For the third straight year in 2014, the Greater Boston office market recorded more than 2 million square feet of positive absorption, in a steady expansion that boosted occupancy rates at properties ranging from suburban office parks to converted warehouses and downtown high-rises.
But if there was a star of the market, downtown Boston made the strongest case, in an indication that the tech- and Millennial-driven preference for urban workplaces is here to stay. Although downtown comprises just 33 percent of the metro area’s office market, it accounted for half of all new absorption during the past seven quarters, according to Avison Young’s quarterly office report.
The urban core stretching from Back Bay to the Seaport now is approaching 66 million square feet of office space, with nearly 60 million square feet occupied. And more workers are being jammed in these free-form office spaces than previous generations of cubicle life.
“There’s more office product than ever and it’s getting filled in a much more dense way than ever before,” said Brendan Carroll, vice president of research for Avison Young. “If you’re wondering why the T seems more packed, or why you can’t get a cab to take you across the (Fort Point) Channel, that seems to be the reason.”
As companies distance themselves from private offices and embrace open workspaces, average space per worker has declined to approximately 200 square feet, approximately half the historical norm. State Street Corp.’s 500,000-square-foot One Channel Center in South Boston, which opened in June, has capacity for 3,500 employees and 10 percent of the building is reserved for unassigned workspace.
Big Tenants Favor Urban Core
Seven of the fourth quarter’s 12 largest office leases were in downtown Boston, including the two largest: Partners’ HealthCare and audio manufacturer Sonos’ leasing of a combined 344,000 square feet at Lafayette Corporate Center in Downtown Crossing.
The downtown market vacancy rate dipped into single digits – finishing at 9.3 percent – while Route 128 finished the year at 11 percent. Route 495 brought up the rear with an 18.5 percent vacancy rate.
At $80 per square foot for trophy space, Back Bay has the highest quoted rents of any submarket, and the vacancy rate has fallen to 7 percent. The relocation of online retailer Wayfair to a new 105,000-square-foot headquarters at Copley Place and Boston Properties’ groundbreaking of a 17-story tower at Prudential Center highlighted the Prudential Center submarket’s resilience.
But in the wake of trophy properties’ recruitment of sought-after tenants, it seemed inevitable that rent increases would follow at second-tier office properties in 2014, according to Avison Young research.
Fort Point was one of the rent growth leaders, with asking prices for brick-and-beam space at $46 per square foot, up 15 percent from the previous year. That, combined with a vacancy rate of 5.4 percent, has prompted more companies to consider the more affordable rents in the Boston Marine Industrial Park.
“The opportunity to be in urban Boston and have lease rates under $40 is really beginning to wane,” Carroll said.
Cluster Effect Boosts Cambridge
In an era where tech and life science companies are more likely than ever to locate in close proximity, Cambridge’s 5.6-million-square-foot Kendall Square has near-zero vacancies and record asking rents. Only nominal relief is expected through new development, with 84 percent of the construction pipeline pre-leased.
At the same time, the 1.9-million-square-foot Alewife submarket offers a 44 percent discount to Kendall Square, the all-time largest spread between the two submarkets, according to Avison Young research. A flurry of investment sales on Cambridgepark Drive during 2014 and potential repositioning of properties could set the stage for rent increases in Alewife, however.
While suburban markets have been portrayed as endangered species because of their largely single-use office parks and limited mass transit, the Route 128 market has shown steady recovery, with 15 quarters of positive absorption. The vacancy rate hit a 12-year low of 11 percent.
The core Route 128 area – defined by Avison Young as Waltham to Burlington – is the strongest suburban submarket, with several new developments, including Keurig Green Mountain’s 500,000-square-foot build-to-suit campus in Burlington and Boston Properties’ 10 and 20 CityPoint, which will contain 450,000 square feet of office space anchored by Wolverine Worldwide and two restaurants.
One suburban laggard: The South Shore, which had 38,000 square feet of negative absorption during the quarter and a 13.4 percent vacancy rate. The average asking rent was $21.11, the lowest of the 128 submarkets, and the discount compared with the core 128 market was 34 percent, compared with a 10-year average of 20 percent.
The south market is dominated by financial and insurance tenants that tend to grow and contract more slowly than tech companies. Massive office complexes such as State Street Corp.’s former south campus in Quincy have big availabilities that are unlikely to fill up anytime soon, said Gerald Nadeau, executive vice president of commercial banking at Rockland Trust Co. That has prompted speculation that some of the complexes will be converted into housing.
“In the suburban markets, we’re not seeing any drive from our clients wanting to build or expand offices,” Nadeau said. “The rents in Quincy are the same they were 15 years ago.”
