The Shifting Tides of Boston's Office Market: What You Need to Know

In this article, you'll learn:

• The impact of tenant downsizing and rising vacancy rates in Boston.
• The opportunities from growth in white-collar jobs and the life sciences sector. 
• Current challenges of declining rents and property devaluations.
• How tenants can leverage market conditions for better lease terms.

Boston’s leasing market faces unique challenges and opportunities. As global events reshape how we work,  Boston has largely been the victim of wide-scale tenant downsizing. However, the city's expansion of white-collar jobs and promising deals offer a ray of hope.

Yet, Boston's journey to full recovery is long and complex, marked by record vacancy rates and declining rents. In this ever-evolving narrative, we'll explore the forces at play in Boston's leasing environment.

Boston Leasing Environment

Companies everywhere are downsizing, and Boston is no exception. Some areas within the Boston office market have been more sensitive to tenant-trend toward downsizing than others. However, across the board the city’s commercial sector is in flux.

The overall vacancy rate increased by 120 basis points compared to the previous quarter, reaching 15.6%. This increase represents the most significant quarterly change in the current economic cycle. It's important to note that this trend wasn't uniform across all submarkets.

The downtown, in particular, saw a substantial rise in vacancy rates, with an increase of 260 basis points, bringing the vacancy rate to 18.4%. In contrast, the suburban areas witnessed a more modest increase of 40 basis points.

These moves are in line with the fact that corporate tenants are slowing down in order to make strategic decisions regarding the long-term health of their commercial portfolios.

Climbing vacancy rates in Boston, according to CoStar

Critical decisions often come in the form of cutting and streamlining footprints to maximize utilization rates. Because occupancy rates are still relatively low across the board, tenants occupying properties with extra space will likely not renew (at least for the same square footage) when those pre-pandemic leases expire.

And an oversupply of space and a fleeting tenant pool have devalued the lot of office properties. But at the same time, the Flight to Quality has disguised the overall rent dip experienced by the office market. Premium properties are garnering more interest across the board. Outdated offices are being phased out, marked by dwindling interest.

According to Phil Mobley of CoStar, “There is much more attention being paid to both the quantity and quality of office space. When you realize you don’t need as much, you can take that same amount of (investment) and put it toward nicer space.”

The starkest reminder of this is the recent sale of downtown property for 74% what it was worth in 2016. The building was sitting at 50% occupancy, further highlighting the similar fate of a lot of office buildings in CBDs right now. Boston’s commercial real estate is largely on rocky ground, and when 36% of its total general revenue comes from commercial property taxes (the highest percentage in the country), does this mean that the city is in for a doom loop of property devaluation?

Promise for Boston's Leasing Environment

Boston’s status as a stronghold for premier talent bases may be its saving grace. The expansion of white-collar jobs is backed by a robust academic pipeline and because of this, the city continues to be a magnet for cutting-edge industries.

Because of this, many professionals are negating that the recent 75% fire-sale represents a “new normal” for the leasing environment.

There is long-term potential for a strong rebound and this is echoed by the new property owner. Mai Luo, president at Kendall Capital who bought 41 West Street for $4 million explained,  “Although it is challenging right now and probably for years, I’m optimistic about the long-term future,” Luo.

41 West Street, sold for a 74% devaluation

Property devaluations with a promising future is good news for tenants. Boston’s strong talent white-collar talent sphere coupled with its record low office vacancies make it an interesting and potent opportunity for commercial tenants looking to invest in their footprints.

Record vacancy and declining rents present a favorable environment for tenants seeking to secure advantageous lease agreements. As competition for tenants intensifies and landlords adjust to market dynamics, tenants have an opening to negotiate more favorable lease terms. It's a market dynamic that savvy tenants are poised to leverage for their benefit in securing office spaces that align with their goals and financial considerations.

Boston’s Top Industries

Many startups and tech-based businesses have found footing in Boston’s environment. Due to its talent specialization, capital, population density, connectivity, and cultural statistics, Boston has earned a spot among the top cities for startups. It's also become a foothold for the life sciences industry. 

In the recent quarter, the life sciences sector experienced an impressive 31.2% surge in leasing activity compared to the previous quarter. What's noteworthy is that seven out of the fifteen new deals signed during this period encompassed spaces exceeding 20,000 square feet, a significant uptick from the three such transactions in the preceding quarter.

So, while there may be a long road to total recovery, there is a lot of promising activity in Boston’s office leasing environment.

Boston's Industrial Market

Boston's commercial real estate environment is backed by its industrial sector which has been performing notably well. In the third quarter, the market saw an impressive 3.9% increase in the overall average asking rent compared to the previous quarter. This surge pushed the average rent beyond the $15.00 per square foot (psf) NNN threshold for the first time.

One of the primary drivers behind this growth is the presence of a surplus of high-quality, new construction properties that have remained on the market. This indicates a strong demand for such spaces, contributing to the rise in rental rates.

Leasing activity in the third quarter was robust, with a total of nearly 988,000 square feet leased. This figure represents an 11% increase from the second quarter, highlighting the continued momentum in the Boston industrial market.

Opportunities in Boston for Tenants

The record vacancy and declining rents create a favorable landscape for tenants looking to secure the optimal office space for the best price and terms. Tenants can leverage the reduced demand for space and asking prices to reduce their overall commercial real estate costs and lessen the strain on their EBITDA. 

Moreover, Boston's diverse industries, particularly the thriving life sciences sector, underscore the city's potential for sustained growth. While a full market recovery may be a long-term endeavor, Boston's office leasing environment presents substantial promise for businesses looking to establish or expand their presence in this vibrant city.

Of course there's a lot of considerations when looking for commercial space. So if you're looking for the right property in this (or any) market, you want to be prepared. Enroll in the free course led by True Tenant Reps™, unbiased experts, to learn insider tips on finding the best office space for the best price.