• Tue. Jun 21st, 2022

An Incredible Year for the Boston Commercial Real Estate Market

Webster Collins

When I called CBRE’s New England research director to ask about events I could “zoom in” to gather data for a 2022 launch story, I was told we were getting the following market summaries:

• Downtown Boston office market rebounds in fourth quarter

• Cambridge office ends 2021 better than it started

• The suburban office is gaining momentum

• Boston’s industrial market hits record highs…again

• Lab market ends 2021 with record rents and record vacancy rates

This article summarizes CBRE’s findings.

Boston Downtown Office Market
CBRE highlighted remote “work from home” issues and their impact on the market in the first quarter of 2021. During the year, occupancy increased significantly.

Office space utilization is three times higher than a year ago. The Boston office market recorded the second consecutive quarter of growth since 2019 with 426,000 square feet of office uptake. The trend reported last year of large office tenants (occupiers over 20,000 square feet) moving to newer spaces has continued. 79% of these tenants moved into new Class A buildings, with Class B buildings being left behind.

At the same time, looking to 2022, uncertainty looms over the downtown office market, particularly in Class B space.

The Seaport, with 280,000 square feet of office absorption in Q4 2021, continues to be a magnet and represents 66% of quarterly downtown absorption. The city ended the year with a vacancy rate of 10.9%, which is still plenty of space – over 9,000,000 s/f.

Cambridge office market
Office vacancy in Cambridge, at 5.2%, is half that of Boston and with 509,141 s/f of positive absorption, is close to Boston’s 621,285 s/f. Office rents are at record highs averaging $85.83 per s/f (gross).

Important corporate leases have been signed. Facebook has leased 290,000 sq m with a sublease of 267,000 sq m at 50 Binney St. and a direct contract of 22,400 sq m at 100 Binney St.

40 Thorndike has been revived with Leggat McCall Properties and Granite Properties’ joint venture with CBRE Investment Management to finance and fully redevelop its 422,000 square foot tower with delivery expected in mid to late 2023.

This is a strong indicator that once pandemic concerns are brought under control, businesses and employees will feel comfortable returning to the office.

Suburban office market
The suburban office market, which had been hit hard in the first two quarters of 2021 with a negative absorption of 617,077 s/f, recovered during the fourth quarter of 2021 with a positive absorption of 305,061 s/ f.

While rental activity shows an image of recovery, the sublease market shows little. Clarks’ 120,000 square foot building is a prime example of sublease space being pulled from the market, although sublease rates have remained consistent throughout the year.

With the decrease in demand for office space, many landlords are investigating the possibility of converting their office buildings to life science use. The process is far from automatic due to high ceiling requirements (16′-17′), mechanical systems and equivalent hospital finishing costs eliminating many properties.

In terms of market rents, the average suburban market office rent is $25.42 per s/f (gross), 36% lower than the city of Boston and 30% lower than the city of Cambridge. This rent gap propelled the momentum of the suburban market.

The Boston Industrial Market
The current level of industrial demand for robotics manufacturers, biomanufacturers, logistics, wholesalers, retailers and transportation usage has driven vacancy rates to record highs and rents to record highs. Vacancy rates are 1.5% and average asking rents are $12.55 per s/f, NNN.

Industrial absorption for the fourth quarter of 2021 totaled 7,547,590 square feet, a single-year record.

The current level of industrial demand will exceed supply over the next 18 to 24 months. The space’s speculative development pipeline only totals 2.9 million square feet, due to significant barriers to entry and a lack of developable industrial land.

The Boston market, which at one time was Tier II, has moved up in terms of classification. The quality of the property trumps all issues. Old, junky buildings with low ceiling heights and outdated designs don’t fit this frame.

The Greater Boston industrial market now has top-notch fundamentals with global capital seeking properties in this market.

The laboratory market
From its start-up years, before 2000, the laboratory market has become Greater Boston’s premier sector.

The laboratory market is location-centric. Kendall Sq., Harvard/Allston, the Seaport/Fort Point Channel continue to shine. There is a sharp decline in second tier locations, due to venture capital money only being placed in locations with the highest potential and lowest risk. Somerville has been added to the list of key locations.

There are 11,300,000 square feet of space under construction. Leasing is at record levels, driven largely by venture capital.

Conclusion
These are extraordinary times in a city that is recovering from the pandemic faster than any other in its competitive set. Boston is one of the best places to live, play and work. I haven’t missed a single day out of the office which is my library of information to properly represent my growing client list.

Webster Collins, MAI, CRE, FRICS is executive vice president on the Valuation and Advisory Services leadership team at CBRE, Boston, Mass.