BOSTON– Greater Boston commercial real estate market went from best in 2019 to worst in 2020, but is expected to see a recovery in 2021 because of growing demand for life sciences facilities, according to a report from Boston commercial real estate firm Hunneman.
“A year marked by uncertainty, negative absorption and limited leasing activity has come to an end for the Greater Boston office market, but not without optimism heading into the new year,” Hunneman report said. “With the promise of a new vaccine hitting the market throughout 2021, companies and landlords alike are expecting employees to return back to the office in varying capacities.”
Tucker White, director of research at Hunneman, said that market will show recovery in second half of this year.
“2019 was one of the best years the market has had on record while 2020 market one of the worse,” said Mr. White. “Although it will be a long road to recovery, I think we will see the market take its first steps in that direct later this year once there is a mass distribution of the vaccine.”
The Hunneman report said that for some companies, the pandemic has proven that operating remotely is seemingly just as effective as working from the office. While for others, it has had a clear negative effect.
“Either way, most companies have agreed on one thing – there is an intangible and unmeasurable value to working in the office that is incapable of being fully realized in the short-term,” the report said. “This means the market will not transition back to pre-pandemic levels over night and not all companies will come to make decisions regarding office operations in 2021. In other words, despite the news of a vaccine on the horizon, market conditions could get worse before they get better.”
Here are some other highlights from Hunneman report:
- Mass distribution of the COVID-19 vaccine is not expected to fully take place until the second half of 2021. If this quarter’s performance is any indication of what to expect during the first half of 2021, the market is expected to further soften.
- Mainly driven by an increase in sublease space coming online in Boston, 1.7 million square feet of negative absorption took place last quarter throughout the market. Since last quarter rents decreased by 1.2%. The overall vacancy rate increased to 11.9%, up from 9.6% at the start of the pandemic.
- The construction pipeline held steady with just over 12 million square feet of space underway. However, not all is “doom and gloom”. The short-term ramifications brought on by the pandemic to the office market are temporary and Greater Boston has much more going for it than it does against it.
- When you look at the office market alone, Boston has performed similarly to most major metropolitan areas across the nation, but when you take a step back and look at the emerging industries in the region, the market is positioned advantageously for the future.
- Some of the most forward-thinking sectors such as robotics, cyber security and most notably, the life sciences have established Greater Boston as an international hub. Evidenced by leasing and sales activity throughout the pandemic, these industries have only gained momentum headed into the new year and are expected to increase significantly in size over the next decade. These emerging industries separate Greater Boston from the majority of markets across the nation, positioning it to recover faster than most.
“Looking ahead, 2021 is expected to be a year of “give then take”. More space will be given back to the market before companies are able to take it back up,” the report said. “The speed at which the market rebounds will be dependent on several factors assuming vaccinations by mid-2021 are successful.”
These factors are:
- First, and perhaps the most important question, will a sublease market which is now breaching 3 million square feet of space remain? With an average remaining term between three to four years and most space unleased, companies will have to decide if they want to keep the space on the market or return to the office. This is an important market dynamic because these are companies who are already here and operating. The more companies that return to work, the less the market will be reliant on external demand to fill vacancies.
- Another factor to keep an eye on is the amount of sheer office supply expected to deliver over the next several years. This supply is solely intended to accommodate office users, thus limits the amount of demand that can be captured through tenants that require a lab or flex component. In Boston alone, there are several office towers underway that have over 2.6 million square feet of available space combined that will deliver vacant over the next four years if not leased.
- Finally, the rate at which the office market comes back will be dependent on the lab market and the complimentary services provided to life sciences companies. As the top life science market in the world, this sector is growing at an exponential rate with demand for lab space only gaining momentum since the start of the pandemic. Over the next several years, a significant fraction of the office space currently available now is expected to transition to lab or be leased by life science-oriented companies with office needs, helping take away office vacancy and putting pressure back on rents.
“The market is positioned to have a more expedient recovery compared to other markets in the US due to its strong educational backbone and thriving life science market that is unable to be replicated elsewhere” said Peter Evens, Executive Vice President and Managing Principal at Hunneman.