Lauren Lipscomb
The downtown Boston office market had another record year marked by peak rents, limited supply and significant large deal activity. Year-end absorption should eclipse 2.2 million square feet, as compared to 1.2 million square feet at the end of 2017.
Boston’s rent previously peaked in 2000 at $59.68 per square foot and in 2008 at $56.31 per square feet, while today average asking rents across the Boston market stand above the $60.00 per square-foot mark.
The young, educated workforce in Boston continues to attract out-of-market tenants, who typically have more immediate requirements than local ones. From a square footage perspective, Technology, Advertising, Media and Information (TAMI) tenants make up almost 40 percent of the demand in the market. The legal industry is also contributing to the overall out-of-market tenant demand and market absorption. Top-tier Am Law 100 firms recognize Boston as a major market where a presence is necessary. Law firms are attempting to change their workplace metrics to become more efficient. Despite the influx of new firms to Boston, the legal industry only makes up 3 percent of demand in the market.
Big Financial Service Firms Face Decisions
Demand from the financial services industry was flat in recent quarters, but significant lease expiration-driven demand is currently coming from two bastions of the Boston economy. While Boston will continue to see organic growth and new out-of-market demand in 2019, a significant number of large tenant requirements are expected to be complete by mid-2019.
The coworking trend and appetite for flexible office space continues to swell across the city. More than ever, coworking is changing the fundamentals of traditional leasing. These operators’ appetites for expansion are not diminishing. The idea that coworking focuses solely on small, early stage companies and entrepreneurs is far from the current reality. Enterprise users are increasingly the primary target. The enterprise model focuses on large users and enables them to sign short-term (1-5 year) agreements, allowing for flexibility. Tenants pay a significant premium for this ability to actively manage their growth and avoid committing to a long-term lease. Realizing that coworking is here to stay, many new players have entered, or are looking to enter, this marketplace in force. Some of these include Industrious, Spaces (Regus), Convene, Knotel, MakeOffices and CBRE’s Hana. Several large landlords and developers are also creating their own coworking opportunities within their projects.
The fundamentals of the Boston economy are strong. The traditional financial sector users, such as State Street Corp. and Bank of America, are making new long-term commitments to the city. New economy TAMI tenants are growing organically and have been relocating to Boston from out-of-market every quarter. Cambridge no longer can accommodate the demand from the life science and pharmaceutical industries, and Boston is becoming the beneficiary of this demand. Many large-scale requirements and commitments will land in 2019, contributing to what will likely be record-breaking absorption numbers. Coworking is uncharted territory, and its long-term effect on real estate fundamentals will be of interest to landlords and tenants both now and in the future.
Lauren Lipscomb is a first vice president at CBRE New England.
