METRO BOSTON OFFICE MARKET REPORT

Transcription

1 METRO OFFICE MARKET REPORT FOURTH QUARTER CONGRESS STREET, MA HUNNEMANRE.COM

2 OFFICE MARKET OVERVIEW The Greater Boston office market ended the year with a bang as absorption gains of nearly one million square feet pushed vacancies down to 11.6% in the fourth quarter. Tech and life sciences continue to make waves throughout the broader metro area with Sanofi executing one of the area s largest single leases for 900,000 square feet of office and lab space at Cambridge Crossing. Downtown, users in need of more than 100,000 square feet are faced with few options and Wayfair and WeWork are in expansion mode. Following the groundbreaking of Winthrop Center and the office tower at the Hub on Causeway, square feet underway surpassed four million. That said, new construction is still measured and pre-commitments remain strong. Lab conversions and the blurring of property type definitions are common themes in many of Boston s office markets as well; particularly in the suburbs. Asking rents held steady over the quarter, however, conditions remain frothy in select pockets of Cambridge and Boston. The long-awaited conclusion to Amazon s search for a secondary headquarters location finally came to an end in the fourth quarter. In a surprising twist, the e-commerce giant is splitting the requirement across two locations: Long Island City, NY and Crystal City, VA. While Boston didn t land the white whale, the local tech industry is as strong as ever. In fact, Amazon already maintains a sizeable (and growing) presence here. WeWork continues to dominate local and national headlines, and the coworking giant is reportedly looking at any and all large blocks of office space in the city. WeWork currently occupies more than 700,000 square feet throughout Boston and Cambridge, and will likely double its local footprint over the coming years. Moreover, WeWork s business model is shifting. Once a haven for entrepreneurs and freelancers, major coworking operators are now focused on snagging enterprise clients. ezcater is the most recent to join these ranks after leasing the entirety (97,494 SF) of WeWork s newest location at 40 Water Street in the Financial District. There is no question that WeWork is changing the commercial real estate game and its impact on the market bears watching. Consensus expects economic growth to persist in the near term. However, uncertainty is weighing on sentiment. A yield-curve inversion, volatile stock market, softening housing market, rising interest rates and trade conflicts have emerged as potential economic risks. Many are looking to 2020 as a potential inflection point in what will likely be the longest U.S. economic expansion in history % RATE 953,970 Q4 NET $33.97 ASKING RENT 4,170,171 UNDER CONSTRUCTION 2 METRO OFFICE Q4 2018

3 OFFICE $/SF 12% 10% 8% 6% 4% 2% 0% NET SQUARE FEET (thousands) 1,200 1,000 ASKING RENTS $100 $80 $60 $40 $ $ CHARLESTOWN MIDTOWN 5-YEAR HISTORICAL AVERAGE NORTH STATION CLASS A SOUTH STATION ASKING RENT RANGE SEAPORT CLASS B VACANCY RATES FINANCIAL DISTRICT WEIGHTED AVERAGE BACK BAY FENWAY/KENMORE Boston ended 2018 on top. Year-to-date net absorption totaled nearly 1.6 million square feet as out-of-market demand and local growth resulted in several blockbuster lease transactions. Vacancies ended the year at just 7.1%, more than 100 basis points below year-ago levels. While demand drivers remain strong, large blocks of office space are increasingly harder to find. The development landscape is more dynamic than ever as projects push traditional geographic boundaries. Asking rents continued on their upward trajectory, with rates on select high-rise space in the Back Bay reaching high $90s/SF. New tech clusters are forming among Boston s urban markets. Wayfair s meteoric rise has permanently changed the landscape of the Back Bay. Once a bastion for traditional finance and insurance firms, the e-commerce giant is now one of the market s major office users. Wayfair recently received a grant to add jobs and ultimately lease another 300,000 square feet in the Back Bay. Reportedly, the firm is planning to backfill space Liberty Mutual is vacating at 10 St. James Avenue. Development surrounding North Station is propelling this market into a tech hub as well. With Verizon (Oath) and Rapid7 already signed on to anchor Boston Properties Hub on Causeway project, this area will likely see more in-migration from new economy tenants. New supply is on the horizon in urban Boston. Winthrop Center s groundbreaking represents the largest tower, which includes 750,000 square feet of office space, to be built downtown in more than a decade. After an infusion of capital via a new joint venture, construction on Bulfinch Crossing will likely kick off in the summer of Massport is proposing a 600,000-square-foot tower on Parcel A-2 in the Seaport and Samuels & Associates is planning an office tower over the Mass Pike on Parcel 12. Developers are also focusing on emerging markets like South Boston, the South End, East Boston, Charlestown, Dorchester, Allston and Brighton. Lease rates continue to rise in Boston, nearing $61/SF in the fourth quarter. Average rents in the Financial District surpassed $60/SF for the first time this cycle with Charlestown and Midtown offering the most value options. Class B rent growth is still outpacing gains in the Class A market as well. TOTAL INVENTORY TOTAL VACANT RATE Q4 NET YTD NET ASKING RENT Class A 50,619,673 3,322, % 551,603 1,972,301 $64.83 Class B 20,628,321 1,705, % (230,806) (387,300) $52.88 Total 71,247,994 5,028, % 320,797 1,585,001 $ METRO OFFICE Q4 2018

4 CAMBRIDGE OFFICE SQUARE FEET (thousands) NET SQUARE FEET (thousands) OFFICE SHARE OF STOCK 1, LAB VS. OFFICE SUPPLY SHARE 48% 46% 44% 42% 40% 38% 36% DIRECT SUBLEASE Cambridge s narrative remains the same. Office space is virtually nonexistent here. With absorption gains of more than 100,000 square feet, vacancies ended the fourth quarter at just 3.2%. This puts rates 110 basis points below year-ago levels and well below the market s historic average. Developers struggle to keep pace with such frothy demand, and most leasing activity has been occurring off-market. The lack of available space makes tracking rent observations difficult, but reportedly asking rents in East Cambridge have topped $100/SF in select spaces. Cambridge Crossing is this market s next big super cluster. Sanofi is following in the footsteps of Philips NA and Goldfinch Bio, with one of the largest commercial leases signed in Greater Boston in recent years. The French pharma company committed to 900,000 square feet of office and lab space across two yet-to-be constructed buildings, consolidating their Boston operations and moving 1,200 employees from 50 Binney Street beginning in With residential, retail and another speculative office building in the works, Cambridge Crossing will likely continue to attract both office and lab users in the coming years. With a majority of the new supply already preleased, the focus remains on build-to-suit projects as well as redevelopments. Boston Properties recently received approval for an 18-story tower in Kendall Square, which would replace the MIT Coop building at 325 Main Street. Google is rumored to be the anchor tenant as the new structure would connect to their current office at 355 Main Street. New England Development is proposing to convert the third floor of the Cambridgeside Galleria into 140,000 square of office space. Given the struggle malls have faced this cycle due to growth in e-commerce, it makes sense to adapt the underutilized space. While tight market fundamentals have lead some tenants, like iteos/ Elevate Bio and Foundation Medicine, to consider relocations to Boston or the suburbs, expansions are still happening here. Capital One is planning to take down three floors at MIT s 314 Main Street development. Apple is reportedly taking a floor in the building as well. CarGurus also expanded by more than 50,000 square feet in the newly-completed 121 First Street. TOTAL INVENTORY TOTAL VACANT RATE Q4 NET YTD NET ASKING RENT Class A 6,937, , % 54, ,915 $64.06 Class B 3,427, , % 49,793 (166,797) $63.43 Total 10,365, , % 104,403 (57,882) $ METRO OFFICE Q4 2018

5 SUBURBAN OFFICE $/SF 17% 16% 15% 14% 13% ASKING RENTS $80 $60 $ NET SQUARE FEET (thousands) 1,500 1, ,000-1, A strong showing during the last quarter of 2018 helped mitigate major suburban move outs from earlier in the year. Suburban vacancies ended the fourth quarter at 15.1%; 50 basis points below the previous quarter. While Route 128 continues to benefit from proximity to the urban core and a high concentration of executive housing, conditions along the Route 495 belt have improved markedly over the last two quarters. Firms like ClearMotion and MACOM are major drivers of this trend. Leasing at 200 Smith Street (the Post) in Waltham picked up some serious steam this quarter. Built completely on spec and delivered fully-vacant, the property signed on Deciphera (44,256 square feet) as the its first tenant in the second quarter of 2018, then added iteos/elevate Bio and Boston Dynamics at 107,000 square feet and 175,000 square feet, respectively, before year end. The life science industry is having a material impact on the commercial space markets in the suburbs. Demand from biotech companies is at an all-time high, and suburban landlords are responding. Several buildings/ spaces have already been repositioned for lab use. Others are looking to tap into this outsized demand. In Waltham, 60 Sylvan Road, which is being vacated by Verizon, has been earmarked for lab conversion. At 1560 Trapelo Road, a lab conversion is being considered for the space formerly occupied by AutoDesk. Boston Properties is reportedly redeveloping 33 Hayden Avenue in Lexington and 200 West Street in Waltham as well. 4 Burlington Woods in Burlington is also likely going lab. These moves bode well for suburban office fundamentals as underutilized space will ultimately be removed from the inventory. $20 $0 Looking ahead, the suburbs will remain on solid footing, especially if millennials (and talent) make their way back to the suburbs as they age. ROUTE 495 SOUTH ROUTE 495 NORTH ROUTE 495 NORTHEAST ROUTE 495 WEST FRAMINGHAM-NATICK ROUTE 128 NORTH ROUTE 128 SOUTH ROUTE 128 NORTHWEST INNER SUBURBS ROUTE 128 WEST The lack of large blocks of available space and cyclically high office and lab rents in Cambridge and Boston could mitigate recent urbanization trends. Tenants are already beginning to make the move. TG Gallagher is selling the building they currently occupy in Cambridge and has leased ASKING RENT RANGE WEIGHTED AVERAGE more than 31,000 square feet at Waverley Oaks Park in Waltham. TOTAL INVENTORY TOTAL VACANT RATE Q4 NET YTD NET ASKING RENT Class A 59,088,383 8,659, % 48,331 (776,311) $29.52 Class B 54,592,645 8,541, % 480,439 (7,772) $22.81 Total 113,681,028 17,200, % 528,770 (784,083) $ METRO OFFICE Q4 2018

6 NOTABLE TRANSACTIONS DAWES STREET CAMBRIDGE 200 SMITH STREET WALTHAM NETWORK DRIVE BURLINGTON 110 HIGH STREET Company Sanofi Company Boston Dynamics Company Avid Technology, Inc. Company Medidata Size 900,000 SF Size 175,000 SF Size 123,790 SF Size 117,000 SF Submarket East Cambridge Submarket Route 128 West Submarket Route 128 Northwest Submarket Financial District 200 SMITH STREET WALTHAM 40 WATER STREET - WEWORK 101 MAIN STREET CAMBRIDGE 60 STATE STREET Company iteos/elevate Bio Company ezcater Company Alnylam Pharmaceuticals Company Pioneer Size 107,000 SF Size 97,494 SF Size 95,299 SF Size 90,580 SF Submarket Route 128 West Submarket Financial District Submarket East Cambridge Submarket Financial District 125 SUMMER STREET 131 DARTMOUTH STREET 10 MAGUIRE ROAD LEXINGTON 309 WAVERLEY OAKS ROAD WALTHAM Company Haemonetics Company Industrious Company Reveneer Company TG Gallagher Size 62,000 SF Size 48,600 SF Size 31,697 SF Size 31,607 SF Submarket Financial District Submarket Back Bay Submarket Route 128 Northwest Submarket Route 128 West 6 METRO OFFICE Q4 2018

7 RESEARCH SPOTLIGHT URBAN COWORKING LOCATIONS CAMBRIDGE COWORKING* AS A SHARE OF SUBLEASE AVAILABILITY WEWORK ENTERPRISE CLIENTS 25% 20% 15% 10% 5% 0% *Only includes WeWork, Industrious, Workbar & Regus 7 METRO OFFICE Q

8 CAPITAL MARKETS SALES VOLUME DOLLARS (millions) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ SUBURBAN URBAN MEDIAN PRICE/SF $800 $600 Boston s capital markets ended the year on a strong note, as $5.7 billion in office assets changed hands and prices neared record highs in While this puts sales volume 16% below 2017 totals, several blockbuster transactions took place during the fourth quarter. Clearly, Boston remains a highly-desirable destination for capital and liquidity should remain steady moving into the new year. Some highly-anticipated urban sale transactions finally closed. Late in the fourth quarter, UBS Realty Investors divested 53 State Street for $845 million or $685/SF while Carr Properties acquired 200 State Street for $222 million or $730/SF. In the Seaport, 51 Sleeper Street sold for $91 million or $598/SF and Skanska sold 121 Seaport for a whooping $455 million or $1,137/SF. $400 $200 $ SUBURBAN URBAN Investors seeking higher yields and greater opportunities are driving suburban investment activity, which accounted for 36% of 2018 total sales volume. A handful of high-profile transactions took place, including 25 Burlington Mall Road in Burlington and 250 Royall Street in Canton. The former traded for $257/SF, which is well above the suburban average. TOP Q4 / INVESTMENT SALES 53 STATE STREET 121 SEAPORT BOULEVARD 200 STATE STREET 51 SLEEPER STREET Buyer Beacon Capital Partners, etc. Buyer American Realty Advisors Buyer Carr Properties Buyer Brookfield Asset Management, Inc. Price $845,000,000 Price $455,000,000 Price $222,000,000 Price $91,000,000 Total SF 1,234,434 Total SF 400,342 Total SF 304,178 Total SF 152,102 Price/SF $685 Price/SF $1,137 Price/SF $730 Price/SF $598 Cap Rate - Cap Rate 4.6% Cap Rate - Cap Rate - SALES VOLUME ($) NUMBER OF TRANSACTIONS TOTAL SF MEDIAN MEDIAN CAP RATE $2.0B M $ % 8 METRO OFFICE Q4 2018

9 OFFICE RECAP TOTAL INVENTORY UNDER CONSTRUCTION DIRECT VACANT SUBLEASE VACANT TOTAL VACANCY RATE Q4 NET YTD NET ASKING RENT Back Bay 14,097, ,844 43, % 242, ,719 $66.71 Charlestown 2,589,875-51,266 2, % 45,076 21,346 $43.23 Fenway/Kenmore 1,673, , % 38,700 (87,190) $71.97 Financial District 35,813, ,000 2,770, , % 374, ,343 $60.94 Midtown 2,117,611-61,857 11, % 25,544 (14,048) $47.00 North Station 2,668, ,000 94,987 3, % (25,761) (4,577) $49.41 Seaport 11,112, , , , % (376,761) 690,540 $55.66 South Station 1,174,568-77, % (3,336) (49,132) $54.68 Boston Total 71,247,994 1,872,979 4,554, , % 320,797 1,585,001 $60.83 East Cambridge 5,894,888 1,261,048 37,907 14, % 60, ,689 $79.96 Mid Cambridge 2,538,270-34,944 17, % 9,241 (8,593) $66.81 West Cambridge 1,931, ,211 89, ,766 (223,978) $58.41 Cambridge Total 10,365,113 1,261, , , % 104,403 (57,882) $63.72 Framingham-Natick 4,624, ,187 27, % (39,048) (178,036) $24.46 Inner Suburbs 6,458, , ,457 8, % 14,491 (34,374) $34.53 Route 128 North 14,032,255-1,800,045 68, % (103,774) (104,545) $24.72 Route 128 Northwest 13,680,890-1,670, , % 70,306 (54,319) $31.79 Route 128 South 16,020,476 61,702 2,023, , % 111,459 (595,943) $25.74 Route 128 West 23,185, ,442 2,629, , % 297,668 18,324 $38.60 Route 128 Total 66,919, ,144 8,124, , % 375,659 (736,483) $30.92 Route 495 North 13,179,408-3,057,296 36, % 155, ,327 $19.41 Route 495 Northeast 7,941,544-1,406,591 53, % 42,398 64,781 $20.18 Route 495 South 3,332, ,949 12, % 113,561 87,554 $19.18 Route 495 West 11,225,641-2,033,366 32, % (133,856) (377,852) $20.65 Route 495 Total 35,679,500-6,895, , % 177, ,810 $19.92 Suburban Total 113,681,028 1,036,144 16,358, , % 528,700 (784,083) $26.11 Market Total 195,294,135 4,170,171 21,121,410 1,437, % 953, ,036 $ METRO OFFICE Q4 2018

10 LIZ BERTHELETTE Director of Research JOEY BIASI Research Analyst METHODOLOGY Source: Co-Star, Hunneman. Prepared: December Disclaimer: The above data is from sources deemed to be generally reliable, but no warranty is made as to the accuracy of the data nor its usefulness for any particular purpose. Average Rental Rates are asking rents on direct space. Vacant space includes both direct and sublease space. 303 CONGRESS STREET, MA HUNNEMANRE.COM