If you think Boston office space is getting pricey again, you haven’t seen anything yet. Downtown Boston tower rents, already soaring, are set to bust through the roof.
Yes, some office tower owners are boasting again about $80-per-square-foot rents, but the big story here is that, as expensive as it is now, the Boston office market, and choice space along the 128 belt as well, is just getting into gear, with even steeper increases ahead.
Now that’s great news for all the investors chasing deals to buy marquee towers and buildings in Boston and the inner suburbs, who can spend ungodly amounts of money and still rest assured there is room to grow. But just maybe it’s not so reassuring for companies faced with footing the bill for ever-more expensive digs.
Overall, Boston rents rose nearly 7 percent last year, commercial real estate firm JLL reports. That’s about even with the torrid pace we saw with home prices, and it outpaced apartment rents.
“There really is now a palpable shortage of space developing in the tower market,” said Ted Oatis, a top executive with the Chiofaro Co., developer of the International Place tower. “That, combined with ever-increasing optimism about the economy, means it’s not over – if anything, we expect the increases will accelerate.”
Certainly office rents have bounced back since the dark days of 2009, when the Great Recession and near collapse of the global financial markets threatened to suck the commercial real estate market into the vortex.
Just take the Back Bay, where rents for top-shelf (Class A) space are back in the low $60s per square foot range, notes Mary Kelly, senior vice president and chief research officer at Colliers International.
Of course, that’s just the average. There are always a few market-leading deals, with some scattered reports of leases in the $70s and even $80s per square foot, mainly in the Back Bay.
Rents for high-rise space in the Financial District continue to lag the red-hot Back Bay, but are back into the high $50s per square foot, Kelly said.
A similar story can be found along the 128 belt, with rents in corporate hot spots like Waltham and Burlington up to the high $30s per square foot.
‘Staggering’ Rates Not Yet Reached
Yet while office rents are high, we have a ways to go before we hit the staggering levels reached when the market last peaked in late 2007 and early 2008.
In those years, a growing number of firms were shelling out absolutely crazy numbers for deluxe space in skyscrapers like the Hancock and International Place, reaching into the $90s per square foot, and in some cases past the $100 mark, Oatis said.
On average, suites in top Back Bay office towers were fetching number in the mid-$60s to low $70s per square foot.
“The highest rents achieved over 10 years ago were in the $90s, with a few over a $100 [per square foot],” Oatis said.
Moreover, we have failed to take inflation into account here – simply put, that high-water, $90-per-square-foot rent back in 2008 would actually be closer to $100 per square foot today.
But while we aren’t back at peak yet, there is also little doubt we are headed there, or at the very least, in that direction, and heading there fast.
All the macro factors are pointing up right now, not down. After a scare late last year, the economy looks to be in growth mode again, with Eastern Massachusetts a bright spot nationally, with booming high-tech and biotech sectors leading the way.
We are also looking at vacancy rates that are dropping fast, with the Back Bay now down to 8.1 percent, making it officially a “landlord’s market,” Kelly of Colliers International points out.
And don’t bank on new office space being built anytime soon. Sure, developers are building a few new mid-rises for local companies, but no builder has yet to take the plunge and unveil plans for a spec office tower that would be open to any and all companies needing new and larger offices.
A Good Investment
It doesn’t take a Donald Trump or a Sam Zell to figure out what happens when rising demand meets limited supply. But the best gauge of where office rents are headed can be found among the deep-pocketed investors, increasingly from overseas, who are spending huge sums to buy up office towers in Boston.
Baked into those big tower sale prices is a very basic assumption – that office rents, as high as they are now, are only going to go higher.
Taking up a full city block, 40 Broad St. sold for $110 million last year after having sold for less than half that – $50 million – back in 2006. A 12-story tower at 11 Beacon went for nearly $35 million, more than double the price of its previous sale in 2009.
And brokers selling downtown Boston buildings have built into their prices aggressive assumptions about where rents are headed, Oatis noted.
“They have built into their forecasts very healthy rent increases,” he said.
Email: sbvanvoorhis@hotmail.com
