Scott Van Voorhis
Maybe all our hardworking developers should have built few more office towers to go along with all those new soaring apartment and condominium palaces taking shape on seemingly every block in downtown Boston.
The Boston office market is in the grips of a rental spike, one that is on track to boost the cost of a corporate suite by a stunning 30 percent by 2017, a new study by Cushman & Wakefield contends.
That puts us at the very top of the country in terms of rising office rents, leaving powerhouses New York, San Francisco and Washington in the dust.
Sure, that projection may be bit “aggressive,” as one very sharp local office market researcher at rival firm Colliers International put it, yet no one is disputing that rents are rising and will continue to do so over the next few years.
And it’s likely to get worse before it gets better, with plans for new skyscrapers that would ease the crunch still mainly on the drawing boards.
“Our out-of-state clients and investor groups and increasingly insurance companies, they are hot to be here in Boston,” said William Pezzoni, a partner at Day Pitney LLP who specializes in real estate and economic development. “Foreign money is hot to be here in Boston. There is real push for us to be accepted as a real international destination.”
“It is going to drive rents,” he added.
Soaring Office Costs
Cushman’s predictions are certainly bold.
Downtown Boston office rents will jump 10 percent each year in 2015, 2016 and 2017, for a cumulative increase of 30 percent, the commercial real estate firm predicted in a recent market report.
The study’s bar graph says it all, with the Boston bar stretching across the page, well above the shorter lines representing the projected 24 percent or so jump in rents in central business districts across the country.
Next up is Seattle, with a somewhat shorter line of about 23 percent over the next three years, followed by Oakland and then the various New York submarkets, which are expected to see rent hikes in the mid-teens.
Take that, Big Apple.
Overall rents in Boston’s commercial business district are on track to jump from $46 a square foot to $62 by the end of 2017.
“Boston ranks first for projected asking rent growth,” the Cushman report notes.
Mary Sullivan Kelly, senior vice president and chief research officer at Colliers in Boston, is the one who called out those numbers earlier as “aggressive.” Still, she doesn’t dispute that increases are on the way, though typically spikes don’t happen in neat, 10-percent-a-year increments, as Cushman predicts.
Supply And Demand
There’s really no mystery as to why rents are likely to take off over the next few years, regardless of whether it takes form as a sharp spike or something more along lines of a sustained increase. It’s because developers have been tripping over each other to build new luxury apartment towers and high-rises in true herd fashion, with everyone jumping on the bandwagon.
Literally dozens of new apartment and condo buildings and high-rises have taken shape across Boston over the past decade, in part because skittish bankers have decided that apartments are the only real estate product they are comfortable financing.
How’s that for imagination!
You can count on one hand the number of new office buildings that have come on line during the same period – and most are build-to-suits not open to the general market.
Lenders have been slower to warm to the idea of putting up the money for new office towers, which arguably have been a bit riskier as the recovery lagged in the tough years following the Great Recession.
However, companies are starting to hire again in big numbers. Suddenly we are caught with far too many deluxe apartments renting out for $5,000 and not enough office space.
Here’s the real problem, though: While help is on the way, it will take years to arrive. Former City Hall development chief turned mega builder Tom O’Brien’s plan to replace the ugly Government Center garage is years from fruition, and the always-colorful Don Chiofaro’s plans for a sky-high harborside office palace are even further behind as he struggles to get a green light from City Hall.
And who knows when construction will start on plans to replace that derelict city garage on Federal Street with one of the city’s tallest towers, with the Boston Redevelopment Authority just starting to evaluate potential bidders.
Meanwhile, the amount of vacant space, which ballooned past the 20 percent mark in key parts of the downtown Boston office market after the Great Recession, has fallen steadily into the single digits.
Nor has it just been downtown’s traditional mix of legal and financial services firms filling the void, with an influx of high-flying tech firms priced out of the stratospherically expensive Cambridge office market.
Spreading The Wealth
Don’t fool yourself. Dropping a 30-percent rent-bomb on the Boston market is going to have a big impact, even if it is spread over three years. And even if it’s only a 15 to 20 percent increase, it will still have wide-ranging repercussions, extending well beyond the city limits to the 128 and 495 belts.
For starters, if they stick, higher rents will make winners out of all those new office towers on the drawing boards right now for downtown Boston. Building a new tower in Boston these days can easily be a billion-dollar proposition and someone has to foot the bill for it.
So the rent spike is music to the ears of all those ambitious developers, who will need to push rents towards $80, if not $100, a square foot for their top suites to keep their lenders on board and meet their projections.
But what about all the companies caught in the path of this runaway rental spike train?
Well, some will clearly need to do more with less space, an easier proposition than ever before given our increasingly mobile and work-from-anywhere workforce.
Many law firms and other companies need a presence in downtown Boston, but they certainly don’t need all their employees hanging out in the most expensive office space north of New York, Pezzoni notes.
“I think a lot of them will suck it up, but for smaller space,” Pezzoni said. “The conference rooms won’t be so big and grand and it’s going to be about the locations, not the amount of space.”
But some companies will likely pick up and move out of Boston and into the suburbs. And with 128 starting to fill up fast, that could drive more companies to make the jump to the 495 corridor, which is just starting to heat up now.
That could further bring down office vacancy rates and spur some new construction along the corridor, which hasn’t really seen boom times since the tech rush of the late 1990s. New development could also give a boost to 495’s lagging home prices as well.
The real estate boom here in Massachusetts has been too Boston-centric for its own good, whether it’s new office development or home prices.
And if it takes a 30-percent spike in Boston office rents to spread the wealth a little bit, well, so be it.
