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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