Greater Boston’s office market faces a year of reckoning in 2023 amid a wave of lease expirations and dwindling lab conversion activity, commercial real estate brokers predict.
“A lot of [office] tenants have kicked the can during COVID, and next year will separate out the winners and losers in where the market is headed,” said Tyler McGrail, executive managing director at Newmark, during NAIOP-MA’s annual market forecast.
Recessionary indicators and inflation pose hazards for most commercial real estate classes in 2023, with industrial properties likely to be the most durable asset, according to panelists at the NAIOP forum.
Class A office vacancies are currently 15 percent in Boston’s Financial District and over 16 percent on Route 128. Another 8 million square feet of office sublease space is on the market in Boston, Cambridge and the suburbs.
Concessions offered by office landlords have risen 20 to 30 percent in the form of free rent and tenant improvement allowances, McGrail said.
“The urban and suburban market tenants just have too many options. Tenants have the right to be picky in this market, and that makes deals difficult to get done,” McGrail said.
Life science developers have had widespread success leasing speculative projects in recent years. But market conditions are changing amid upticks in sublease space and cutbacks in biotechs’ expansion plans.
Lab subleases hit a cyclical high of 5 percent in the third quarter, according to a recent Newmark report which predicted more than 80 percent of Greater Boston planned life science projects could be curtailed as investment in biotech slows.
Lab space requirements have declined in the past year from 6 million square feet to 1.9 million square feet, according to JLL research, a retreat to pre-pandemic levels. And lab tenants have listed 1.7 million square feet of subleases this year in the urban submarkets, nearly half of which has been committed or leased. The two-year lab development pipeline is approximately 6 million square feet.
As biotechs are increasingly conservative with their spending, developers are building out 67 spec suites totaling nearly 1.2 million square feet, absorbing the cost of tenant buildouts.
“There is very little or no appetite for shell space: space that requires tenants to come out of pocket or take on exposure to cost overruns,” said Carolyn Wheatley, executive vice president at JLL.
The various factors will cause acting rents to fall in 2023, Wheatley said.
The 187 million-square-foot industrial sector appears positioned for additional growth in 2023, said Michael Dalton, a principal at Avison Young.
The industrial market absorbed 2.1 million square feet in the third quarter, a 58 percent increase over the previous quarter, according to Avison Young research. Vacancies range from 4.5 percent in the Interstate 495 submarket to 7 percent in the urban market.
Approximately 5.2 million square feet is under construction, and retailers Best Buy and Target both are in the market for more than 1 million square feet of distribution space.