Developer Hines’ office, hotel and residential tower at Boston’s South Station, seen under construction through a Red Line subway station skylight. Photo by James Sanna | Banker & Tradesman Staff

Next year is poised to be great for office tenants but challenging for landlords.

For the first time on record, there is a major disconnect between office-using job growth and the absorption of office space in the Boston metro. Despite today’s ongoing period of sustained white-collar employment expansion, the office market is not benefitting from that growth.

Locally, each of the major office-using job sectors (professional and business services, financial activities and information) is handily outperforming those sectors’ corresponding year-over-year U.S. growth rates. The aggregate pace of national average growth in these sectors has trailed off dramatically in recent months. However, in the Boston market, growth has settled in at a rate that is better than the market’s average in either of the two previous economic recoveries.

Although strong job numbers suggest a relatively healthy local demand base, Boston’s office market is being inundated with waves of negative net absorption. A primary cause of this is tenants right-sizing leases in response to new employee working patterns. The amount of occupied office space in the Boston metro has been wound backward by a decade, decreasing by more than 14 million square feet (9 percent) since its pre-COVID peak.

For the foreseeable future, this will be a tenant’s market. Companies considering relocation or lease renewal can leverage the presence of nearly 39 million square feet of space available across the market – the highest amount ever recorded – to their benefit in negotiations.

A record 22.2 percent of the space in the city of Boston is available. Cambridge’s 16.4 percent total availability rate is higher than at any other point outside the dot-com-bust era. And in the suburbs, more than a fifth of office space is on the market. Across the metro, each of the 20-plus submarkets tracked has vacancies above its historical average.

To compete, many landlords have significantly increased tenant concessions, in the form of free months of rent and tenant improvement allowances. The exception to this rule could be the growing number of investors buying assets for less than the previous owner paid, who as a result may be able to undercut market asking rents.

Tenants Want the Top Shelf

Tenant preferences for high-quality space will continue to shape the market in 2024. As firms gravitate to newly built or recently renovated buildings, owners of older assets will be under pressure to upgrade their properties to maintain tenancy and backfill empty space.

Fortunately for landlords, the amount of space under construction is shrinking. Less than 3 million square feet, almost exclusively within the city of Boston, is underway, compared to almost 6 million square feet across the metro a year ago. Given the market’s elevated vacancies and higher construction costs, developers aren’t incentivized to break ground on new speculative projects without securing an anchor tenant beforehand.

Unlike the case in recent years, when millions of square feet of office-to-lab projects were started across the Boston market, conversions are not likely to substantially boost office fundamentals in the near term. Transforming office buildings into other property types helps landlords by reducing competition and forcing companies to consolidate into the remaining office stock.

Jeff Myers

Factors such as a more challenging financing environment, rapidly rising life sciences vacancies and the limited number of buildings that are ripe for residential conversion all reduce the chances that new conversion projects will significantly impact the office market next year.

The disconnect between jobs and absorption is most likely a unique condition that will eventually return to the positive correlation of previous decades. Given the large number of leases yet to turn over in this era of downsizing, demand losses will probably continue into 2024. And even when the office recovery does set in, it could take years for vacancies to return to pre-COVID lows. As this plays out, the ongoing disruption to office market fundamentals is sure to create opportunities for tenants and stress for landlords.

Jeff Myers is Boston research director at brokerage Colliers.