Cassidy Turley today released its Q3 Marketwatch research that tracks the performance of the commercial real estate market in Boston, Cambridge and the suburbs. Third quarter figures indicate that while fundamentals in Boston and Cambridge remained level, tenant demand in the suburbs is rapidly gaining strength – resulting in the lowest availability rate the suburban office market has seen since the first quarter of 2009.
Downtown Boston posted negative absorption for the third consecutive quarter, as did the lab market in Cambridge. While larger (50,000 SF+) deals are being executed in these markets, several significant availabilities that came online earlier in the year (First Marblehead and MetLife in Boston; Vertex Pharmaceuticals in Cambridge) are what is keeping the market balanced. This balancing act is largely the result of the continued rightsizing of professional service firms coupled with the appreciable growth of technology and life science companies.
While the story in Cambridge has been about escalating office rents (especially in Kendall Square), the third quarter brought them to at least a temporary halt. Overall Cambridge office rents are down 4.6% quarter-over-quarter. And, for the first time since the beginning of 2009, East Cambridge office rents have flattened – actually declining 50 basis points since mid-year. While a single quarter does not always make a trend, we will be closely monitoring office rents to see if they really will level off at circa-2000 levels.
In the suburbs, 495 North and 128 Central accounted for the majority of market activity for the second consecutive quarter. Methodical expansions continue to drive leasing activity in both submarkets – leading to a notable decline of large, contiguous blocks. Yet as these companies continue to stack more people into fewer square feet, suburban parking needs are increasing. This confluence of factors is causing build-to-suit activity to pick up. While speculative construction is likely a thing of the past, large suburban tenants with specific requirements are beginning to turn to new construction to accommodate their needs. We suspect this trend is here to stay.
Old City, New Direction
- With absorption totaling (169,635) SF YTD and availability declining only 10 basis points to 16.9%, Boston fundamentals were flat for the third consecutive quarter.
- But this doesn’t mean nothing happened. In fact landmark deals (such as TripAdvisor’s commitment to 70,000 SF at 226 Causeway Street) don’t show signs of abating. However, on paper this activity is negated primarily by the large blocks of space put online by First Marblehead and MetLife in the first quarter.
- While ancillary submarkets such as Downtown Crossing and North Station rightfully received a lot of buzz this quarter, the Seaport is still the submarket to watch:
- 25 Thomson Street became available in its entirety - this is solely what is driving negative absorption of (109,838) SF.
- Joining the ranks of 337 Summer Street and 300 A Street, increasing availability of large blocks of space in existing buildings means that the Seaport is likely poised to land another large user in the near-term.
- In the next 24 months, the Seaport will have an influx of at least 9,000 daytime employees. With Atlantic Avenue already crowded at rush hour, we will be watching to see how the city deals with the expected increase in commuter traffic.
- Low-rise space in the Financial District is still the best value in the city. Priced in the mid $30s, it offers a 23% discount to high rise space and a 30% discount to class A space in the Seaport.
East Cambridge Rents Level Off; Lab Rents Decline
- At 7.6%, vacancy in the East Cambridge office sector is still tight, but the days of spiking rents have come to an end – at least temporarily. At $56.39 PSF, asking rents for class A space are up nearly 4% in the past 12 months, but actually declined 50 basis points quarter-over-quarter.
- In the lab sector, all of Vertex’s space has been listed as available, but their move will begin in earnest next quarter, so we anticipate lab vacancy will jump to 2011 levels.
- As a result of this influx of space, lab rents continue to flatten. Quarter-over-quarter, lab rents have actually declined just over 3.0%. In East Cambridge, they’ve declined 4.7% in the past three months.
- The good news for the lab sector is that while many office-using tenants continue to leave East Cambridge in search of economical deals, demand from life science companies in the 30,000 to 50,000 SF range is increasing (i.e. Bluebird Bio took 43,000 at 150 Second Street; Moderna Therapeutics took 43,000 SF at 200 Technology Square).
- In an interesting twist, Akamai committed to 51,000 SF at 1 Kendall Square - where they will be converting lab space to office space.
Suburban Office Availability reaches 19-quarter low
- Strong activity continues in Suburban Boston as healthy tenant demand is seen for the fourth consecutive quarter
- 1.8 MSF SF of absorption year-to-date
- Slipping 2.2 percentage points year-over-year, overall availability in the office sector finally reached 21.0%, a 19-quarter low
- 495 North & 128 Central lead activity
- In 495 North, three steady quarters of consistent tenant demand in both Office and R&D has resulted in 790,000 SF of absorption
- Similar momentum has not been seen since Q4 2007 when there were two consecutive quarters of positive absorption in both product types
- Buildings dormant for 6-10 years are finally reaping the benefits of increased tenant demand from users experiencing organic growth
- Quality options are dwindling as overall availability dropped 4 percentage points since last year
- Landlord confidence is increasing - leading to an uptick in asking rents for select buildings across 495 North
- Increased BTS activity in the future?
- In 128 Central, Keurig delivered Phase I of its Built-To-Suit (BTS)
- Dwindling supply for mid-size and large users is more imminent than ever – strong potential for further construction activity is looming
- 40% of Class A availability is in blocks of space smaller than 5,000 SF
- On a square footage basis, 82% of tenant demand is for blocks of space greater than 50,000 SF
- New construction, which typically has an 18-24 month lag time, may require large users to begin entering the market much earlier.
- Will available supply keep up with demand in coming months?
Click here to access our report.
About Cassidy Turley
Cassidy Turley is a leading commercial real estate services provider with more than 3,800 professionals in more than 60 offices nationwide. With headquarters in Washington, DC, the firm completed transactions valued at $22 billion in 2012, manages approximately 400 million square feet on behalf of institutional, corporate and private clients and supports more than 23,000 domestic corporate services locations. Cassidy Turley serves owners, investors and tenants with a full spectrum of integrated commercial real estate services—including capital markets, tenant representation, corporate services, project leasing, property management, project and development services and research and consulting. Cassidy Turley enhances its global service delivery outside of North America through a partnership with GVA, giving clients access to commercial real estate professionals in 65 international markets.
Linda M. McDonough