The Greater Boston office market will expand through 2018, propped up by its diverse job base and strong economic fundamentals, according to an industry report.
A contraction phase characterized by increasing vacancy rates, slowing rental growth and rising cap rates will follow, according to PwC’s first-quarter real estate investor survey.
“The challenge you have in the city of Boston is: do we create too much supply and get to a point where we’re not seeing rent growth?” said Mitchell Roschelle, PwC’s national practice head of real estate advisory. “We heard this quarter in the survey a little bit of concern on the part of some investors about the new supply to the market. How that supply performs is going to dictate whether we see investors flooding the market with capital.”
The tenant retention rate was 68 percent in the first quarter with landlords offering an average of five months of free rent, according to the survey. Cap rates averaged 5.7 percent in the Boston central business district and 7.2 percent in the suburbs.
Boston is one of 32 U.S. office markets expected to remain in expansion phase in 2015, the PwC report said, with employment generating demand for office space outpacing new supply.
San Francisco, which shares many of Boston’s market characteristics, is expected to contract in 2015 and enter a recession mode with negative rental growth in 2017.
Both markets have strong development pipelines competing with aging office properties. More than 1 million square feet of office inventory is scheduled to be delivered in Boston during 2015, including major build-to-suit projects for Converse, New Balance and PwC’s Boston offices.
Boston’s booming tech sector offers some insulation, with start-ups filling lower-rent spaces vacated when existing tenants move to newer properties, Roschelle said. The region’s economic fundamentals are among the nation’s strongest, with healthy financial services, health care, education and life science sectors.
“Jobs are chasing people, not the other way around, and the real estate market follows,” Roschelle said.
