Photo by James Sanna | Banker & Tradesman Staff
COVID concerns continue to cast a shadow over the future of office space and delay tenants’ decisions about long-term real estate needs, a state of uncertainty that’s expected to linger well into 2022.
Boston’s central business district has struggled to regain the critical mass of its pre-pandemic daytime workforce despite office reopenings and widespread vaccination rates.
“The crystal ball is completely broken,” said Garrett Larivee, executive vice president for tenant representation brokerage McCall & Almy.
Sporadic upticks in positive COVID cases prompt corporate decision-makers to hit pause on long-term space commitments. Many companies are reluctant to make decisions without the deadline pressure of a pending lease expiration, Larivee said.
The Seaport and the Financial District now have vacancy rates of 13 and 17 percent, respectively, according to Hunneman research, while Back Bay has remained more resilient with just a 6 percent vacancy rate at the end of the third quarter.
Labor Market Complicates Decisions
Some commercial real estate executives see indicators of a recovery in 2022: Leasing velocity hit a pandemic-era high of 4.5 million square feet across Greater Boston during the third quarter. JLL is tracking over 4 million square feet of urban office requirements. And companies are pulling sublease space off the market, with sublease listings having declined more than 700,000 square feet since March.
But employees’ preference for hybrid and remote work is prompting smaller and early-stage companies to take a less aggressive approach to leasing, JLL Managing Director Ben Heller said.
“There’s major fear that replacing talent right now is very difficult. People are allowing their workforce to dictate their strategy to some degree,” Heller said.
Boston has 2.3 million square feet of negative office space absorption since Jan. 1, according to Hunneman data. And a potential glut of new office space could materialize with more than 6 million square feet under construction at new developments including One Congress, the South Station tower and Millennium’s Winthrop Center.
The new supply is partially being offset by life science conversions of properties such as 2 Financial Center and brick-and-beam buildings in Fort Point.
What’s been noticeably absent in the Boston office market, Larivee said, is demand for expansion by growth-stage companies that fueled past cycles’ gains.
Cambridge Retains Cachet
Cambridge’s desirability as an office address has remained unblemished throughout the pandemic, and there’s no indication that will change in 2022. The vacancy rate has declined to 5.8 percent, according to CBRE research. Rents hit an all-time high of $85 per square foot in the first quarter, according to a Newmark report.
Since Jan. 1, Cambridge has recorded nearly 558,000 square feet of positive office space absorption, including HubSpot’s 205,000-square-foot lease at 2 Canal Park that expands its East Cambridge footprint to 450,000 square feet.
Some high-profile sublease availabilities have surfaced, but are expected to be snapped up quickly, according to brokers. Facebook is reportedly still close to subleasing 263,000 square feet from Bluebird Bio at 50 Binney St. And Akamai Technologies is offering five floors totaling 133,500 square feet at its new 145 Broadway headquarters.
Cambridge landlords appear confident in their bargaining positions and haven’t reduced asking rents during the pandemic, with class A rates approaching $100 per square foot on a gross basis, said Charles Kavoogian, an executive vice president at CBRE New England. Approximately 75,000 square feet offered by Boeing for sublease at 314 Main St. is committed to two companies, in a typical example of the competition for well-located properties.
“The resiliency will continue and it may create some opportunities for tenants that have wanted to be part of the Cambridge ecosystem, but haven’t because of the frenzied competition for space,” Kavoogian said.
Suburban Market Turned Upside Down
Potential to attract higher rents for distribution centers than office buildings – an unheard-of notion before COVID – is upending the suburban commercial real estate market.
There’s been little evidence of a widespread move toward “hub-and-spoke” office models predicted by some, beyond Cambridge-based Pegasystems’ anchor lease at Hobbs Brook Real Estate’s 225 Wyman St. in July.
Instead, developers are acquiring suburban office parks for changes of use: primarily life science deals on Route 128, and distribution plays along Interstate 495. JLL is tracking nearly 10 million square feet of commercial property conversions in Greater Boston, primarily to life science uses.
“It’s something that will never go back to office or flex R&D space again, because of the investment that goes into [converting] these buildings,” JLL Executive Managing Director Matt Daniels said. “In some cases, the offices are less valuable than the land it sits on. If it’s functionally obsolescent, and the financials justify new industrial space, you’re seeing new buildings.”
Steve Adams
San Francisco-based Spear Street Capital is proposing a 224,000-square-foot biomanufacturing facility at 300 Minuteman Road in Andover, at the last available development site within Minuteman Office Park. Other biomanufacturing projects are planned at 41 Seyon St. in Waltham and 25 Network Drive in Burlington.
The influx of lab and industrial developers is helping stabilize the suburban market, weeding out second-tier properties that have received little recent interest as office space. Life science and industrial conversions removed nearly 5 million square feet of Greater Boston office space in the past year, according to Newmark research, including 1.4 million square feet of space removed from the office market in the third quarter alone.
Projects that gain approvals and break ground the fastest will have the advantage, Daniels said.
“If you can’t deliver a product within 14 to 16 months, many companies won’t consider your project,” he said.
