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Boston Area Office Market Report for Q2 2020

Overview

Of the real estate industries, the office market, and particularly in Boston, has been expected to take the hardest hit due to the COVID-19 pandemic. Given office buildings in Boston are currently only five percent occupied by employees, and 15 to 20 percent occupied in the suburbs as people continue to work from home, according to the National Association of Industrial and Office Parks’ (NAIOP) Boston chapter, things could still be heading that way.

However, the statistics indicate that the second quarter of 2020 wasn’t as bad as perhaps initially predicted.

Despite the highest unemployment rate in the nation (16.3 percent), the office space vacancy rate grew by only one percentage point, to 8.1 percent — it ended at 7 percent at the end of 2019. Biotech leasing continues to be active, and cap rates remain similar to where they were before the pandemic at 5.9 percent. Rents have slowed from the first quarter, when it was at 4.2 percent, above the national average, but continue to show growth, up 2.2 percent. Rents currently sit at an average of $41 PSF. They are forecasted to drop 7 percent, and while the number is glaring, it’s not nearly as bad as the 20 percent drop the office market experienced in the past two recessions.

Perhaps the biggest impact in the office market so far from COVID-19 has been on the sales side. Following the first quarter, 2020 was on pace to outdo 2019 in sales volume, the latter of which was the strongest year on record. But things have come to a halt in the second quarter, especially concerning large transactions. From April 2019 through July 2019, there were 29 sales closed of Boston office buildings more than 200,000 SF. During the same period in 2020, that number finished at five.

Of the real estate markets, office space continues to present the most questions. The greatest is how will companies handle the new trend of employees working from home. According to University of Chicago research, 44 percent of Boston-area jobs, especially education, technology and financial, can be done entirely at home. According to national brokerage Redfin and reported by The Boston Globe, 27 percent of Boston-area employees who previously didn’t have the option of working remotely, would like to continue to do so, at least on a part-time basis. Whether companies will allow this or will want employees back in the office — or potentially a hybrid of both — is arguably the biggest factor in how strong the office market will continue to be. For what it’s worth, CoStar data and forecasts predict things will bottom out in the office market early-to-mid 2021 before fully recovering to 2019 levels by 2022.

Information provided by CoStar.com

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