The Class A & B office space in Boston has never been closer than what we are experiencing now. The rents low rise Class A and Class B are near identical with the differentiators being loss factor, amenities and fit up from union versus nonunion general contractors.
According to our research office rents will continue to grow through 2017 within the greater Boston market. On top of that, construction costs continue to climb while tenant improvement dollar’s decline and rent abatement all but disappears.
According to the BBJ, “rents for large office space in Greater Boston hit their highest levels in at least a decade in the fourth quarter of 2015, with the vacancy rate dropping to its lowest level since 2007…The total vacancy rate fell to 13.8 percent from 14.3 percent the previous quarter.”
Low-rise and Class B offices are now commanding rents in the mid- to upper $40s range, while high-rise rents are reaching well past the $90 per square foot range, according to second-quarter research from commercial real estate services firm DTZ. Class B office rents are up 21 percent from last year in the Financial District, 12 percent in the North Station region and 20 percent in South Station, DTZ said.
“It’s also worth noting that nearly 25 percent of Boston’s office inventory has traded hands in the past 12 months,” the research report said. Meanwhile, Cambridge also maintained its post as the strongest real estate market in Massachusetts, with $2.2 billion in sales activity. That’s more than half of the overall $4 billion in total sales volume so far this year, according to recently released second-quarter research from JLL..Direct average rents rose more than 5 percent year-over-year in nine out of 12 of Boston’s submarkets, topping out with 16.3 percent growth in East Cambridge.
One Broadway in Kendall Square (click for property details)
Fewer options exist on the Boston office market, and what is available is more expensive then previous quarters. Combined with fewer concessions offered by landlords, local tenants are feeling the pinch.
Boston’s office market is hopping, according to reports issued by real estate brokerages Transwestern and Jones Lang LaSalle. Driven by strong employment gains and growing companies in need of additional space, rents are rising all across Greater Boston, up 7.6 percent in the last 12 months. Throughout Cambridge, there are just three vacant office spaces of 20,000 square feet or more on the market, and rents in Kendall Square are averaging above $70 per square foot. Along Route 128, vacancy rates are at record lows, while office rents along Interstate 495 are at seven-year highs.
Harbor Corporate Center in Boston Seaport District
It is true, office rents are going to continue to rise with no expected tenant relief until after 2017. This is primarily due to the limited amount of speculative new construction coming online. Developers have chosen the residential dollars to chase over the office dollar and very few office developers are willing to go in the ground on spec.
B&T notes, “Dropping a 30-percent rent-bomb on the Boston market is going to have a big impact, even if it is spread over three years…For starters, if they stick, higher rents will make winners out of all those new office towers on the drawing boards right now for downtown Boston. Building a new tower in Boston these days can easily be a billion-dollar proposition and someone has to foot the bill for it…So the rent spike is music to the ears of all those ambitious developers, who will need to push rents towards $80, if not $100, a square foot for their top suites to keep their lenders on board and meet their projections.”
Boston office rents continue to rise, and are expected to climb through 2017. What can you do to hedge your risk against leasing in the top of the market? Understand what you need and engage an advisor.
The BBJ notes, “Boston can expect its asking rental rate increase to average 10.1 percent per year during that timeframe…The office market in Boston’s central business district averaged a $46.60 per-square-foot rental rate last year…[with estimates for] those rates to increase to $52.83 by 2015, $59.48 by 2016 and $62.09 by 2017.”
You can read the complete article on the Boston Business Journal, here.
Boston is 3rd in office rent growth for 2014 behind Singapore and San Francisco. The factors that drive Boston are the innovative economy and the extensive university presence. The YE Market Report (link below) goes through the Downtown Class B office market fundamentals.
“According to Banker&Tradesman, Boston ranked first globally with a 34.6-percent increase in capital value growth. Foreign investors drove up prices of the Boston region’s commercial real estate, with investors such as Toronto-based Oxford Properties Group and Norges Bank Investment Management buying trophy office buildings in Boston and Cambridge. The index is designed to identify which cities are changing the fastest by combining real estate data with socioeconomic factors.”
You can download a pdf of the report here: http://www.bostonrealestates.com/reports/year-end-2014/Downtown/YE-MarketReport-Downtown-lo.pdf
The recent trades on the Class A and B will provide the fuel for increased rent growth for 2015 as new owners justify their investment. Rent concessions and tenant improvement dollars will move the opposite direction.
“Rents in Boston’s Downtown Crossing have risen from $25 to $35 per square foot in the last two years, with growing demand from tech tenants…for tenants looking for pockets of value, good deals remain in the low-rise floors of Financial District buildings, where vacancies remain in the mid-teens and rents average in the low $40 range,” according to a quote from Joseph Sciolla, managing principal at CresaPartners Boston on Banker&Tradesman.