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Boston Area Office Market Report for Q2 2021

Overview

Absorption turned negative in each quarter of 2020 for the first time in a decade and rent growth continued to decelerate. With 13.6 million SF in the supply pipeline and lingering uncertainty regarding the economy, the Boston office market will likely face several quarters of rising vacancy rates, continuing the weakening seen in 2020.

Firms are reevaluating future space needs considering health protocols necessitated by the pandemic and a successful large-scale work-from-home experiment. To gain clarity on these fronts, even many financially stable office occupiers are either delaying space decisions or opting for short-term renewal leases.

Life-sciences and biotech firms were key drivers of leasing demand during the past several years, particularly in Cambridge, as well as other spillover markets like the Seaport and Watertown. These industries had a voracious appetite for office space. Now, many of these firms, particularly start-ups, are prioritizing preserving cash reserves which could slow much of the defensive leasing in anticipation of future growth, which had been a hallmark of these sectors. Conversely, this concentration of life sciences firms has placed the Boston metro at the forefront of medical research to combat the coronavirus. Many of these firms working on a vaccine have been actively leasing space during the pandemic.

Flexible office providers of both local and national brands were on a leasing binge for the past several years. But given the fact that much of the country is limiting human interaction and most office workers continue to work from home, near-term demand for co-working and flexible office product will remain measured. WeWork was on track to become the largest office occupier in Boston, however, its financial troubles following its failed IPO and the subsequent arrival of the pandemic prevented the firm from taking that title from Fidelity. The firm has since been engaging major brokerage firms to help lease its spaces in several markets, including Boston.

Current office construction levels in the Boston metro are the highest seen since early 2001. Projects with minimal preleasing could struggle to secure tenants in the current leasing environment. Looking ahead, new high-quality assets with next-generation ventilation and air filtration systems may see stronger demand as office tenants put a premium on employee safety.

As a core gateway market, Boston had a strong capital markets environment before the pandemic took hold. The market posted a solid stretch of dollar volume and robust price appreciation. Investment volume held up relatively well in the first half of 2020, though the Q2 figure was skewed. If not for one large deal that accounted for the majority of the second-quarter total, the picture would be far less impressive. Investment volume continued to slow in the third quarter but saw a late resurgence in the fourth. Looking ahead, forecasts for pricing call for declines on a per-SF basis as well as cap rate expansion. However, to what extent pricing will be impacted remains uncertain.

 

 

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Information provided by CoStar.com