Pure Office Users Hard to Come By, Who Else is Out There Looking for Space?

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Elizabeth Holmes

WAYLAND, MA—R.W. Holmes, one of the largest commercial brokerage firms serving tenants and landlords in Massachusetts for more than 45 years, released its second quarter market report and the forecast for the remainder 2023, saying that Grater Boston office market will continue to see an increase in sublease space coming to market as office users continue to reset space needs and office deals.

“Pure office users are becoming harder to come by. Many of the tours we are doing at our office buildings have increasingly been focused on less-traditional office uses – such as quasi-medical or light lab/manufacturing,” said Elizabeth Holmes, Director of Corporate Services at R. W. Holmes. “These users are still open to 5+ year deals and, in many cases, are paying a higher portion of the buildout due to their unique use.”

Office buildings that can accommodate light loading/shipping needs, heavier power, and other light manufacturing/R&D requirements have a unique niche in the current market, added Ms. Holmes.

Here are key highlights from the R.W. Holmes Q2 2023 report:

· About 70% of office deals during the second quarter of this year were under 4,500 square feet. This trend of downsizing and smaller tenants being the ones making space decisions is a trend that is likely to continue for the next 18 months.

· Industrial demand appears to have shifted from large distributors to large manufacturers. So far, in 2023, we are tracking over 1,000,000 square feet of manufacturing requirements currently circulating the North market. There is still demand from distributors/warehouse users, but it has not been quite as robust.

· There are two types of office tenants in the market: those looking for Class A, premium space and willing to pay the higher rent to provide the highest image and amenities to employees. The second type of tenant is those in slightly older/with fewer amenities Class A-/B+ buildings that cannot justify the rising rents and are looking for cheaper seats.

· Tenants are showing some willingness to relocate to other sub-markets to find high-quality space for a lower price if it also means a shorter commute time for employees.

· Lab demand has reset back to pre-pandemic levels. While it is estimated that there are about 2.8 million square feet of lab demand in the Greater Boston market, there is 3.2 million SF of sublease space and almost 10 million square feet of new lab space delivering in the next year.

· Landlords with Class B office buildings struggling with rising vacancies are unsure of the future of the asset. With valuations dropping, in some cases, it no longer makes sense to invest additional equity in the property. In these scenarios, owners will need to get creative to find alternative uses for the property to increase cash flow or be willing to sell at a major discount.

Ms. Holmes said that the impact of the office-to-housing conversion regulations remains to be seen but has the potential to benefit the housing and office markets greatly.

“As the cities/towns across Massachusetts scramble to get their zoning in place to comply with Housing Choice, we look to see which communities are making impactful zoning changes that will allow significant conversions of vacant office buildings to reduce future excess supply,” said Ms. Holmes.

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