A recovering economy and an increased appetite for investment risk should spark greater interest in Class B and suburban office properties from tenants and investors in core markets such as Boston as the next phase in the recovery of the commercial real estate market begins.

In the aftermath of the Great Recession, Real Estate Investment Trusts (REITs) and other institutional investors flocked to the relative stability offered by Class A trophy buildings in markets such as New York, Washington, San Francisco and Boston, driving up prices and rents for these properties.  However, as the economy continues its recovery and capital becomes more readily available, tenants who are being squeezed out of Boston’s Back Bay and Seaport Districts are starting to migrate to lower-cost Class B space in Boston’s Financial District.  This makes these properties a tempting target for investors who are seeking higher returns.

At $31.79 per square foot, office space in Financial District Class B buildings – usually older properties – is nearly 72 percent less expensive than Class A Seaport space and 7.5 percent less expensive than comparable office space in the Back Bay, according to Cassidy Turley’s first-quarter report.  Even Kendall Square tenants are migrating to Class B space in Boston near the Red Line because they can’t afford the Cambridge tech center’s asking rents of $60 per square foot.

As a result, the vacancy rate in Boston’s Class B office market dropped to 11 percent at the end of the first quarter from 15.8 percent a year earlier.  This is welcome news to owners of these properties, who are now beginning to see increased interest from both buyers and tenants.

The shift, which started last year, is continuing this year. First-quarter transactions in Boston included Synergy Investments & Development’s $34.9-million purchase of 11 Beacon St., a 93-year-old, 146,000-square-foot building at the edge of Boston’s Beacon Hill and the Financial District.

At the time of its sale in February, 11 Beacon St. was 78 percent vacant, with tenants paying on average 85 percent of market rents.  The owner paid $16 million for the property in 2010 and reportedly spent $4.9 million in capital improvements before selling it.

Savvy sellers seeking to capitalize on growing demand for Class B space have already started to bring new listings to the market.  For example, 45 Milk St. – a 90 percent vacant building last sold in 2007 for $33.9 million – reportedly has just been put under agreement for sale to Deutsche Asset & Wealth Management for about $21.4 million.

The dormant suburban office market is also starting to show signs of life, with $470 million in sales closed or put under contract in the first quarter. Recent large deals included Hines Global REIT’s $197-million purchase of the 510,000-square-foot Riverside Center – a three-building office complex in Newton – from Blackstone LP’s Equity Office Unit Group.

New listings include Burlington Centre, a 620,000-square-foot office park in Burlington, that could reportedly fetch as much as $100 million. The owner, Multi-Employer Property trust, a pension-backed fund in Washington, D.C., bought the property in 1991 for $21.3 million.

The building momentum in both Boston Class B and suburban office markets is expected to continue, but a great deal depends on employment growth, which is a critical driver in the commercial real estate office market.  The Fed’s commitment to keeping interest rates low and the government’s active role in helping the recovery have been key factors supporting slow but steady job gains.  And Eric Rosengren, president of the Federal Reserve Bank of Boston, expressed optimism in a recent interview that gross domestic product growth could reach 3 percent this year.  

In addition, a national commercial real estate forecast released in April by the Urban Land Institute and Ernst & Young predicts continued growth in key areas such as access to capital and investment sales activity, as well as improvement in fundamentals such as rents and occupancies.

All of the foregoing suggests that real estate investors will begin looking beyond Class A buildings in core markets.  Although investment in Class B properties and suburban properties won’t balloon overnight, they will become increasingly targeted by tenants and investors throughout the rest of 2013 and beyond.

John M. Steiner is a partner in Sullivan & Worcester’s Boston-based REIT and Real Estate Practice Groups. Email: jsteiner@sandw.com