2015 Downtown Boston Office Outlook

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by Kevin Kennedy, First Vice President, Urban Brokerage

As 2015 begins, real estate in Downtown Boston is at $110 billion with $4 billion in new construction breaking ground and tech companies, such as LogMeIn and Bullhorn are expected to have job openings for 650 people. This incredible statement is Boston commercial real estate’s current reality.

2014 was a frenzied year for Boston. The market was less defined by the impact of the Mega deal of 2013, such as Goodwin Proctor, Brown Brothers, PWC and Partners, and more defined by diversification from both urban migration and homegrown growth. Robust job growth and subdued levels of new construction have driven demand. At the end of the day, healthy market fundamentals have caused rent spikes of 25% in some neighborhoods, an absorption explosion of 1.8 million square feet, single digit vacancy and a general optimism that has not been felt in a long time.

At 1.8 million square feet of positive absorption Downtown Boston is at its highest level of annual growth in almost 10 years. While urban migration is not a new phenomenon, unlike 2013, this trend of is affecting market fundamentals. During 2014, six of the largest transactions came from out of market. This trend of urban migration to Boston continues by supplying 850,000 square feet and 50% of the absorption. The punctuation of this trend is the fact that Boston’s largest lease in 2014 came from out of market, with Sonos taking 170,000 square feet at 500 Washington Street. Before this lease was signed in October there were only four other leases signed larger than 50,000 square feet committed to relocation, totaling just 300,000 square feet. This demand came from home grown companies such as LogMeIn, which will absorb another 117,000 square feet at 333 Summer Street, and from tech companies like DraftKings, which relocated from 2,000 square feet into 12,000 square feet, and is searching again for 35,000 square feet. The high-tech industry continues to lead leasing velocity, accounting for 35% of the largest transactions.

Although some had predicted the death of the Financial District in the past, of the 1.8 million square feet of positive absorption in 2014, 1 million came from Class A properties in the CBD. Of those transactions, only three were over 50,000 square feet. This means about 800,000 square feet of absorption in the CBD came from small- to mid-sized organic expansion. One of our hottest cluster neighborhoods today is around Downtown Crossing. About a year ago, the renaissance brewing in the DTX was a popular trend in discussions. Today several buildings in Downtown Crossing have experienced rent spikes of 25% over the past 2 years. Couple this with the already existing popular transit system and oversaturated Seaport and Cambridge markets and it is easy to understand the motivation behind the relocations. Downtown Crossing has served as an outlet valve for less expensive space but those days could be coming to an end. 2015 may be a challenging year for good economic opportunities. Creative open space in Downtown Crossing is capturing higher rates than newly built spec suites in the low rise of Class A towers. This speaks to the current demand in and around the Summer Street corridor starting from the Convention Center and finishing at Washington Street. More and more, the Red Line has turned into the pulse of the business community. Overall, rents have shifted dramatically.

Although average asking rents in 2015 are below other peak cycles in 2000 and 2008, the last nine consecutive quarters experienced rent increases. New ownership players like Oxford Properties, Rockefeller Group and Columbia Property Trust are helping push rents in Boston. Their entry into the market have seemingly pushed rents overnight, similar to Blackstone in 2007. The difference between 2007 and 2014 is there are more players in the market and more square footage trading. Rent increases have been more gradual than previous cycles. Assuming the same trend continues, it will take 24 months to surpass the high of 2008. Even at an average asking rate of $50 per square foot, the cost of doing business in Boston is considerably less than other markets and underpriced as a world-class city with room to grow.

More and more companies are searching outside the traditional geography of Downtown Boston due to tight market conditions. For example, The Fenway neighborhood is undergoing a dramatic facelift and offers terrific access, amenities and visibility. Activity from office users in this market is vigorous. Companies like Converse, Partners, and Elkus Manfredi have all chosen destination locations rather than accepting the current market trends of Downtown Boston. The question still remains whether the trend of destination locations will continue in 2015 and what effect this might have on recruiting and retention.

Owners are continuing to benefit from updating and adding amenities with new rehab buildings leasing 77% faster and at an 18% premium than existing product. Differentiation is more important now than ever. Embellishing on views and natural light are no longer enough as today’s tenant is far more sophisticated, more mobile and more diverse than ever before. Emphasizing efficiency, collaboration and creativity are critical in building offerings as the demand for creative space becomes more competitive. Understanding there are only so many configurations a building can make, having an updated lobby with Tenant amenities such as a fitness center, outdoor space, bike rooms and shared conference rooms are all critical. Office merchandising will surely continue in 2015 in an effort to capture new economy credit tenants.

Similar to 2013, 2015 looks to be another year of mega-deals with companies such as Putnam Investments, Bank of NY Mellon, Autodesk, Wells Fargo and the Boston Globe adding up to over 1 million square feet of current demand. As the size of our demand cycle changes so does our type of vacancy offered. From 2012 to 2014 many owners chose to secure low-rise availability by creating more high-rise option space. Today the availability rate in Downtown Boston is 14% with space above the 20th floor currently consisting of 38% of all Class A availability. In 2013 that number was 12%. With only 11 leases signed over 10,000 square feet above $50 per square foot in 2014, it would seem that type of vacancy could linger. In addition to that availability, we may also see some new supply. Owners such as Tishman Speyer and Skanska spoke of going spec with developments Pier 4 and L2, respectively, in the Seaport.

At $37-$47 per square foot, the Class B market in Boston will be considered a real value to companies expanding out of Cambridge and other markets. Buildings like Shorenstein’s Center Plaza, with 250,000 square feet of availability, Red Line access and a major potential renovation in place, will certainly benefit from the recent growth recent growth. At this point, assuming the robust pace of 2014 continues, rents are expected to be supportable for a long period of time led by further urban migration and home grown growth.

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Finding the “Kendall Square Effect” Outside of Kendall Square

photo of Kendall Square by Mike Diskin

photo of Kendall Square by Mike Diskin

by Lenny Pierce, Research Analyst

The story of the East Cambridge lab market in recent quarters has been one of dwindling space and $60 rents that biotech and pharmaceutical companies seem consistently happy to pay. Part of this phenomenon stems from the area’s proximity to employee producers like MIT and Harvard, but another factor is how much more valuable the region becomes with each new life science company that moves there. Decision makers at these organizations value being close to similar companies as this clustering effect allows for regular dialogue between the various groups – interactions that could always lead to the generation of applicable new concepts in their given fields. With rents so high, one would think that smaller groups who can’t afford to set up shop in East Cambridge might miss out on this “Kendall Square Effect” altogether. However, with an uptick in leasing activity outside of East Cambridge over the last 12 months, there could be a handful of smaller new life science hubs producing that same dynamic – and companies aren’t paying $60 a square foot to be a part of it.

Two of these micro-hubs are right next-door – West Cambridge and Watertown. Groups like Tetraphase, Forma, and Enanta are already in Watertown with more tenants likely to gravitate to the region that is a reasonable commute from attractive residential areas like Newton, Wellesley, Belmont, Waltham, Weston and additional cities in the upscale Route 128 West submarket. Formerly the home of over 500 Pfizer employees before its move to Kendall Square, the Alewife area can expect Dicerna Pharmaceuticals to fill Pfizer’s space at 87 CambridgePark Drive shortly. Upon completion of a $50 million renovation of the building by owner King Street Properties, the building will have a more open environment which could be attractive to incoming groups eager to have extra-close contact with Dicerna. Right down the street from said property, 200 CambridgePark Drive recently landed Amgen for 80,000 square feet, furthering life science density in the area. Rents in both Watertown and West Cambridge are currently in the $40-per-square-foot range.

In one fell swoop, pharma giant Vertex created a biotech hub on its own with its relocation from Cambridge to 40 Northern Avenue in the Seaport. The 15-year deal, which consolidated all of the company’s operations to Fan Pier, constituted the largest commercial lease in the history of Boston at $1.1 billion for a 1.1 million-square-foot lease. A few months later, New York City biotech Keryx set up shop right next door at One Marina Park drive after first using the Seaport’s District Hall as temporary office space. Dune Medical Devices joined the party as well, moving into 25 Thomson Place less than two years after the Vertex construction began. The Seaport is also home to the Dana Farber Cancer Institute, which shares 27 Drydock Avenue with life science groups, Immunetics, Inc., Smiths Detection and Cytonome. The prices in said venue are looking nothing like those in East Cambridge, usually hovering somewhere around the $30-per-square foot range.

You can even find micro-hubs in those suburban locations that are more than just a T-ride away. In addition to a handful of smaller life science companies, Cubist Pharmaceuticals is headquartered in Lexington, employing 370 at 65 Hayden Avenue. Lexington is also the U.S. headquarters location of Shire Pharmaceuticals, which will be relocating 500 people from Chesterbrook, Pennsylvania, to the Lexington campus (already home to 1,300 employees) throughout 2015. And Shire isn’t the only Irish pharma with a taste for the burbs – Alkermes has been on Winter Street in Waltham since 2010, just across from fellow life science giant Immunogen. AstraZeneca, Genzyme, and PerkinElmer also have campuses in Waltham. Groups moving to Lexington and Waltham can expect to pay around $30 per square foot, while companies wishing to join Celgene, Anika Therapeutics and Life Technologies in Bedford could be looking as low as the mid to high $20s if they like what they see for space at 18 Crosby Drive or the handful of lab-ready spots on Burlington road.

On the far side of 495, Worcester provides an example of how, as in Cambridge, educational facilities can be a major driver in the formation of a life science hub. UMass’ School of Medicine and Graduate School of Biomedical Sciences act both as generators of potential employees and as collaborators that, unlike an actual pharmaceutical company, won’t ever pack up shop and move elsewhere once the lease is up. Worcester also has three Massachusetts Biomedical Initiative (MBI) campuses. MBI is a private, independent economic development organization, which helps fast track the development of fledgling life science companies by providing cost-effective, high quality lab space as well as a trained support staff to assist with operations. These factors made Worcester a welcoming locale for groups such as Agilux, Blue Sky BioServices and Zata Pharmaceuticals.

It has been clear for a while that existing in a life science hub has critical value for biotechs and pharmas. The newer idea is that this hub doesn’t need to be Kendall Square. The increasing density of life science groups in areas like Watertown and Lexington could mean that the sacred intellectual commingling so readily associated with Cambridge could be available in a handful of other locales. If this phenomenon is truly replicable in these new areas, could having a Bedford address on your letterhead someday pack the same reputational punch as the coveted words “East Cambridge”?

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