Driven by a steady stream of tech and life-sciences companies migrating into the Boston/Cambridge market in recent years, Greater Boston commercial real estate is booming, seeing steady rental growth across its various submarkets, and continuing to be a favored target of both foreign and domestic investors, according to panelists who spoke at a recent ULI Boston event. But that growth does risk displacing some longtime residents.
Even with the construction of millions of square feet of new office and lab properties in recent years and more in development—much of it pre-leased—positive absorption remains steady year over year, including 715,000 square feet (66,400 sq m) in Boston proper in the first quarter of 2019 alone. The overall vacancy rate for Boston office properties is less than 9 percent, Cambridge office is at 5.6 percent, and lab is a microscopic 1.6 percent, according to research by Colliers International. Rents in both markets are now cresting above $100 per square foot (1,076 per sq m). Investment sales pricing remains equally strong, with a number of newly constructed properties trading north of $1,000 per square foot (10,764 sq m) in 2018, including $1,208 per square foot (13,000 per sq m) for 200 Pier Four Boulevard in the Seaport District.
“I think Boston is the hottest market in the country right now—and maybe the globe,” said Ann Cole, managing director with JP Morgan, at the ULI Boston Spring Summit 2019 held in early April. She cited the explosive growth of the biotech and technology sectors in the market, the strength of more traditional tenants such as financial services companies, and the abundance of universities as the “good, strong drivers that cause us to want to be investors here.”
The demand for office space is being driven primarily by technology, advertising, media, and information (TAMI) tenants, which reflects a significant change from when the city’s towers were dominated by law firms and financial services companies. E-commerce firm Wayfair (1.4 million square feet [130,000 sq m]) and WeWork (1.2 million [111,500 sq m])—two firms that did not exist 10 years ago—are now the city’s number-two and number-three space occupiers behind financial services firm Fidelity (1.5 million [139,000 sq m]). And with WeWork actively seeking additional space in the market, it may soon become Boston’s largest tenant.
No slowdown in leasing momentum is in sight, according to Colliers’s executive vice president Kristen Blount, a downtown office broker. While the firm typically tracks 100 to 150 tenants in the marketplace, she noted, they are currently tracking 250 firms seeking 6 million square feet (557,400 sq m) of requirements. Moreover, it comes at a time when companies (particularly law firms) are taking less space per employee. Blount reported that longtime client Blue Cross Blue Shield relocated in 2015 from 500,000 square feet (46,500 sq m) in the Fenway neighborhood to 330,000 square feet (30,700 sm) in the Back Bay neighborhood while maintaining the same headcount. And Blue Cross recently subleased two floors, as its number of telecommuters increased from 100 to 700.
Also, a fundamental shift is underway in how tenants think about office space. Coworking and flexible office providers like WeWork, Industrious, and Boston-based Workbar are offering flexible and shorter-term leases to users, forcing traditional landlords to rethink their leasing models in order to compete. In addition, companies are increasingly using their real estate as a recruiting and retention tool in “the war for talent” in tech markets like Boston, so savvy landlords are now upping their amenity packages to appeal to those firms. “Amenities are one of the main things that tenants are looking for,” said Blount. “They’re also looking for culture, brand, wellness, and a technology-enabled environment in order to compete for the talent.”
Those elements were the key reasons that HYM Investment Group and Carr Properties were able to lure Boston-based financial services firm State Street to One Congress Tower to establish its new global headquarters. State Street will take 510,000 square feet (47,000 sq m) at the 1 million-square-foot (93,000 sm) tower in 2023. One Congress will be built to meet Leadership in Energy and Environmental Design (LEED) Gold standards as well as feature collaborative workspace, state-of-the-art technology that supports flexible working and connectivity, and an amenities package that includes more than 30,000 square feet (2,800 sq m) of fitness space; a one-acre (0.4 ha) outdoor roof garden; shared conferencing space; and numerous upscale food and beverage offerings.
“A lot of the amenities that have traditionally gone into the residential or the hotel work that we do is now going into our office work, because a lot of the office projects that we do are becoming more residential, more hotel-like in the way that they feel,” said Thomas N. O’Brien, founding partner and managing director of HYM.
The success of Boston’s existing central business district has given rise to newly created submarkets that also are flourishing. Led by the Seaport District, a 1,000-acre (400 ha) master-planned mixed-use development that has become a magnet for traditional and TAMI companies (as well as a relief valve for the Cambridge lab market), neighborhoods with access to public transit are being redeveloped throughout the city as well as in the inner suburbs.
“To me, the most amazing thing that’s going on in our market right now is that offices can be located and do well in places that five or 10 years ago we would not have believed could happen,” said O’Brien, citing Boston’s North Station and Boston Landing in Brighton as well as Assembly Row in Somerville—developments that are attracting large-scale tenants to the transformed neighborhoods.
O’Brien hopes that momentum carries over to HYM’s megaproject—the redevelopment of Suffolk Downs, a horse-racing track in East Boston. Once a potential site for Amazon HQ2, HYM will proceed with plans to develop the 161-acre (65 ha) site into 16.5 million square feet (1.5 million sq m) of new residential, retail, office, hotel, and lab space, including $365 million in infrastructure.
Blount, for one is optimistic about the prospects for the project. “I think it’s going to be a home run,” she told the gathering. “With 6 million square feet [557,400 sq m] of tenant requirements in the market and rent rising at nearly 10 percent per year, tenants need outlets and want outlets that are centered around public transportation. Traffic has never been worse [in Greater Boston] than it is right now.”
But traffic is not the only problem plaguing Greater Boston’s commercial real estate market, since a stark contrast exists between the success of the CRE industry and the whole of the region, according to Congresswoman Ayanna Pressley, who detailed those issues in her keynote address. The redevelopment of many of the neighborhoods and the subsequent increase in housing prices are forcing many middle- and lower-income residents out of the city and the inner suburbs, or increasing housing cost burdens to extraordinary levels. And the latest Brookings Institution report on income inequality named Boston as one of the most unequal cities in the nation. Pressley pointed out that while her congressional district (which encompasses Boston and Cambridge) is one of the most diverse in the nation, it is also “one of the most unequal.”
“Today, when you board the MBTA’s Number One bus in Cambridge, it’s less than three miles (5 km) to Dudley Station in Roxbury, but by the time you’ve made the 30-minute trip, the median household income in the neighborhoods around you has dropped by nearly $50,000 a year,” she said, adding that life expectancy rates for the upper-income and lower-income segments of her district decrease by as much as 30 years. “So it is my fundamental belief that those people that are closest to the pain, are those that should be closest to the power, driving and informing the policymaking. It’s what the residents of the district deserve.”