As of early 2024, Boston’s office market is grappling with the repercussions of a national post-pandemic decline in demand, particularly impacting the life sciences sector, which previously provided a stable demand source. This downturn coincides with a generational influx of new office supply, amplifying the challenges faced by various sectors, including technology, finance, and professional services. The city’s office attendance remains low, with ridership on the MBTA struggling to reach 70% of pre-pandemic levels, highlighting the ongoing struggle to bring employees back to the office.
The impact of reduced office attendance has led many organizations to reevaluate their space requirements, resulting in a collective giveback of approximately 5.9 million square feet over the past year. This trend is likely to continue as leases negotiated before 2020 expire, pushing more organizations to sublet their excess space. The availability rate has surged to an all-time high of 17.6%, reflecting the significant challenges facing the market.
In addition to these shifts, nearly 12 million square feet of new office space has been added since the beginning of 2022, primarily for lab use, with another 15 million square feet anticipated by the end of 2025. This influx of supply marks the highest volume seen in the past two decades and is expected to drive vacancy rates up and effective rents down in the coming years. Currently, Boston’s vacancy rate stands at 13.1%, slightly below the national average of 13.9%, but this gap has been narrowing since late 2019.
The office market is also feeling the effects of rising interest rates, leading to a freeze in capital markets activity. Transaction volumes in 2023 reached their lowest levels since 2010, with significant sales activity, including a nine-figure lab portfolio, occurring late in the year. Values have dropped approximately 20% on average since 2021, compounded by rising cap rates of over 100 basis points, complicating the valuation landscape.
While the current market conditions are challenging, liquidity is expected to return as the cycle of interest rate hikes stabilizes. This resurgence will likely lead to a repricing of assets, reminiscent of the significant declines observed during the aftermath of the Great Recession. For businesses navigating this uncertain landscape, proactive strategies will be essential.
Ready to optimize your office space strategy in Boston’s evolving market? Contact ABG Commercial Realty today! Our expert team can guide you in identifying opportunities and making informed decisions to enhance your real estate portfolio.
