The rules of the commercial real estate game have changed as tech startups’ clout grows in the Greater Boston office market.
Long-overlooked buildings have become desirable primarily because they sit near MBTA stations, and neighborhoods once far removed from the heart of commerce are drawing second looks from tenants. The prime examples: Downtown Crossing and North Station, where office rents have shot up roughly 30 percent in the past year.
“These startups are pioneers and they want to go where there’s affordable office space,” said Ashley Lane, vice president of research for Cassidy Turley. “Generally there’s affordable office space in sleepy submarkets, and that’s what starts the growth in these neighborhoods.”
As the region cycles through its second tech boom of the 21st century, the Innovation Economy is calling the shots in the office market from downtown Boston and Cambridge to Route 128.
It’s a potentially more volatile atmosphere than the days when industries such as financial services, insurance and law firms seemed like the only game in town.
Widespread Disruption
Cassidy Turley’s “Innovation Watch” report, released this month, traces the far-reaching influence of the high-tech economy on local commercial real estate markets.
Tech companies occupy less space than the corporate headquarters tenants of previous generations, but grow and fail at a more rapid pace, so executives want more flexible terms from landlords. Millennial sensibilities are reflected in a preference for exposed brick and mercantile-era architecture over penthouse views and security-fortified lobbies.
Convenient mass transit connections are paramount for startups whose employees tend to rely on MBTA commutes. That has benefited the Red Line corridor between North and South stations, as well as Downtown Crossing.
“We recently worked with a startup and they were adamant about being close to South Station,” Lane said. “They would compromise on floor plate, they would compromise on rent, but they would not compromise on proximity to the T.”
The Financial District has been the primary recipient of the tech industry’s growth in the last 18 months, with 32 leases signed. That tops the 18 leases signed in the Seaport, which enjoyed a brief heyday in which it was branded as the “Innovation District” before rents started to eclipse downtown.
Shared office space companies such as WeWork and WorkBar have filled big blocks of space in the South Station submarket, filling a niche by renting out desks by the day or the month for startups and freelancers.
Neighborhoods In Transition
Revitalized shopping, dining and housing scenes are credited with improving Downtown Crossing and North Station’s reputations as workplace choices.
Average office rents at Downtown Crossing have topped $40 a square foot, up nearly 27 percent in the last year. Ad agency Havas’s Arnold Worldwide and tech companies Carbonite and Sonos signed big leases downtown in the future shadow of the 60-story Millennium luxury condo tower scheduled to open in 2016.
A wide-ranging development boom around North Station has prompted more office tenants to consider the area. Average office rents are now $35.12 a square foot, according to Cassidy Turley research, an increase of 33 percent from just a year ago.
TripAdvisor subsidiaries FlipKey and SmarterTravel leased 72,000 square feet late last year at 226 Causeway St., moving into the neighborhood as its development scene accelerates. The city’s tallest apartment tower, the 38-story Avalon North Station, is rising next to the TD Garden, and shoe manufacturer Converse Inc. will open its new 200,000-square-foot headquarters at nearby Lovejoy Wharf in May. The neighborhood is bracketed by two future multi-billion-dollar mixed-use development sites: HYM Investments’ Government Center garage redevelopment and Delaware North Cos.’ three-tower complex on Causeway Street in front of the TD Garden.
For now, the area’s best values and selection remain in the Financial District, according to an executive for Boston-based brokerage Cresa.
“The low-rise space is still going to be in the low-$40s which, compared to Cambridge, is a bargain, and you’re probably to have low-rise vacancies in the mid-teens, so there’s a lot of opportunities there,” said Managing Partner Joseph Sciolla. “It’s going to work for some tenants, but not all.”
The next relief valve, predicts Cassidy Turley’s Lane: Somerville and Watertown, where developers are putting big bets on office and retail developments such as Assembly Row and the Arsenal Project.
“When we exhaust downtown Boston, people who work for startups will still want the transportation and the walkable amenities,” she said.
Email: sadams@thewarrengroup.com
