Companies are currently listing 4.2 million square feet of sublease office space in Boston, including 190,000 square feet of Verizon’s offices at The Hub on Causeway. Photo by Steve Adams | Banker & Tradesman Staff
Office tenants have never had more options to choose from in Boston, including gently used trophy spaces that could render a generation of older commodity-style buildings obsolete.
A surge of sublease activity and a growing divide between high-end properties and the increasingly out-of-favor class B market has set the tone for the local office market in 2023.
CBRE is tracking 4.2 million square feet of sublease space, representing over 5 percent of the entire Boston office market. Space-shedding by tech companies represents the largest share of activity, including Verizon’s recent decision to list 190,000 square feet at the two-year-old Hub on Causeway office tower. And even more companies are notifying brokerages of their willingness to reduce office footprints if the right deal presents itself.
“There is more in the shadows that, if pressed, companies would probably put on the sublease market, if an opportunity came to them,” said Suzanne Duca, CBRE’s director of research in Boston.
Boston’s direct office vacancy rate topped 13 percent at the end of the first quarter, while availabilities including subleases rose to 20.4 percent.
The future fundamentals of both downtown and suburban markets will be affected by businesses’ willingness to make long-term space commitments. But with so much sublease space available, many with just a few years left to run, landlords have been forced to be more flexible in their dealings with existing tenants. Some are offering short-term extensions as lease expirations loom.
“The shorter term is appealing right now as companies are solving their own internal policies on remote and hybrid work,” Duca said. “Landlords are willing to get creative and think of the bigger picture. Nothing is really off the table.”
Further tipping the scales in tenants’ favor, office-to-lab conversion activity, which helped stabilize Boston’s office market in 2022, has decelerated amid declining investment in the life science sector.
“Tenants don’t like to make long-term decisions in hard times,” said Matt Daniels, New England brokerage lead for JLL. “A lot of tenants are opting not to make wholesale changes to their spaces, because that requires a lot of construction dollars, so they are just pushing off decisions.”
Rather than exercising the standard five- or 10-year option, some tenants are asking landlords for a one-year extension. And many landlords are receptive, Daniels said.
Office Class Divide Widens
Subleases have the advantage of shorter terms in many cases, Daniels noted, but often mean tenants need to accept hand-me-down space designed for pre-pandemic density.
“It’s not necessarily the modern designs with the conference rooms and collaborative spaces as you would design today,” he said. “Sublandlords traditionally don’t give tenant improvement allowances, so you have this sea of cubicles and they are just not designed for a lot of the tenancy today.”
Brick-and-beam offices in Boston’s Fort Point were a popular pre-pandemic landing spot for tech and creative tenants, noted Laura Dunn, managing director at Spear Street Capital, at an Urban Land Institute Boston/New England forum last week. Those properties now pale in desirability compared with some of the brand-new towers with state-of-the-art amenities.
“There are brick-and-beam assets we would have chased all day long three years ago that now you would ask yourself, with what we know about return-to-work, ‘Is that the right real estate? Can it offer the right amenity base to compete with all of the new product that has sprung up around it?’” Dunn said. “The argument could be made that it’s not relevant real estate anymore.”
The chasm between the class A and B offices continues to widen, according to brokerage research. Asking rents for class A space in Boston now average $74.94 per square foot, according to Newmark data, compared with $51.86 for class B properties.
But landlords in both categories will have to compete for what’s expected to be a shrinking pool of tenant requirements. Most of the major leases signed in recent years involved consolidation and relocation of tenants that already had big footprints in the Boston central business district.
“Expiration-driven activity has certainly been a major driver of leasing for the last couple of years, and we do expect that to continue given where the market is currently,” said Liz Berthelette, director of research for Newmark in Boston.
The pending relocation of Lego’s headquarters from Enfield, Connecticut to Boston was hailed by local business and political leaders as a vote of confidence in the urban office model. The company is in the market for approximately 100,000 square feet of office space, according to a real estate source, and has indicated it will initially have 500 employees in Boston.
A Shift to Value Proposition for Investors
Another quiet quarter for investment sales in Greater Boston illustrated the uncertainty among both potential sellers and buyers about pricing. The $900 million in office and lab transactions that took place during the first quarter was the lowest in a decade, according to Newmark research.
Investors no longer can chase job growth in coastal tech markets such as Boston and be confident of strong returns, real estate executives said at the ULI forum.
Instead, future opportunities will be tied to a lower acquisition cost basis or the success of select “micromarkets,” said Dan Rudin, managing director of real estate at asset manager KKR. The firm is an investor in the Two Drydock and 400 Summer St. towers in the Seaport District.
Steve Adams
Future office acquisitions need to be viewed through the lens of the economic slowdown and hybrid work era, both of which depressed tenant demand.
“You’re going to pick your positions far more selectively than you have in the past,” Rudin said.
Like buyers, lenders are taking a more conservative stance toward the office sector, said Samantha Hallowell, a managing director at brokerage Newmark.
CMBS lending for the office sector has retreated. Assumable financing – in which the buyer takes on existing debt from the seller – remains an option, but activity has been limited so far.
“It’s subject to lender approval at the end of the day, so there are a lot of hoops to jump through,” Hallowell said.
