Office Market Report
Boston’s office market remains tight and overall performance strong, driven by rapidly expanding tech and biotech firms. Foundation Medicine, Twitter, and software company Klayvio headline some of the tech firms that have leased large blocks of space in the CBD.Cambridge, after being unusually quiet for much of 2019,has seen a number of tenants grab space, including lab incubator Lab Central, MIT’s the Engine, and Apple.Suburban leasing, on the whole, remains solid, though benefits haven’t been spread equally. The suburban submarkets to the west of the CBD, notably Waltham and Watertown, continue to experience positive impacts from migration within the suburbs and from biotech firms leaving Cambridge.
Despite strong current conditions, warnings signs have begun to emerge. Net absorption has been historically tepid in 2019, even turning negative in the third quarter. This comes after essentially unabated positive absorption this cycle. The forecast calls for strong positive absorption in the next several quarters, meaning slow recent absorption may be a blip but is still a trend worth noting. The struggles of co-working giant WeWork also looms over fundamentals. The firm leases more than 1.5 million SF in greater Boston, including 2.6% and 1.6% of the entire inventory of Back Bay and the Financial District, respectively. While Boston doesn’t nearly have the same exposure as other major metros like New York or San Francisco, a slowdown in leasing, or even givebacks of space, could be a headwind to current conditions.
While rent growth is down from early-cycle highs, gains continue at a consistent pace in response to tight vacancies. Due to their particular scarcity, upper floors and large blocks of space in the urban core have reportedly seen the biggest rent increases. Other changes have emerged in the rental landscape in response to low vacancy rates. In the City of Boston, quoted triple-net rents have reportedly become the norm, as have percentage bumps above 2%. While rents are likely to continue their rise in the near term, Boston is a tech-heavy economy, and rent declines during economic slowdowns are typically sharper than in other markets.
On the supply side, deliveries for the next several quarters are expected to be minimal, aiding vacancies in the near term. However, a supply threat looms in 2021 and beyond. Millions of SF have broken ground in 2019, including three towers in the CBD alone, meaning the market’s supply peak has likely yet to hit the metro. While much of the space underway is already committed, risks may come from backfill space when the economic outlook may be murkier than it is today.
Deep-pocketed investors, particularly pension funds and international investors, continue to drive pricing up to new heights. While 2019 sales volume is trending well below levels of the market’s 2014 peak, it already has exceeded levels posted in 2018. The Seaport has seen an outsized amount of investment, as have lab buildings, which have been targeted almost regardless of their location. Cap rates remain low and may even go lower in response to recent shifts in interest rates.
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Office fundamentals continue to be solid in the Boston market. Despite negative absorption in the third quarter of 2019, Boston’s vacancy rate remains near two-decade lows and looks to continue to contract over the next several quarters. The combination of limited supply relative to its history and robust demand, primarily from rapidly expanding tech and biotech firms, has caused vacancies to continually contract even this late in the cycle. Boston’s highly skilled workforce continues to be a driver for outsized performance. The market’s nearly 50 accredited universities continue to churn out the best and brightest, and companies want to be located here to latch on to this superior talent pool.
A major factor in the market’s strong performance this cycle has been robust demand from tech firms. KPMG recently ranked Boston ninth worldwide in terms of tech hubs that will lead innovation over the next several years, up from 12th the year before. 2018 also closed with record amounts of venture capital investment, a leading indicator in tech performance. According to PWC’s Money Tree report, more than $10 billion of venture capital funds were invested in Massachusetts based companies in 2018, the highest amount since 2000 and a 46% increase from the year before. Cambridge has been the strongest beneficiary of the tech boom this cycle. MIT has spent generations cultivating Kendall Square into the country’s premier biotech hub and also one of its hottest real estate markets. Kendall Square’s sub-1% vacancy and triple- digit rents have been to the benefit of a number of surrounding submarkets, including Waltham, Watertown, Fenway, and even Brighton. Though, the already white-hot Seaport appears to be setting itself up as the primary “Kendall Square” relief valve. In July 2019, Cambridge based Foundation Medicine signed a 580,000 SF lease at WS Development’s 400 Summer, the largest lease in the Seaport in more than eight years. More biotech demand could be generated in the future as major life science players have recently spent big on development sites. So far in 2019, heavy hitters including Alexandria Real Estate Equities, Tishman Speyer and Related have spent in excess of $600 million on land in the Seaport for future lab construction.
Industrial Market Report – Boston
Industrial Market Report
While the market experienced steep negative absorption in the third quarter of 2019, Boston’s market remains historically tight. Vacancies stand in line with the US average after trailing above it for much of the past two decades. While Boston may not be a national distribution hub, a strong local economy has led to surging levels of demand for last-mile logistics space. The need is particularly acute given Boston’s high-income levels, strong income growth, and high concentration of millennial residents. Amazon, for example, has grown its industrial presence in Boston to more than 1.7 million SF just in the past several years. The firm is confirmed to be negotiating for 800,000 SF at the old NECCO factory in Revere as well as a 3-million-SF build-to-suit in Andover, which would be one of the largest industrial buildings in the northeast. Other retailers and third-party logistics firms have also expanded their footprints in an effort to compete. The metro’s rapidly growing life science industry provides another crucial source of demand. Biotech firms that do their design work inCambridge also need high-end space to manufacture and distribute their drugs or devices, in places ranging from Andover to Norton. Finally, legalized cannabis is a wild card for industrial demand. While a slow rollout of recreational cannabis has limited the impact to date, hundreds of firms are waiting for licenses, potentially tightening the market further.
Supply has also played a role in current market conditions but not in a way one might expect. Boston has net lost supply this cycle, as more than 20 million SF of industrial space has been demolished or converted since2010. Multifamily and office development has pushed into areas that were once industrial hubs, explaining the widespread loss of industrial inventory. Only 2.1 million SF is underway, meaning these limited to negative supply conditions should continue for the near term. This severe supply and demand imbalance has caused rent growth to keep climbing upward and may have yet to peak. Investors have taken notice, deal volume in 2019has already broken 2018’s lofty total. Cap rates continue to compress but still offer investors better returns than either the U.S. overall or Boston’s three other property types.
Although Boston, and to an extent New England, is not a high-profile logistics market, demand for last-mile logistics space has been white-hot and has driven vacancies to historical lows. The rise of e-commerce firms, with their strong appetite for space to meet growing distribution needs, has dominated U.S. logistics for several years. Boston is no exception to this phenomenon. Despite challenges in finding suitable distribution buildings in this old northeastern metro, Amazon has been aggressive in its expansion in theBoston metro and leases industrial space in Braintree, Roxbury, Dedham, Gloucester, Everett, Stoughton, and Fall River, totaling over 1.7 million SF (1 million SF of it in Fall River). Amazon is also confirmed to be under contract for a 3.6-million-SF facility in Andover, which, if built, would be the largest industrial building inMassachusetts. Other traditional logistics tenants have recently taken large spaces, including Quiet Logistics (355,000 SF at 64 Jackson Road, Devens), XPOLogistics (169,000 SF at 176 Grove St., Franklin), and Arnold Industries (118,000 SF at 1 Kay Way, Stoughton). Robust demand, coupled with limited supply growth and compounded by the removal of old industrial properties from the market, has created a tight market for logistics,particularly anywhere near the urban core. With the challenges of building industrial within metro Boston and likely the continued removal of supply, these conditions don’t appear to be going away any time soon.
Boston’s strong medical/life science concentration also helps drive industrial demand. One of the largest leases of 2019 was by Unitex, a healthcare laundry service firm,which committed to 189,000 SF at 155 Shepard St. inLawrence. Pharmaceutical and medical device manufacturing also fills a notable portion of demand.Siemens is underway on a 300,000-SF laboratory diagnostics expansion, one of the larger buildings underway across the metro. In May 2019, Pfizer completed a 175,000-SF expansion to its clinical manufacturing facility in Andover. The extensive regulations and high construction costs of these manufacturing facilities mean most are owner-occupied. Siemens Walpole’s expansion, for example, is estimated to cost $300 million ($1,000/SF) to build and take a full four years to complete.
Fundamentals could soon be in for a shock as recreational marijuana is rolled out in Massachusetts. The state voted to legalize the drug recreationally in 2016, but sales only just commenced in November 2018. If other states where marijuana is legal are any guide,then the Massachusetts industrial could be in for a wild ride over the next several years. Hundreds of growers could hit the market, looking for space in an industrial market already lacking substantial options. Most growers will likely look to cheaper areas to the west of the state,but as of July 2019, roughly 65 firms had license approvals in metropolitan Boston. A handful of groups will build their own space, like AmeriCann’s 1-million-SFfacility in Freetown, but the impact will likely be the strongest in smaller, privately owned, Class C space. In Colorado, grower tenants reportedly occupy about 25,000–50,000 SF in lower-class buildings. While most industrial tenants will likely not be directly affected by grower tenants, growers’ demand for space could reverberate throughout the market. In Colorado, grower tenants typically pay two to three times more than traditional tenants. It’s important to note that most of the Boston market hasn’t felt a significant impact just yet. Lengthy regulations and NIMBYism have tied up most growing firms, and when sales commenced, only two shops were able to open their doors. Cannabis’ impact on the industrial market will very well be dependent on where growing is allowed and how many firms are allowed to do so.
Copyrighted report licensed to Boston Commercial Properties, Inc. – 82690.