BOSTON–The Greater Boston office market ended 2018 with a bang as absorption gains of nearly one million square feet pushed vacancies down to 11.6% in the fourth quarter of last year, according to a report by Boston brokerage firm Hunneman.
“Tech and life sciences continue to make waves throughout the broader metro area with Sanofi executing one of the area’s largest single leases for 900,000 square feet of office and lab space at Cambridge Crossing. Downtown, users in need of more than 100,000 square feet are faced with few options and Wayfair and WeWork are in expansion mode,” said the report prepared by Liz Berthelette, Director of Research at Hunneman. “Following the groundbreaking of Winthrop Center and the office tower at the Hub on Causeway, square feet underway surpassed four million. That said, new construction is still measured and pre-commitments remain strong.”
The report said that WeWork continues to dominate local and national headlines, and the coworking giant is reportedly looking at any and all large blocks of office space in the city. WeWork currently occupies more than 700,000 square feet throughout Boston and Cambridge, and will likely double its local footprint over the coming years.
“There is no question that WeWork is changing the commercial real estate game and its impact on the market bears watching,” the report said.
Here are other highlights from the Hunneman Report:
Boston ended 2018 on top. Year-to-date net absorption totaled nearly 1.6 million square feet as out-of-market demand and local growth resulted in several blockbuster lease transactions. Vacancies ended the year at just 7.1%, more than 100 basis points below year-ago levels. Asking rents continued on their upward trajectory, with rates on select high-rise space in the Back Bay reaching high $90s/SF.
New supply is on the horizon in urban Boston. Winthrop Center’s groundbreaking represents the largest tower, which includes 750,000 square feet of office space, to be built downtown in more than a decade. After an infusion of capital via a new joint venture, construction on Bulfinch Crossing will likely kick off in the summer of 2019. Massport is proposing a 600,000-square-foot tower on Parcel A-2 in the Seaport and Samuels & Associates is planning an office tower over the Mass Pike on Parcel 12. Developers are also focusing on emerging markets like South Boston, the South End, East Boston, Charlestown, Dorchester, Allston and Brighton.
Cambridge’s narrative remains the same. Office space is virtually non- existent here. With absorption gains of more than 100,000 square feet, vacancies ended the fourth quarter at just 3.2%. This puts rates 110 basis points below year-ago levels and well below the market’s historic average. Developers struggle to keep pace with such frothy demand, and most leasing activity has been occurring off-market. The lack of available space makes tracking rent observations difficult, but reportedly asking rents in East Cambridge have topped $100/SF in select spaces.
With a majority of the new supply already preleased, the focus remains on build-to-suit projects as well as redevelopments. Boston Properties recently received approval for an 18-story tower in Kendall Square, which would replace the MIT Coop building at 325 Main Street. Google is rumored to be the anchor tenant as the new structure would connect to their current office at 355 Main Street. New England Development is proposing to convert the third floor of the Cambridgeside Galleria into 140,000 square of office space. Given the struggle malls have faced this cycle due to growth in e-commerce, it makes sense to adapt the underutilized space.
Suburban vacancies ended the fourth quarter at 15.1%; 50 basis points below the previous quarter. While Route 128 continues to benefit from proximity to the urban core and a high concentration of executive housing, conditions along the Route 495 belt have improved markedly over the last two quarters.
The life science industry is having a material impact on the commercial space markets in the suburbs. Demand from biotech companies is at an all-time high, and suburban landlords are responding. Several buildings/ spaces have already been repositioned for lab use. Others are looking to tap into this outsized demand. In Waltham, 60 Sylvan Road, which is being vacated by Verizon, has been earmarked for lab conversion.
Boston’s capital markets ended the year on a strong note, as $5.7 billion in office assets changed hands and prices neared record highs in 2018. While this puts sales volume 16% below 2017 totals, several blockbuster transactions took place during the fourth quarter. Clearly, Boston remains a highly-desirable destination for capital and liquidity should remain steady moving into the new year.
Some highly-anticipated urban sale transactions finally closed. Late in the fourth quarter, UBS Realty Investors divested 53 State Street for $845 million or $685/SF while Carr Properties acquired 200 State Street for $222 million or $730/SF. In the Seaport, 51 Sleeper Street sold for $91 million or $598/SF and Skanska sold 121 Seaport for a whopping $455 million or $1,137/SF.