METRO BOSTON Q OFFICE REPORT 11.7% (67,812) $ ,367, Congress Street Boston, MA

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1 METRO BOSTON Q2 218 OFFICE REPORT VACANCY Q2 ABSORPTION ASKING RENT UNDER CONSTRUCTION 11.7% (67,812) $ ,367,21 33 Congress Street Boston, MA

2 Q2 218 OFFICE STATISTICS DOWNTOWN DOWNTOWN INVENTORY VACANCY Q2 ABSORPTION YTD ABSORPTION Class A 49,426,67 3,253, % 728,194 1,9,656 $63.49 Class B 2,979,81 1,757, % 21,72 (36,1) $5.61 ASKING RENT CLASS A & B 7,46,48 5,11, % 749, ,646 $59.25 VACANCY 12% 1% 8% 6% 4% 5-Year Historical Average = 9.1% TRENDS The second quarter proved to be one of the strongest in Downtown Boston s recent history. With more than 7, square feet in positive absorption, vacancies in the urban core declined by 4 basis points over the quarter and 1 basis points over the year. Delivery of two fully-occupied office developments 121 Seaport and 22 Boston Wharf Road drove much of the activity. Following move-ins from Reebok and Amazon earlier this year, net absorption in the Seaport has surpassed 7, square feet year-to-date. Demand from out-of-market office users will continue to drive urban fundamentals in the foreseeable future. 2% % ABSORPTION SF (s) 1,2 1, NOTABLE Notable TRANSACTIONS Transactions Amazon Wayfair WeWork Class A Class B Several sizeable users are in the market for new office digs, but availabilities over 1, square feet remain limited. State Street Bank (5,+ SF), Bank of America (5,+ SF), Salesforce (5, SF), Oath (3, SF), and Interpublic (28, SF) are some of the largest tenants touring the Downtown market. With only nine availabilities 1, square feet or more and one over 2, square feet, these users will likely turn to new construction to fulfill their requirements. Oath has reportedly signed a commitment at the 65,-squarefoot office tower at Boston Properties Hub on Causeway, which hasn t even begun construction yet, and Epsilon is rumored to be nearing a commitment for 18, square feet in the same building. Boston s coworking landscape continues to expand. This quarter, WeWork agreed to take down another 9, square feet at Related Beal s Congress Square development, which is slated to come on line later this year. Workbar also recently announced plans for growth in the city. The coworking operator is looking to double its Boston footprint to more than 1, square feet by 219. While the need for flexible, collaborative work environments will likely continue to propel this trend, there is well over one million square feet of coworking space in Downtown Boston. One has to wonder how deep the demand well runs for this type of space. Wayfair finalized its 395,-square-foot lease at 222 Berkeley/5 Boylston Street in the Back Bay. The e-commerce giant currently occupies roughly 655, square feet across multiple buildings at Copley Place. Despite growing its footprint to more than one million square feet in 219, Wayfair is expected to continue to expand, and is reported to be in the market for another 25,-275, square feet in the Back Bay. Spotify BitSight 5K SF 15K SF 25K SF 35K SF Seaport Back Bay Financial District 45K SF Rents continue to climb across most submarkets, but slower growth, which is indicative of a cycle s maturation, has set in. Average asking rents surpassed $59/ SF in the second quarter a 2.5% increase from year-ago levels. Lease rates were up 1.4% compared to the first quarter as well. Despite the recent flight-toquality among Downtown office tenants, Class B lease rates are rising at a faster clip, and now have breached $5/SF Downtown. 2

3 OFFICE STATISTICS CAMBRIDGE CAMBRIDGE INVENTORY VACANCY Q2 ABSORPTION YTD ABSORPTION Class A 7,36,443 29, % 3,212 17,124 $63.77 ASKING RENT Class B 3,49,53 34, % (148,58) (123,54) $55.28 CLASS A & B 1,85, , % (117,846) (16,416) $62.9 TRENDS Cambridge remains one of Boston s tightest and most expensive office markets. Vacancies ended the second quarter near historic lows despite posting more than 1, square feet of negative absorption. Abt Associates relocation to 1 Fawcett Street and the planned redevelopment of the firm s former headquarters at 55 Wheeler Street into a residential development accounted for a majority of this activity. Persistent demand for commercial space in Cambridge will keep fundamentals at or near current lows in the foreseeable future; leaving landlords with a clear upper hand. Tech firms continue to drive demand for office space in Cambridge. In one of the largest transactions of the quarter, HubSpot extended its current lease at 1 Canal Park in East Cambridge and expanded its footprint by another 1,1 square feet. Data management startup, Devo, is relocating from Burlington to 4,5 square feet at 15 Cambridge Park Drive in West Cambridge. Wistia, OnShape and Happie also leased space in Cambridge during the second quarter. Office construction is on Cambridge s horizon and pricing for this space has reached new heights. Lease rates for some existing Class A space in East Cambridge are already in the low-to-mid $9s/SF, with the Cambridge average reaching almost $64/SF in the second quarter. Office users looking at new construction in this Kendall Square will likely pay over $1/SF Gross, which would represent a new high for the Cambridge market. Despite such lofty pricing, demand remains robust for office space in Cambridge and new development is likely warranted. Boston Properties received approval for an additional 25,-371,-square-foot office tower on Main Street in Kendall Square. A few tenants (some are speculating Google is a prospective candidate) are reportedly in negotiations for the space. Out-of-market users are also circling MIT s development on Main Street, also in Kendall Square. With the majority of DivcoWest s first commercial building at Cambridge Crossing preleased to Philips North America, after committing to an additional 1, square feet in the building, the developer plans to bring another 5, square feet of speculative office and lab space to the site. The long-awaited MBTA Green Line extension broke ground in June and areas along the new light rail route, including Cambridge Crossing and along First Street, are already reaping the rewards. New office, lab, multifamily and retail developments are popping up in parts of East Cambridge previously considered the end of the transit line. The expansion project will ultimately connect Cambridge to growth corridors in Somerville and other Inner Suburbs as well as Downtown Boston and Back Bay. These connections will provide tenants with another viable relief valve for the uber-tight Kendall Square market. VACANCT SF SF (s) 1,2 1, NOTABLE TRANSACTIONS Direct ABSORPTION AND ASKING RENT SF (s) HubSpot Shiseido Cosmetics Akebia Therapeutics Onshape Wistia Sublease Net Absorption Asking Rent K SF 2K SF East Cambridge 4K SF 6K SF West Cambridge 8K SF $8 $7 $6 $5 $4 $3 $2 $1 $ 3

4 Q2 218 SUBMARKE B O S T O N S S E A P O R T OFFICE FUNDAMENTALS INVENTORY INDEX SF (s) Net A bsorption Seaport Total Vacancy Downtown Total Indexed to Q % 18% 15% 12% 9% 6% 3% % -3% -6% -9% LARGEST NEW TENANTS 566,115 SF 217/ ,348 SF 213/ ,247 SF ,411 SF ,485 SF ,47 SF 217 1,92,13 SF HIGHLIGHTS OFFICE LEASES Starting Rent $9 $8 Size of Bubble = SF of Lease $7 $6 $5 $4 $3 $2 Apr-12 Aug-13 Dec-14 May-16 Sep-17 RENTS HAVE RISEN RAPIDLY SINCE THE BOTTOM OF 21 CONSTRUCTION HAS BEEN WELL ABOVE THE METRO AVERAGE TENANTS IN NEED OF LARGE BLOCKS OF SPACE ARE FINDING OPTIONS HERE 4

5 T SPOTLIGHT 21 ASKING RENTS (BY BUILDING CLUSTER) $2 s/sf $3 s/sf $4 s/sf $5 s/sf $6 s/sf $7 s/sf 218 ASKING RENTS (BY BUILDING CLUSTER) STRONG TENANT DEMAND, NEW CONSTRUCTION & THE REPOSITIONING OF CURRENT OFFICE STOCK HAVE ALL LED TO OUTSIZED RENT GROWTH. 5

6 Q2 218 OFFICE STATISTICS SUBURBAN SUBURBAN INVENTORY VACANCY Q2 ABSORPTION YTD ABSORPTION Class A 59,315,665 8,431, % (522,586) (774,497) $29.36 ASKING RENT Class B 53,941,335 8,988, % (177,276) (274,742) $22.45 CLASS A & B 113,257, 17,419, % (699,862) (1,49,239) $25.76 VACANCY & ABSORPTION SF ('s) 1,5 1, , Net Absorption Vacancy 17% 16% 15% 14% 13% 12% TRENDS Boston s urban-to-suburban migration had a material impact on suburban fundamentals during the first half of 218, with vacancies spiking again in the second quarter. Following Reebok s recent relocation from its former campus in Canton to the Seaport, the completion of Alexion and PTC s new office, also in the Seaport, resulted in another several hundred thousand square feet of negative absorption. Dell EMC, Kenexa and Shire vacated large blocks of space in the second quarter as well. Similar to Downtown, rents continue to rise, but growth is waning. Looking ahead, the suburbs will remain on solid footing despite continued migration to the urban center. Pockets along Route 495 may continue to contend with higher-than-average vacancies and struggle with lease-up, but adaptive reuse projects could help mitigate these risks. The lack of large blocks of available space in Cambridge and Downtown could also mitigate recent urbanization trends. SUBURBAN RENTS Suburban Rents 35% 3% 25% 2% 15% 1% 5% % Route 128 West Route 128 South Route 128 Northwest Inne r Suburbs Route 128 North Route 495 North Rent Growth ( ) Route 495 West Fra mingham-na tick Current Rent Route 495 Northeast Route 495 South $4 $35 $3 $25 $2 $15 $1 $5 $ It s not all bad news for Boston s suburban office markets. Even with the loss of several major tenants, the Route 128 West submarket remains popular for Class A tenants. Recent leases by Simpson Gumpertz & Heger, Alkermes, Tesaro, and ZoomInfo point to the strength of Core Route 128. Outside of Route 128, Mathworks recently completed an 18,-square-foot expansion at its Natick Campus, KROHNE completed its new 175,-square-foot headquarters in Beverley and Allegro Microsystems relocated from Worcester to Marlborough. Speculative construction in Boston s suburban office market is leasing up, albeit at a slightly slower pace than the Downtown markets. In Waltham, the Post at 2 Smith Street landed its first major tenant. Deciphera Pharmaceuticals inked a deal for 44,256 square feet of office space in the newly constructed building. Now, 37% of the speculative suburban office construction built since 216 is occupied. NOTABLE TRANSACTIONS L3 Comm. ClearMotion Another large mixed-use development is on the docket for Somerville. Cresset Group recently received approval for Xmbly; a 1.5 million square foot development adjacent to the ever-popular Assembly Row. The site, located along the MBTA s Orange Line, will include three new commercial buildings. This new economy space will encompass office, lab and R&D uses. ZoomInfo Sovos Deciphera Pharmaceuticals 25K SF 5K SF 75K SF 1K SF 15K SF Route 495 North Route 128 West Route 128 North Asking rents have been expanding rapidly in select suburban submarkets, but overall growth will likely wane as this current cycle matures. Demand for space within Route 128 and the Inner Suburbs has led to above-average gains over the past three years, with cumulative rent growth reaching 2-3% in some submarkets. Speculative construction in key markets, like Route 128 West, has also been driving higher rents. Average suburban asking rents ended the second quarter at $25.76/SF a 6.3% increase from year-ago levels and 2% above last quarter s rates. 6

7 CAPITAL MARKETS STATISTICS SALES VOLUME NUMBER OF MEDIAN MEDIAN ($) TRANSACTIONS SF $/SF CAP $1,229,48, ,648,439 $ % TRENDS Sales volume reached a four-quarter high in the Boston office market. Propped up by a handful of large Downtown transactions more than $1B in assets changed hands during the second quarter. Slower late-cycle growth, a widening bid-ask spread and rising interest rates are expected to stifle investment sales this year. With that said, Boston remains a highly desirable destination for capital among all investor types. Prices remain elevated and cap rates are compressing modestly. Buyers continue to pay a premium for Downtown assets. In June, Heitman LLC closed on the 572,153-square-foot 28 State Street. Mitsubishi Estate and Rockefeller Group sold the 95%-occupied asset for $417.6 million or $731/SF. Related Beal acquired 451 D Street in Boston s Seaport Submarket for $276 million or $578/SF, with plans to convert some of the office space to lab. In the Back Bay, Beacon Capital Partners divested the 26,837-square-foot 177 Huntington Avenue for $665/SF. All three properties garnered substantially higher price tags compared to their previous sale price as well as low, single-digit cap rates. Other owners look to be testing the waters as well. Skanska recently listed its newly constructed office at 121 Seaport for sale, and the price could reach $45 million or more than $1,/SF. Investors seeking higher yields and greater opportunities are driving suburban investment activity. As a result, recent price growth has accelerated in Boston s suburban office market. Although sales volume dipped in the burbs during the second quarter, several deals took place. The Carlyle Group acquired 67 S Bedford Street in Burlington for $55 million or $314/SF, and Lincoln Property Company and ASB Management purchased 91 Hartwell Avenue for $22.2 million or $186/SF. The cap rates on these deals were 5.6% and 6.1%, respectively. TOP Q2 / INVESTMENT SALES SALES VOLUME $ (s) $4, $3,5 $3, $2,5 $2, $1,5 $1, $5 $ Suburban Urban MEDIAN PRICE/SF $8 $7 $6 $5 $4 $3 $2 $1 $ Suburban Urban INDUSTRIAL SALES 28 Former State Reebok Street HQ Q1 217 Q2 217 Q3 217 Q4 217 SALES VOLUME ($) $453,379,723 $385,172,81 $433,947,886 $374,173,554 $1,646,673,244 Boston Canton 451 D Street Boston 177 Huntington Avenue Boston 67 S Bedford Street Burlington # OF TRANSACTIONS SF 4,779,432 CrossHarbor Capital 6,394,25 AFL-CIO 4,45,511 Building Buyer Heitman Spear Street LLCCapital Buyer Buyer Buyer 4,243,774 The Carlyle Group 19,462,922 Partners Investment Trust Price MEDIAN $/SF $418,, $88,, Price $75 $276,, $59 Price $137,5, $13 Price $86 $55,5, $9 Total SF 572,153 68, Total SF 477,132 Total SF 26,837 Total SF 176,886 Price/SF $731 $129 Price/SF $578 Price/SF $665 Price/SF $314 Cap Rate - Cap Rate 4.2% Cap Rate 4.7% Cap Rate 5.6% 7

8 Q2 218 M E T R O B O S T O N OFFICE RECAP INVENTORY UNDER CONSTRUCTION DIRECT SUBLEASE VACANCY Q2 ABSORPTION YTD ABSORPTION Back Bay 13,959,411-1,22,35 128, % 132,99 326,142 $67.97 Charlestown 2,554,975-5,362-2.% 25,63 25,1 $43.27 Fenway/Kenmore 1,673, , % (41,345) (13,431) $64.75 Financial District 35,694, ,283 2,51,21 238,12 7.7% 115,932 7,65 $57.1 Midtown 2,9,44-79,12 6, % (11,234) (26,331) $48.22 North Station 2,668, , 9,593 3, % (9,911) (568) $46.58 Seaport 1,591, ,64 59, , % 551, ,43 $56.87 South Station 1,174,568-38,555 4,6 3.6% (12,197) (13,815) $5.6 BOSTON 7,46,48 1,11,347 4,451, , % 749, ,646 $59.25 East Cambridge 5,636,548 1,261,814 54,555 52, % 12,68 66,686 $82.31 Mid Cambridge 2,517,47-33,55 1, % (8,636) (567) $65.84 West Cambridge 1,931,955-68,299 15,682 9.% (121,278) (172,535) $45.95 CAMBRIDGE 1,85,973 1,261, ,44 168, % (117,846) (16,416) $62.9 Framingham-Natick 4,623, ,56 62, % (22,29) (185,728) $24.18 Inner Suburbs 6,41, , ,199 3, % 22,445 27,684 $34.44 Route 128 North 13,869,18 145, 1,493,784 7, % 155,528 (43,227) $22.78 Route 128 Northwest 13,882,97-1,86,93 219, % (23,639) (177,658) $3.91 Route 128 South 16,159,293 61,72 2,142,216 22, % (66,67) (691,759) $25.46 Route 128 West 23,51, ,67 2,764, , % (447,596) (278,76) $37.2 ROUTE ,962, ,769 8,27, , % (562,377) (1,191,35) $3.13 Route 495 North 13,194,841-3,75,566 19, % 97, ,475 $2.24 Route 495 Northeast 7,538,395-1,39,877 26, % (5,814) 9,274 $2.24 Route 495 South 3,337, ,852 4, % (69,868) (78,281) $19.57 Route 495 West 11,189,789-1,847,647 47, % 65,58 33,687 $2.53 ROUTE ,26,584-6,998, , % 42,36 3,155 $2.25 SUBURBAN 113,257, 1,94,4 16,379,879 1,39, % (699,862) (1,49,239) $25.76 MARKET 193,749,453 3,367,21 2,987,828 1,768, % (67,812) (182,9) $33.14 ASKING RENT METHODOLOGY SOURCE: Co-Star, NAI Hunneman Commercial Company. PREPARED: June 218. LIZ BERTHELETTE Director of Research lberthelette@naihunneman.com 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.