Mark Fallon

As we approach the end of 2024, there have been several noticeable changes in the metropolitan Boston office market from this time last year.

The most notable development is the supply of sublease space. Sublease availabilities steadily marched upward, quarter-over-quarter, starting in 2021, notching above, or close to all-time highs in a variety of submarkets, both urban and suburban.

However, from current data it would appear that trend may have peaked in late 2023. While there have been some slight variations in certain markets, overall, the trend is heading downwards.

In Boston proper, sublease availabilities have dropped steadily each quarter since the start of the year. A similar narrative is occurring across the Charles River, where Cambridge has seen a steady (albeit moderate) decline in available sublease space each quarter this year.

The suburban markets (Route 128 and Interstate 495) have also notched similar decreases, with overall sublease availability down approximately 70 basis points since January. Although individual submarkets within the suburbs south of the city have had some vacillation and movements upwards, the overall trend is decidedly downwards.

What Sublease Shrinkage Means

While some subleases of significant size have been signed recently – Toast took 102,000 square feet on Summer Street in Boston in late 2023, Cerevel Therapeutics inked a deal for nearly 50,000 square feet on Jacobs Street in Cambridge, and SAP LeanIX grabbed 25,000 square feet on State Street in Boston in late July – this does not mean that all this space is being reabsorbed by new tenants.

A significant portion of the availability is flipping back to direct space, either as the initial term has expired or agreements between the lessor and lessee to return the space to the landlord. Regardless, this shift is indicative of two trends. First, the initial wave of companies responding to remote work and macroeconomic business conditions has started to subside. Second, businesses have begun to regain confidence in the market due to general sense of stability post-election and Federal Reserve decisions.

This has a variety of impacts on the market for both landlords and tenants alike.

The immediate effect has been observed in the form of increases in direct vacancy rates. This also has begun the shift of control moving back into the hands of landlords.

To be clear: Sublease availabilities remain elevated in general. However, with fewer sublease options coming to market, and preexisting space being leased or shifting back to landlord control, these changes will begin to impact market fundamentals.

Landlords will have less competition in the form of discounted rates and beneficial terms and, in theory, this will push more tenants to sign longer-term leases directly with ownership, reducing total vacancies.

Rental Rates Could Eventually Rise

These follow-on effects could eventually increase rental rates in the long term.

As it stands currently in metro Boston, asking rents have maintained relative stability after sustaining several consecutive quarters of decreases. Over a longer-term time horizon, there will be less competition from discounted space, constrained new construction supply and, coupled with the growing strength of the state and national economy, could indeed be the beginning of a turnaround for office dynamics.

More tenants signing direct leases will start to drive vacancies downward – reducing supply and pushing asking rents upwards. Again, this is a recovery over years, not an effect that will happen in immediately.

This is just the beginning, and the first small step in the right direction. Challenges persist.  Vacancy rates remain extremely elevated. There is north of 40 million square feet of office space in Boston, Cambridge and their surrounding suburbs currently vacant. This represents years of supply assuming a relatively stable baseline level of positive absorption – something which has yet to be achieved.

All Recoveries Start Somewhere

The recovery still remains far away, and given the new remote work paradigm and the uptick in adoption of artificial intelligence, vacancy rates may not return to the low single digits for a decade.

However, all recoveries start somewhere and noting not only the significant decrease in sublease additions, but also the outright reversal of that trend in the majority of submarkets across the commonwealth offers some comfort.

The election has passed, the Federal Funds Rate has decreased by a total of 75 basis points, and the Massachusetts unemployment rate has dropped or remained static for the past three months following four consecutive monthly increases leading up to July.

Office fundamentals will remain constrained for the near future, but barring any dramatic macroeconomic changes, we can count this as one of the first tailwinds this asset class has received in many years, however light the wind may be.

Mark Fallon is director of research and strategy at brokerage Hunneman in Boston.