GREATER BOSTON MARKET VIEWPOINT 4 TH QUARTER 2016

Transcription

1 GREATER BOSTON MARKET VIEWPOINT 4 TH QUARTER 2016

2 BOSTON This has been a year of ups and downs in the Boston market. Vacancies moved up 2.3 percentage points to 11.3%, sublease vacancy increased by two-thirds to 967,640 SF, and total absorption ended the year in the red. Despite that backdrop, landlords have continued to push rents, by 6.5% throughout 2016, and hundreds of tenants are touring for space. Creating optimism going into 2017, the fourth quarter posted positive absorption for the first time since year-end A truly competitive Seaport Submarket has caused ripple effects throughout the broader Boston market. The Seaport ended the year with nearly 400,000 SF of positive absorption, with the wind at its back. With so much activity there, it may be hard to remember that GE announced its plans to relocate its headquarters from Connecticut to the Seaport less than a year ago. This year is ending with a bang as well, with Reebok planning a move there to the Innovation & Design Building in 2017, bringing 700 jobs from Canton into a new 220,000 SF headquarters. Boston s highly educated talent pool continues to be a draw for employers, and these two marquee companies see the city as a means to reinvigorate their brands and position themselves for future competitive advantages. Statistics in the core submarkets are as follows: MARKET SEGMENT SUPPLY VACANCY RATE* 2016 ABSORPTION Back Bay 13,318, % -62,035 Class A 11,288, % -250,546 Class B 2,030, % 188,511 Financial District 33,976, % -847,409 Class A 27,886, % -780,318 Class B 6,090, % -67,091 Seaport 10,173, % 396,340 Class A 4,551, % 412,936 Class B 5,621, % -16,595 * includes sublease space SUPPLY AND DEMAND Two new towers delivered this year, 888 Boylston Street in the Back Bay and 100 Northern Avenue in the Seaport, adding a combined 923,000 SF to the market. Largely preleased upon completion, the two buildings have just 18% of their space available at the end of Another 1.4 million SF remains under construction, from ground-up developments in the Seaport (Pier 4, 121 Seaport) to creative office space at North Station (Hub on Causeway) to the redevelopment of 40 Water Street and 22 Boston Wharf. New projects totaling several million SF of new inventory are either proposed or permitted to move forward, continuing the evolution of Boston s skyline. 2 The TAMI (tech, advertising, media, and information) sector continues to grab headlines as the main driver of demand, since downtown locations with Red Line access have been in vogue. While these firms have been prominent space-takers in B buildings, a wide array of tenants have been driving the market. Headline deals over the year included Putnam Investments, DigitasLBi, Boston Consulting Group, Wayfair, Optum, and WeWork Labs. Demand is healthy, with over 250 tenants in the market seeking an aggregate of over five million SF of space. These firms span the spectrum of industries, but financial services, law firms, insurance and tech are well represented. Although the average requirement is less than 25,000 SF, some of the larger requirements include: TENANT SF INDUSTRY Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo 225,000 Legal Services Reebok* 220,000 Footwear/Apparel Holland & Knight, LLP 110,000 Legal Services Cengage Learning 100,000 Education Technology Berkshire Hathaway Specialty Insurance 100,000 Insurance *Committed VELOCITY Velocity (signed lease activity) showed signs of slowing earlier in the year, and that trend has held into the fourth quarter. Now that the election is over, firms can better plan for the future. With several large tenants in the market, velocity is likely to pick up steam in For example, Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, as well as Reebok, are likely to have leases signed early in the new year. More tenants will enter the market in 2017, including Nixon Peabody and Marsh & McLennan. Both tenants are expected to become more efficient with their footprints. Several tenants, including US Bank at 1 Federal renewed early in place, taking themselves out of the active tenant pool. The Back Bay s newest tower attracted tenants, with Accenture taking over 52,000 SF in a relocation from the Prudential. Highlighted fourth quarter transactions include: TENANT ADDRESS SF SUBMARKET Accenture 888 Boylston 52,340 Back Bay Mass General Hospital 100 Cambridge 52,187 Financial District First Marblehead 200 Clarendon 32,198 Back Bay Tsoi Kobus & Associates 60 State 24,565 Financial District ViaSat 100 Summer 14,594 Financial District

3 ABSORPTION AND VACANCY Absorption varied widely from submarket to submarket. The Financial District posted negative absorption each quarter of the year for a total of nearly 850,000 SF due in part to some large tenants departing for the Seaport. The fourth quarter showed signs of turning the corner, but a largerthan-reported sublease from State Street at 1 Lincoln for 317,000 SF kept the market in the red. The Seaport and Fenway/Kenmore were the hot spots this year, for a total of nearly 650,000 SF of absorption. Healthcare is the most prominent use in the Fenway/Kenmore market and we anticipate more absorption from this sector as the institutions continue to decant non-essential uses from their campuses. Tower space dynamics continue to shift. After a very strong 2015, absorption in low-rise space within Back Bay and in Financial District towers was negative. The space below the 20th floor posted more than 580,000 SF of negative absorption during the year. Most of this loss was in the Back Bay, at 222 Berkeley, 500 Boylston, and 200 Clarendon. Back Bay high-rise space (above the 20th floor) posted modest positive absorption, while the Financial District took a hit on both high- and low-rise space. Financial District high-rise vacancies continue to worsen: We have never tracked higher vacancies than their current rate of 19.7%. Space shuffling and tenants focus on becoming more efficient (read: less space per employee) is expected to weigh on an otherwise strong demand-side fundamentals picture. Later in the forecast, the risk of an economic downturn will increase. Because its exact timing and magnitude are unknown, a conservative outer-year projection has been used. Even with modest absorption levels over the next few years, the vacancy rate is expected to remain below 11% (see chart to right). RENTAL RATES Rents continued to push northward in 2016, ending the year near historical highs. Many submarkets rents are well above the last cycle s highs, but the Financial District is a laggard. While its direct rents are up nearly 2.1% over the past year, they remain about 5% below 2008 levels. Resistance levels may have been reached in the Back Bay and Seaport. Forecast Vacancy & Absorption Thousands 2,500 2,000 1,500 1, (500) (1,000) (1,500) (2,000) (2,500) With the growing demand for innovation space, some of the Class B brick-and-beam space is priced higher than historically more expensive lower floors in towers. The spread between asking rents in various segments of the market is depicted below: SPACE TYPE Absorption 2010 RENTAL RANGE/SF Class A High Rise $65 - $85 Class A Mid Rise $55 - $65 Class A Low Rise $48 - $60 Class B $40 - $ Vacancy 2013 LOOKING AHEAD A post-election pop may be in store for 2017 as tenants make real estate decisions again. Rent growth is expected to cool, with pockets of weakness developing in the next months. The question comes down to which landlord blinks first. Boston will remain a target for investment capital both foreign and domestic but sales volume for this cycle has peaked. Tenants from outside the market are looking to Boston for space, a potential upside for the forecast. Many of those tenants are expected to retain a presence in the suburbs as well. Transit and accessibility remain at the top of tenants minds finding creative ways to move Boston s swelling population and daytime workers around is paramount for future growth % 2016 Forecast % 15% 10.5% 10% % 0% 3

4 CAMBRIDGE The Cambridge office and lab market is just as hot as ever. In one of the most watched deals of the year, MIT was awarded the development rights to the Volpe Transportation Center. Development is still a ways off, but as the last large infill site in Kendall Square, it further cements MIT s position in the marketplace. Tenants are struggling to find the space to expand, and with little new product coming to market in the near future, availability should stay tight. Firms such as Shire and Akamai are gobbling up space not yet on the market, the Genzyme Center and future construction, respectively. Conditions will keep landlords in the driver s seat and push more firms to neighboring submarkets, such as Lexington, Watertown, Waltham, or Boston. The fourth quarter was a mixed bag, as depending on how the data is sliced, different stories emerge. Overall vacancies moved up over the third quarter s rock-bottom levels but are 0.3 percentage points below year-end 2015 stats. Sublease space nearly doubled over the quarter, as firms such as GlaxoSmithKline put space on the market. There is twice as much sublease space on the market as direct space. Direct vacancies didn t move, as properties remain essentially full. Key statistics at the end of 2016 include: MARKET SUPPLY SF (000s) VACANCY RATE ABSORPTION (000s) Q Total Cambridge* 22, % -306 Office 11, % -196 Lab 10, % -140 *Includes R&D space OFFICE MARKET The vacancy rate in the 11.3 million SF office market moved up to 6% in the fourth quarter, a 1.8-percentage-point increase from last quarter, but below last year s 6.3% rate. This was a sublease-driven phenomenon, as direct vacancies held steady at 2.2%. Direct vacancies are the lowest since late 2000, the height of the venture capital backed tech boom. The largest new block of availability came from Biogen, which made 141,000 SF of sublease space available at 105 Broadway. Alewife posted 122,000 SF of negative absorption, with properties on the periphery of the submarket, 10 Fawcett and 1 Alewife Center, contributing to the increase in space. Class A rent growth in Alewife has stalled. Recently it had been running at double-digit annual increases, but that halted in the fourth quarter. However, the delta between Alewife and East Cambridge rents is $27/SF, a gap that remains historically wide for taking the Red Line a few extra stops. With a surge in residential population thanks to thousands of apartments being built around this transit stop and the addition of an AC Hotel (Marriott brand), the submarket is even more attractive than in previous cycles. Asking rents in East Cambridge are at nosebleed levels. Landlords are now asking in the mid-toupper $70s/SF, with very few value spaces left. LAB MARKET Explosive demand and extremely limited options have characterized the Cambridge lab market for some time. The vacancy rate in the 10.2 million SF lab market remains as tight as a drum. Direct vacancies are less than 1%, holding flat during the quarter at 0.7%. With vacancies this low, it s hard for the market to absorb much space at all, and any movement is likely to be quarterly noise until more product comes to market. Major pharma companies are incubating startups to tap into a future drug pipeline as well as to surround themselves with talent and innovation. Subleasing remains the best bet for users to find space. Firms are willing to put more space on the market if they can find a new home; however, that end of the bargain is proving challenging. 4

5 Significant barriers to entry and lengthy development time frames for new construction will continue to be a challenge for demand. There is 930,000 SF of new space underway, with the lone large block of yet-tobe committed space at 100 Binney Street. Bristol-Myers Squibb is anchoring the 418,000 SF building. Alexandria closed on One Kendall Square, which included a permitted development site expect to see that move forward. Highlighted active tenants and transactions are shown in the tables below. TENANT SF INDUSTRY Novartis 200,000 Life Science Blueprint Medicines 100,000 Life Science Solid Bio 70,000 Life Science Velocity TENANT ADDRESS SF SUBMARKET Akamai Multiple 630,000 East Cambridge Shire 500 Kendall 343,000 East Cambridge Foundation Medicine 150 Second 53,455 East Cambridge Jounce 790 Memorial 51,000 East Cambridge LOOKING AHEAD The Green Line extension s opening has now been delayed until However, DivcoWest/HYM s development at Northpoint could offer some relief to lab users or those with large space requirements unable to find space in Kendall Square. The first office project there is in the planning stages. Both office and lab landlords will remain in the driver s seat as demand outpaces supply, and there is limited relief on the horizon, particularly in the core Kendall Square market. Many tenants will need to consider alternatives outside of Cambridge. Landlords in nearby submarkets such as Lexington are trying to take advantage of this situation. Expect more forward lease commitments from lab tenants. Rent levels are starting to make long-time Cambridge firms, particularly office users, look elsewhere. The development pipeline is beginning to firm up. So while MIT and Boston Properties will bring more than one million SF to the Kendall Square market in time, that space is still years away. Meanwhile, the Davis Companies plan to go vertical with lab space in Alewife, while Bulfinch could move forward with more product at Cambridge Discovery Park. 5

6 SUBURBAN SUBURBAN OVERVIEW The suburban market ended the year on a positive note, with 61,000 SF of net absorption in the fourth quarter and the annual total pushing 1.7 million SF. Total absorption was about 25% below 2015 s showing, though it remained well above the average absorption of this economic cycle (1.15 million SF). Performance varied widely between submarkets and also between cities and towns. Build-to-suit construction was a primary driver of activity in the Inner Suburbs, as both the FBI and Partners Healthcare opened new headquarters during the year. Other major construction deliveries brought on more space for Wolverine Worldwide, Clarks, Thermo Fisher, and the renovation of 100 Upland Drive in Norwood, the future home of Moderna Therapeutics. Aggregate statistics for the office and R&D market are provided below: MARKET/SUBMARKETS SUPPLY SF (000s) VACANCY RATE Q ABSORPTION SF (000s) Suburban Boston 137, % 61 Inner Suburbs 7, % 9 Route , % 404 Route , % (393) Worcester 2, % 42 SUPPLY AND DEMAND Suburban office and R&D market space totals more than 137 million SF, with performance and product varying according to submarket. Class A properties represent nearly a third of the market, and almost 70% are along Route 128. High rents and low availability in Cambridge are forcing more biotech/lab users to look to the suburbs as an alternative. And landlords are responding, with more product coming to market by way of conversion, renovation, or ground-up development. This space is primarily within close proximity to Cambridge, in Waltham, Watertown, or Lexington. Landlords willing to make a bet on placemaking and trying to differentiate their product are positioning themselves for long-term success. The economics work with today s rental rates and capital markets, while the tenant demand for such product is there. Build-to-suits remain a clear driver of the market. SharkNinja is underway on a new headquarters in Needham, MilliporeSigma is underway in Burlington. In Beverly, HighRes Biosolutions is underway on an 80,000 SF headquarters. That said, the pipeline is starting to dry up in parts of the suburbs, particularly the 128 Mass Pike market. The suburbs have long benefitted from a diverse tenant mix dominated by technology, consumer products, and healthcare companies, and that isn t expected to change anytime soon. Some of the more sizeable tenants in the market with potential requirements over the next 12 to 24 months include: TENANT SF INDUSTRY MARKET Haemonetics 125,000 Medical Devices 128 South AEI Consultants 100,000 Engineering Route 495 North Rocket Software 100,000 Technology Route 128/Mass Pike Medica Corporation 80,000 Health Care/Medical Route 128 Northwest New England Sports Network (NESN) 65,000 Media 128 Mass Pike/Inner Suburbs Acadia Insurance 20,000 Insurance Route 495 West 6

7 VELOCITY Velocity (signed leases) cooled in the second half of the year, as tenants were taking longer to make decisions. The state s booming biotech scene continues to benefit the suburbs. MatTek Corporation renewed in place in Ashland, with thoughts on future expansion. Other recent deals include Bay Cove Human Services in Stoughton, while Hitachi took space at 610 Lincoln Street in Waltham in a contraction of its space, coming from Marlborough, and Ascensus expanded at Wells Avenue in Newton. Some of the larger transactions executed during the quarter included: TENANT SF INDUSTRY ADDRESS MatTek 51,000 Biotech & Pharmaceutical 200 Homer Avenue, Ashland Ascensus 50,000 Financial Services Wells Avenue, Newton Murata Power Solutions Bay Cove Human Services 29,000 Energy & Utilities 129 Flanders Road, Westborough 25,000 Healthcare 909 Summer Street, Stoughton Hitachi 25,000 Computer Hardware 610 Lincoln Street, Waltham ABSORPTION AND VACANCY The vacancy rate showed little movement during the quarter, or year, for that matter, ending 2016 at 17.2%. This is 0.2 percentage points above year-ago levels but remains near cyclical lows. Vacancies are likely to move up early next year, particularly in the 128 South market, since Reebok plans to relocate to Boston s Seaport Submarket. Reebok s current Canton headquarters will go on the market, adding more than 500,000 SF of availability. The Inner Suburbs led the market in 2016, but will cool going forward. With no major build-to-suits in the wings, expect the Inner Suburbs to return to a sense of normalcy. Waltham and Burlington are moving in different directions. Aggregate rents in the two markets are comparable, but while Waltham benefitted from nearly 366,000 SF of absorption, Burlington gave back nearly 300,000 SF over the course of the year. The Burlington market came out of the recession red-hot but paused this past year. R&D space in 495 North had a tough year, with Andover and Billerica each posting 100,000 SF of negative absorption. Add in the negative absorption from Chelmsford s office market, and some of the positive momentum from Kronos s deals in Lowell was offset. Deals elsewhere kept absorption positive for the year. LOOKING AHEAD Many tenants are struggling with how best to position themselves in the marketplace today and whether they need a Boston outpost, a trend unlikely to reverse course. But landlords willing to make bold plays stand to benefit from creating best-inclass assets, keeping and/or attracting firms. Right now it takes more than a lobby renovation to stay competitive. Food service and amenity space matter. The Reebok move could have reverberations. The campus will be put up for sale, and its future and various potential uses will bear watching. Little in the way of speculative ground-up office construction is liable to break ground over the next couple of quarters. There are still ample availabilities of over 100,000 SF or more, while the Wynn Casino in Everett has driven up the cost of construction throughout the area. Finding skilled tradespeople is an everpresent challenge. 7

8 CAPITAL MARKETS SALE COMPARABLES OFFICE MULTIFAMILY 27 DRYDOCK AVENUE, BOSTON Buyer Related Beal Price $146,500,000 $/SF $ COLUMBIA ROAD, BOSTON Buyer Akelius Residential AB Price $64,250,000 $/Unit $419, CHANNEL CENTER STREET, BOSTON Buyer LaSalle Price $118,600,000 $/SF $ HAYDEN AVENUE, LEXINGTON Buyer King Street Properties, Carlyle Group Price $79,144,681 $/SF $ INDEPENDENCE WAY, FRANKLIN Buyer Prospect Capital JV Jones Street Investment Partners Price $64,900,000 $/Unit $216,333 2 HANCOCK STREET, QUINCY Buyer Gerding Edlen Price $89,500,000 $/Unit $319, ENTERPRISE DRIVE, QUINCY Buyer Foxrock Properties Price $31,600,000 $/SF $ BEVERLY STREET, BOSTON Buyer GID JV CalPERS Price $188,000,000 $/Unit $657,343 1 KENDALL SQUARE, CAMBRIDGE Buyer Alexandria RE Equities Price $725,000,000 $/SF $1, DOLORES AVENUE, WALTHAM Buyer True North Capital Partners Price $57,000,000 $/Unit $275,362 8

9 RETAIL INDUSTRIAL WASHINGTON STREET, STOUGHTON Buyer Medipower Price $13,750,000 $/SF $ MIDDLESEX TURNPIKE, BURLINGTON Buyer Life Time Fitness Inc Price $10,000,000 $/SF $ WASHINGTON STREET, HANOVER Buyer PECO Real Estate Partners Price $39,500,000 $/SF $ GROVE ST, NORFOLK Buyer Investcorp Price $10,000,000 $/SF $ OLD CONNECTICUT PATH, FRAMINGHAM Buyer National Retail Properties Price $23,840,444 $/SF $ LITTLEFIELD STREET, AVON Buyer Investcorp Price $19,500,000 $/SF $46 1 COMMERCE WAY, PLYMOUTH Buyer DeMoulas Supermarkets Price $13,500,000 $/SF $ BALLARDVALE STREET, WILMINGTON Buyer Investcorp Price $18,000,000 $/SF $61 9

10 MARKET SNAPSHOT Q STATISTICS OFFICE AND R&D / CLASS A AND CLASS B MARKET SQUARE FEET (SF) SUPPLY DIRECT SF AVAILABLE SUBLEASE SF AVAILABLE VACANCY* CURRENT ABSORPTION YTD ABSORPTION BOSTON 66,745,452 6,550, , % 137, ,059 Back Bay 13,318,940 1,517, , % 65,633-62,035 Financial District 33,976,841 3,521, , % -61, ,409 Charlestown 2,679, , % 20,505 51,624 Crosstown 1,025,000 47, % 10,600 6,269 Fenway/Kenmore 2,322,374 84, % 57, ,661 North Station 2,065, ,594 12, % 28,471-75,867 Seaport 10,173, , , % 26, ,340 South Station 1,184, ,005 6, % -10,468-46,642 CAMBRIDGE 22,410, , , % -306, ,019 Alewife Station/Route 2 2,621, , , % -122,554-95,463 East Cambridge 17,889, , , % -201, ,465 Harvard Square/Mass Ave 1,899,495 12,577 23, % 18,059 31,017 SUBURBS 137,397,917 20,821,420 2,817, % 61,148 1,674,947 Inner Suburbs 7,189, , , % 8, ,083 Route 128 North 8,427,892 1,475,080 43, % 63, ,732 Route 128 Northwest 22,953,499 3,500, , % -19, ,516 Route 128 Mass Pike 29,231,141 3,099, , % 107, ,065 Route 128 South 17,678,374 1,784, , % 251, ,473 Route 495 North 26,393,552 5,809, , % -368, ,594 Route 495 West 18,911,850 3,374, , % 20,938 40,643 Route 495 South 4,554, , , % -45,405-33,088 Worcester 2,057, ,012 17, % 41,552-55,039 MARKET TOTALS 226,554,330 27,690,103 4,431, % -107,667 1,765,907 CONTACT: Aaron Jodka Director of Research aaron.jodka@colliers.com To be placed on our mailing list, please visit Colliers International 160 Federal Street Boston, MA The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. This publication is the copyrighted property of Colliers International and/or its licensor(s) Colliers International. All rights reserved. *including sublease space