 4.7 0.0 0 8,000 52.62

North Station/Waterfront 39 3,381,813 12.4 6.5 1.9 (70,863) (8,734) 66.42

Class A 2 998,000 13.3 0.7 0.0 0 64,376 83.05

Class B/C 37 2,383,813 12.0 8.9 2.6 (70,863) (73,110) 53.66

Mid-Town 26 2,479,445 9.4 7.4 0.6 15,687 88,989 46.46

South Station 22 1,332,259 10.1 6.6 0.8 24,033 23,482 53.46

Charlestown/East Boston 20 2,858,655 5.1 2.7 0.1 (19,136) (3,005) 48.56

Dorchester/South Boston 24 3,170,253 36.9 4.4 0.7 3,925 (63,895) 54.51

Allston/Brighton/Longwood 24 2,029,788 3.6 3.6 0.0 0 27,081 34.38

Overall Boston Office 508 85,026,401 13.7 6.2 1.4 163,613 709,772 64.51

NET ABSORPTION The Boston office market had a solid second quarter with 164,000 sq. ft. of positive absorption. While this is lower than recent quarters, it was primarily pulled down by a sizeable sublease put on the market in Back Bay. The CBD had a particularly strong second quarter with 383,000 sq. ft. of positive absorption; in other submarkets, absorption was modestly positive and negative.



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Tenant Address Sq. Ft. Submarket TypeWeWork 100 Summer Street 117,000 CBD New

Grubhub 1 Center Plaza 75,000 CBD New

WSP 100 Summer Street 45,000 CBD New

Charlesbank Capital Partners 200 Clarendon Street 43,000 Back Bay Renewal/Expansion

Ironwood Pharmaceuticals 100 Summer Street 39,000 CBD New

Akouos 645 Summer Street 38,000 Seaport New

WeWork 1 Milk Street 32,000 CBD New

Simon Kucher & Partners One Boston Place 31,000 CBD New


Figure 3: Transactions of Note


Figure 4: Net Absorption

CBD: 383,148 Sq. Ft. Seaport: 59,233 Sq. Ft. Back Bay: (232,414) Sq. Ft.

AVERAGE ASKING RENTS

Rents in the Boston office market continued to grow in Q2 2019, reaching $64.51 per sq. ft. With rents only at $57.01 per sq. ft. at this time last year, year-over-year rent growth was 13.2%, the highest it’s been in over a decade. Rents also grew 3.6% from the first quarter. The quarterly increase came entirely from Class A rents, while Class B remained flat from Q1. Both classes were up significantly year-over-year.

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Figure 5: Average Asking Lease Rates

Class A: $69.17 Class B: $54.26




AVERAGE ASKING LEASE RATE

Rate determined by multiplying the asking gross lease rate for each building by its available space, summing the products, then dividing by the sum of the available space with net leases for all buildings in the summary.

GROSS LEASES

Includes all lease types whereby the tenant pays an agreed rent plus estimated average monthly costs of the operating expenses and taxes for the property, including utilities, insurance and/or maintenance expenses.

MARKET COVERAGE

Includes all competitive buildings in CBRE’s survey set.

NET ABSORPTION

The change in occupied sq. ft. from one period to the next, as measured by available sq. ft.

NET RENTABLE AREA

The gross building square footage minus the elevator core, flues, pipe shafts, vertical ducts, balconies and stairwell areas.

OCCUPIED AREA (SQ. FT.)

Building area not considered vacant.

UNDER CONSTRUCTION

Buildings that have begun construction as evidenced by site excavation or foundation work.

AVAILABLE AREA (SQ. FT.)

Available building area that is either physically vacant or occupied.

AVAILABILITY RATE

Available sq. ft. divided by the net rentable area.

VACANT AREA (SQ. FT.)

Existing building area that is physically vacant or immediately available.

VACANCY RATE

Vacant building feet divided by the net rentable area.

NORMALIZATION

Due to a reclassification of the market, the base, number and square footage of buildings of previous quarters have been adjusted to match the current base. Availability and vacancy figures for those buildings have been adjusted in previous quarters.

Definitions


Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

CONTACTS

Suzanne DucaDirector of Research, New England+1 617 912 7041 [email protected]

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