RESEARCH 3Q 2018 BOSTON OFFICE MARKET ABSORPTION HITS ITS HIGHEST MARK OF 2018 SO FAR The Greater Boston office market witnessed more balanced growth as the suburban submarkets recorded their first absorption gain of the year. Boston s Central Business District (CBD) continues to fire on all cylinders, with robust leasing activity fueling both absorption and rent gains complemented by a recent upswing in investment activity and record-level pricing. With nearly all new construction in the CBD spoken for, a new wave of projects could be on the horizon. In Cambridge, net absorption was also positive, driving down vacancy in both East and Mid Cambridge to below 2.0%. The shake-up from Takeda s acquisition of Shire recently entailed an announcement that Shire will halt its buildout of 500 Kendall Street. However, the space could remain under the Takeda-Shire umbrella as Takeda also announced that it will move its U.S. headquarters to the area. All told, the wider market combined for 373,400 square feet of net absorption, the highest quarterly total so far in 2018. The market total vacancy rate closed the quarter at 12.0%. STRING OF LARGE COMMITMENTS IN THE CBD CONTINUES Boston s CBD inventory grew again this quarter with the completion of Pier 4 in the Seaport District on the heels of 121 Seaport s delivery a quarter earlier. The delivery of pre-committed product continued to propel the market s net absorption, which at nearly 738,000 square feet year-to-date has surpassed the levels recorded in both 2016 and 2017. The CBD saw its largest leasing transaction so far this year when Oath, Inc., a subsidiary of Verizon, inked a 440,000-square-foot lease to anchor the office tower component of Boston Properties The Hub on Causeway at North Station. The spell of large headquarters relocations and office expansions in the CBD continues to strengthen market fundamentals. It is also putting pressure on larger users with upcoming expirations. The evaporation of large blocks of space in the market due to inward migration and organic growth of tech companies is the story Downtown. Whereas there were more than 20 large blocks of space just over a year ago, tenants requiring 100,000 square feet or more now have just six options in the city. Oath, Inc. s recent commitment removes another new construction opportunity and with projects due to deliver this year and next essentially spoken for, there is a growing need as well as clear demand for more new construction. Providing some relief is the John Hancock/Manulife consolidation in the Back Bay that is freeing up more than 500,000 square feet in the Seaport District. Built in 2004, the building is already capturing the attention of CURRENT CONDITIONS The urban and suburban markets both posted healthy positive net absorption, combine for 373,400 square feet. The CBD sees its largest lease year-to-date with Oath, Inc. s commitment at The Hub on Causeway. Tenants continue to lease new construction to satisfy their requirements across the market. Strong fundamentals in the urban core driving rent growth; improved momentum in the suburbs also pushing rents in most submarkets. MARKET ANALYSIS Asking Rent and Vacancy $40 $32 $24 $16 $8 $0 0% Net Absorption (SF, Millions) 1.5 1.0 0.5 0.0-0.5 Average Asking Rent (Price/SF) Vacancy (%) -1.0 MARKET SUMMARY Current Quarter Prior Quarter Year Ago Period 12 Month Forecast Total Inventory 183.8 MSF 182.8 MSF 181.3 MSF Vacancy Rate 12.0% 12.1% 11.8% Quarterly Net Absorption 373,430 338,103-57,852 Average Asking Rent $34.89 $33.63 $34.30 Under Construction 2.5 MSF 2.7 MSF 3.4 MSF Deliveries 372,372 579,103 0 20% 16% 12% 8% 4% NEWMARK KNIGHT FRANK 2018 RESEARCH 1
large users. Other notable activity included Putnam Investments commencing its relocation to 100 Federal Street, and a pair of law firms committing to more than 140,000 square feet at 125 High Street. While all of this large tenant activity is making headlines, it is important to note that Boston remains a small tenant market. The evaporation of large blocks is putting pressure on tenants of all sizes. As a result, asking rents are likely to experience a profound spike in the remaining months of 2018 and into next year. VACANCY FALLS BELOW 2% IN EAST AND MID CAMBRIDGE, MORE NEW CONSTRUCTION LEASES The highly landlord-favorable Cambridge office market again saw vacancies trend lower and asking rates increase on the back of its market-leading fundamentals. The three Cambridge submarkets combined for moderate positive absorption, putting the year-to-date total at 155,100 square feet. Overall vacancy fell to 2.6%, with both East and Mid Cambridge recording vacancy below 2.0%. Notably, the average asking rent for Class A space in East Cambridge eclipsed $90.00/SF. Class B rent growth has been nearly as aggressive, while a spillover effect continues in Mid and West Cambridge, where Class A asking rents are now averaging above $50.00/SF. The Boeing Company had the quarter s largest lease after signing for roughly 100,000 square feet of new construction at 314 Main Street at MIT at Kendall Square. Recent news surrounding Shire s construction halt on its build-out at 500 Kendall Street has caused some speculation that a large-block opportunity may come back to the market. However, it was announced around the same time that Takeda, which is in the process of acquiring Shire, will relocate its U.S. headquarters from Chicago to the Boston area. It remains to be seen what the exact fallout will be, but given Takeda s plans to move up to 1,000 employees, that space could very well remain in the hands of the combined firm. SUBURBS POST FIRST POSITIVE NET ABSORPTION IN 2018 After recording negative absorption in three of the past four quarters, the suburban markets combined for 102,100 square feet of growth. Leading the way was Allegro Microsystems, which relocated its offices to Marlborough, while Collegium Pharmaceuticals occupied its new, 51,000-square-foot office in Stoughton. Several existing tenants leased expansion premises, including Aetna, which took another 15,000 square feet at 77 South Bedford Street in Burlington, while Brigham and Women s Physicians added a new location in Needham. Karyopharm Therapeutics expanded for a second time in 2018, having more than doubled its footprint to 98,500 square feet at Wells Park in Newton. Sun Life successfully leased a combined 60,000 square feet at its campus in Wellesley, led by Morgan Stanley s 42,500-square-foot lease. The lease-up of new construction also continues to gain momentum. Hobbs Brook s renovation at 81 Wyman Street secured a single tenant in Cambridge Savings Bank. The bank leased the 76,000- square-foot building as it plans to relocate the majority of its operations out of Harvard Square. After securing its first tenant in Deciphera Pharmaceuticals last quarter, the Post at 200 Smith Street is reportedly in negotiations with several other tenants for the majority of its remaining available space. The consolidation and relocation of some corporate owner users is putting some pressure on the market in terms of added vacancy, but it is also providing the opportunity for investors to make some value-add plays. Hilco Real Estate recently acquired a property previously owned by Meditech in Norwood and is able to expand the building to accommodate a larger tenant. Hilco also recently purchased CenterPoint in Waltham, which has a sizable upcoming creative office availability when Simpson Gumpertz & Heger relocates to new construction next year. Rubenstein Partners was the seller, while Saracen Properties retained its ownership interest in the asset. CAPITAL MARKETS Recent trades in the CBD s Class A market have reshuffled ownership in some of the most prominent and recently constructed buildings. Tishman Speyer s Pier 4, which delivered this quarter and hit the sales market the prior quarter, has already landed a buyer. Los Angelesbased CommonWealth Partners paid $450 million, or roughly $1,208/ SF, for the 372,372-square-foot building anchored by Boston Consulting Group and Cengage. This is a new high-water mark for an office building in the Seaport District. Three other assets 53 State Street, 200 State Street and 121 Seaport have also secured buyers and investor interest remains strong. Moving into the Urban Edge, Boylston Properties was able to capitalize on robust leasing and market fundamentals at its recently completed LINX project in Watertown. The fully occupied building traded to Clarion Partners for $157.6 million, or $852/SF. Office investment has remained active in the Route 128 markets as well, with many sizable portfolios and single buildings hitting the sales market. One of the more notable was MetLife s acquisition of 89 A Street in Needham, the headquarters of SharkNinja, from Normandy and Westbrook. The fully leased asset sold for $96.5 million following ownership s successful repositioning of the formerly vacant single-story flex building. LOOKING FORWARD Office demand throughout Greater Boston continues to reflect the region s diverse, blossoming economy driven by its talent-rich workforce. The flow of headquarters relocations and large-scale expansions in the urban core, the taking down of new construction across the metro and steadfast activity in the suburbs have put the market on a path to an eighth straight year of expansion. Several large tenant opportunities have materialized as of late that could inflate vacancy over the short-term, but the market could hardly be in a better position to digest any increase in vacancy. NEWMARK KNIGHT FRANK 2018 RESEARCH 2
CONSTRUCTION AND DELIVERIES Square Feet, Millions OFFICE INVESTMENT Sales Volume (Billions) and Average Price/SF 4.0 3.2 2.4 1.6 0.8 $5 $4 $3 $2 $1 $750 $600 $450 $300 $150 0.0 $0 $0 Under Construction Deliveries Sales Volume Average Price/SF SELECT LEASE TRANSACTIONS Tenant Building / Address Submarket Type Square Feet Oath, Inc. (Verizon) 100 Causeway Street, Boston North Station Direct 440,000 The Boeing Company 314 Main Street, Cambridge East Cambridge Direct 100,000 Burns & Levinson LLP 125 High Street, Boston Downtown Direct 103,000 Commonwealth Care 500 Washington Street, Boston Midtown Direct 82,400 Cambridge Savings Bank 81 Wyman Street, Waltham West - Route 128 Direct 76,000 Brigham and Women s Physicians 254 2nd Avenue, Needham West - Route 128 Direct 47,000 Morgan Stanley 121 Worcester Street, Wellesley West - Route 128 Direct 42,500 Hogan Lovells 125 High Street, Boston Downtown Direct 40,400 Infraredx 28 Crosby Drive, Bedford North - Route 128 Direct 40,200 Geode Capital Management 100 Summer Street, Boston Downtown Direct 37,400 Fresenius Medical Care 25 Hartwell Avenue, Lexington West - Route 128 Direct 33,300 Ipsen Biopharmaceuticals 1 Main Street, Cambridge East Cambridge Direct 31,600 SELECT SALE TRANSACTIONS Building / Address Submarket Sale Price Price/SF Square Feet Pier 4 / 140 Northern Avenue, Boston Seaport District $450,000,000 $1,208 372,372 LINX / 490 Arsenal Street, Watertown Urban Edge West $157,600,000 $852 185,015 89 A Street, Needham West - Route 128 $96,500,000 $390 247,542 10 Fawcett Street, Cambridge West Cambridge $59,650,000 $420 142,096 NEWMARK KNIGHT FRANK 2018 RESEARCH 3
SUBMARKET STATISTICS Total Inventory Under Construction Total Vacancy Rate Qtr Absorption YTD Absorption Class A Asking Rent (Price/SF) Class B Asking Rent (Price/SF) Total Asking Rent (Price/SF) Back Bay 13,562,325-8.1% 70,723 273,657 $64.39 $50.17 $61.19 Downtown 32,573,278 331,000 8.6% -6,574-187,135 $61.43 $48.51 $58.70 Government Center 1,796,457-14.0% - -4,800 $55.00 $53.17 $53.57 Midtown 2,285,034-11.2% 5,606 35,171 - $48.67 $48.08 North Station 2,343,179 181,000 3.6% 3,175 51,613 - $46.28 $46.28 Seaport District 11,137,154 97,000 9.7% 226,287 648,493 $75.72 $50.09 $60.68 South Station 2,948,242-4.9% -7,567-51,591 $50.00 $46.91 $46.16 CBD Total 66,645,669 609,000 8.6% 264,168 737,926 $63.73 $49.50 $58.36 East Cambridge 5,714,909 889,216 1.0% 57,904 169,779 $90.22 $77.93 $79.74 Mid Cambridge 2,485,319-1.9% 2,420 61,546 $71.47 $68.15 $64.11 West Cambridge 1,730,789-8.5% -53,171-76,238 $53.80 $47.24 $51.86 Cambridge Total 9,931,017 889,216 2.6% 7,153 155,087 $67.09 $67.79 $63.97 Urban Edge 14,156,879 211,640 5.7% 193,737 80,603 $38.41 $35.16 $36.65 North - Route 128 22,018,012 145,000 12.9% 3,531-15,886 $31.79 $21.93 $26.22 South - Route 128 13,225,455-15.6% 33,457-598,531 $28.58 $20.45 $25.38 West - Route 128 21,925,199 533,000 13.4% -102,649 51,489 $39.10 $30.80 $36.30 North - Route 495 18,899,332 58,000 21.2% 34,010 215,564 $22.07 $18.01 $19.93 South - Route 495 3,257,368 61,702 10.1% 51,315 62,513 $20.51 $20.18 $20.35 West - Route 495 9,665,415-25.7% -119,091-139,846 $21.61 $18.77 $19.76 Framingham/Natick 4,047,181-16.2% 7,799-129,841 $28.14 $19.39 $25.02 Suburban Total 107,194,841 1,009,342 15.1% 102,109-473,935 $29.09 $21.44 $25.34 Market 183,771,527 2,507,558 12.0% 373,430 419,078 $40.39 $28.38 $34.89 NEWMARK KNIGHT FRANK 2018 RESEARCH 4
ECONOMIC CONDITIONS Boston continues to boast one of the lowest unemployment rates in the nation among large metros, one that has stood below 3.5% for 14 consecutive months. At 3.3% as of July, the local rate has been below the national rate by an average of 0.8 percentage points in 2018 so far. On a national level, the unemployment rate slipped below 4.0% for a second consecutive month as of August and has been below that mark in four of the past five months. Sound economic fundamentals will undoubtedly keep unemployment levels low as 2018 winds down. Following a brief period of tapered employment growth into the early months of 2018, the Boston metro has witnessed more accelerated growth over the past few months. Preliminary figures show a 2.3% year-over-year increase in employment, or the addition of 62,200 jobs. This compares to 24,100 jobs added during the previous 12-month period. Employment gains were most profound in the construction sector, which realized a 6.4% increase, followed by 4.8% growth in the business and professional services sector. The financial activities sector was the sole net loser of jobs, seeing a 0.7% dip in employment for the 12 months ended July. Inflation on both a national and local level has been trending upward, with the Boston metro CPI hovering above the national CPI since 2017. UNEMPLOYMENT RATE Seasonally Adjusted 13% 10% 8% 5% 3% 0% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 United States Boston CONSUMER PRICE INDEX (CPI) All Items, 12-Month % Change, Not Seasonally Adjusted 4% 3% 2% 1% 0% -1% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 United States Boston Source: U.S. Bureau of Labor Statistics, Boston-Cambridge-Newton, MA-NH EMPLOYMENT BY INDUSTRY Boston Metro, July 2018, Not Seasonally Adjusted 6.9% 10.3% 4.5% 3.9%2.9% 6.6% 10.6% 15.2% 20.8% 18.3% PAYROLL EMPLOYMENT Health/Education Total Nonfarm, 12-Month % Change, Not Seasonally Adjusted EMPLOYMENT GROWTH BY INDUSTRY Business & Professional Trade/Transportation/Utilities Leisure/Hospitality Government Manufacturing Financial Activities Construction Other Services Information 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 United States Boston July 2018, 12-Month % Change, Not Seasonally Adjusted Total Construction Business & Professional Leisure/Hospitality Manufacturing Health/Education Other Services Information Trade/Transportation/Utilities Government Financial Activities -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% NEWMARK KNIGHT FRANK 2018 RESEARCH 5
JONATHAN SULLIVAN Research Manager 617.863.8421 jonathan.sullivan@ngkf.com DAN CARUCCI Senior Research Analyst 617.863.8425 dan.carucci@ngkf.com MICHAEL MALINCONICO Research Analyst 617.863.8428 michael.malinconico@ngkf.com Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Knight Frank (NKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient s choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains. NEWMARK KNIGHT FRANK 2018 RESEARCH 6