Q1 2018
Greater Boston GREATER BOSTON OFFICE Economic Indicators Q1 17 Q1 18 Boston MSA Employment 1.25M 1.26M Boston MSA Unemployment 3.2% 3.3% U.S. Unemployment 4.7% 4.1% Office Market Indicators Q1 17 Q1 18 Overall Vacancy 10.0% 10.0% YTD Net Absorption (sf) -45k 655k Under Construction (sf) 2.9M 3.5M Average Asking Rent* (psf) $37.89 $35.82 *Rental rates refl ect net asking $psf/year Overall Net Absorption/Overall Asking Rent 4-QTR TRAILING Economic Overview By next month, the U.S. economic expansion will have officially surpassed the 106-month record set in the 1960s taking second place to the tech boom of the 1990s. By next summer, it will become the longest growth period in US history. While all expansions eventually come to an end, the current outlook for this bull market is positive. Recessions happen for three reasons: when investors drive up the value of assets beyond reasonable levels; when too much debt is accumulated; and when shortages of labor and materials lead to higher inflation and interest rates. The last recession was a combination of all three which is why it was so detrimental. Here in Boston, the commercial real estate industry s response to economic growth has been conservative and measured. New development is moderate, corporate footprints (for the most part) are shrinking and while rents are elevated across most of the region, landlords are going out of their way to cater to tenants with building upgrades and onsite amenities. Because of this overall restraint, when the end of the expansion period does arrive, we do not anticipate the kind of cataclysmic impact that we experienced in 2000 and 2008. Market Overview In Boston, a string of large deals continued a trend started 18 months ago. WeWork took 100,000 square feet (sf) formerly occupied by Digitas at 33 Arch Street; Draftkings took 100,000 sf at 500 Boylston Street and ecommerce software developer, Salsify, committed to 55,000 sf at 101 Federal Street. Cengage leased 117,000 sf at the under-construction Pier 4 in the Seaport, while Rapid7 took 147,000 sf at Boston Properties new development, The Hub, at North Station. Overall Vacancy The Cambridge story of high rents and limited availability has been the same for over a decade and the first quarter of 2018 was no exception. Office vacancy now stands at 2.1%, while there is only 86,000 sf of vacant lab space in a 10-millionsquare-foot (msf) market a rate of just 0.9%. And in the suburbs, life science deals are still grabbing headlines. Homology Medicines took 67,000 sf at 1 Patriots Park in Bedford; Kala Pharmaceuticals leased 66,000 sf at Linx in Watertown; Concert Pharmaceuticals took 55,000 sf in Lexington; and Visterra will relocate from One Kendall Square in Cambridge to 275 Second Avenue in Waltham. Outlook First quarters in Boston are generally statistical snoozers, but this one was the strongest since 2006. Tight conditions in Cambridge, ongoing life science demand in the suburbs and over 1.1 msf scheduled to deliver fully occupied in Boston by the end of the year means that market fundamentals will remain strong for the foreseeable future. cushmanwakefield.com 2
Boston BOSTON MARKET Market Indicators Overall Vacancy 7.1% 7.4% YTD Net Absorption (sf) 352k 315k Avg Asking Rent (psf) $52.38 $56.32 Market Overview At 379,000 square feet (sf), first quarter absorption in Boston surpassed the entirety of 2017 which we declared the year of the big deal. In fact, this was Boston s strongest first quarter in 12 years. Vacancy declined 60 basis points (bps) while overall asking rents remained stable. Over 1.0 million square feet (msf) of new construction is scheduled to deliver by the end of 2018 all of which is speculative and 96% pre-leased. Inventory Breakdown Seaport 9.3 MSF Govt. Center/ North Station 3.4MSF Fenway Midtown 2.1 MSF 2.0 MSF Charlestown 1.7 MSF This will lead to at least another 1.1 msf of positive absorption Boston Consulting Group (205,000 sf) and Cengage (117,000 sf) will occupy 140 Northern Avenue; Alexion (150,000 sf) and PTC (250,000 sf) will occupy 121 Seaport Boulevard; Digitas and WeWork leased a collective 275,000 sf at 40 Water Street, while Rapid7 has committed to 147,000 sf at The Hub. Once these buildings deliver, positive absorption will hit statistics. This means 2018 is shaping up to be a banner year in Boston. South Station 2.9 MSF Back Bay 12.8MSF Financial District 30.9 MSF From an availability perspective, there are only six existing options for tenants in the market for over 100,000 sf of Class A space seven if you count WeWork s availability at 31 Saint James Avenue in the Back Bay. The lack of large blocks means conditions are growing increasingly more competitive. Which means that if you are a large tenant in the market, there is a significant likelihood that your first choice space could be leased out from under you during the negotiation process. A&B Historical Availabilities and Rents Class A Rent Class B Rent 25% $70 15% 0% 10% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Class A Availability Class B Availability 2018 $50 $20 Outlook A downtown broker recently suggested that we are on the cusp of a paradigm shift in the way tenants view space. Existing downtown Class A buildings are aging they are, on average, 35 years old. Many of them do not have the conveniences required by today s tenants. The focus on new construction and on-site amenities means many landlords of existing properties have stepped up their proverbial game to attract tenants food halls, roof decks, communal space with giant TVs and golf simulators are all perks landlords are using to attract tenants. Not surprisingly, tenants use these amenities. They brainstorm in the communal spaces, cold call in huddle rooms and have lunch meetings in the food halls essentially spending less time sitting at their desks. As companies rethink space configuration and the line between public and private workspaces begins to blur, we will be paying close attention to the impact on downtown Boston. cushmanwakefield.com 3
Cambridge CAMBRIDGE MARKET Office Market Indicators Overall Vacancy 2.5% 2.1% YTD Net Absorption (sf) 155k 42k Avg. Effective Rent (psf) $79.00 $85.00 Laboratory Market Indicators Overall Vacancy 1.7% 0.9% YTD Net Absorption (sf) -110k 158k Avg. Effective Rent (NNN) $83.00 $85.00 Cambridge Inventory 9.9 MSF 11.4 MSF Lab Office Market Overview In Cambridge, the first quarter of 2018 brought another chapter to the same story. At 2.1% and 0.9%, respectively, both office and lab vacancies are still essentially non-existent. Rents continue to climb effective rents are now in the mid- $80s per square foot (psf) for space in both the office (gross) and lab (NNN) markets. Higher-end space has climbed into the low-$90s. While rent escalation has certainly slowed, it still increased 2.0% quarter-over-quarter. As we have seen for the past 18 months, available space is quickly leased which means it rarely even comes on the market. Very few large availabilities exist and are solely concentrated in the Alewife/ West Cambridge submarket. While the suburban market (specifically the Inner Suburbs) has become an outlet for life science companies seeking rent relief, there is no shortage of well-funded companies waiting to backfill subsequent availabilities and new space in current Cambridge developments. Philips, which originally committed to 243,000 square feet (sf) at Cambridge Crossing in early January, has continued to take on space for its North American headquarters recently leasing an additional 100,000 sf at the new site in East Cambridge. All in, total new construction will grow the 21.5-msf Cambridge office and lab market by 16% over the next two years. Despite a lack of marketed availabilities, large deals are still being executed. Significant leases signed in the past 90 days include Beam Therapeutics 38,000-sf commitment at 26 Landsdowne Street, Cambridge Innovation Center s (CIC) 90,000-sf deal at 255 Main Street and Celgene s 20,000-sf lease at 200 Cambridgepark Drive. Direct Available vs. Sublease Available 2,000,000 Sublease Office Direct Office Sublease Lab Direct Lab 1,500,000 On the venture capital front, Cambridge received $2.9B in funding in 2017 the highest in recorded history. We are on course to shatter that figure, as $1.5B has already poured into Cambridge-headquartered companies since January 1, 2018. The presence of venture capital plays a large role in ongoing demand and rising rents. One property traded in the opening quarter of the year. 15 Story Street, a 4,600-sf office building, traded at $706 psf. As a basis of comparison, 14 sales transactions were executed in 2017. Square Feet 1,000,000 500,000 Outlook Not surprisingly, the ongoing influx of venture capital, proximity to MIT and the clustering of life science and highcredit technology companies means that Cambridge will remain the epicenter of greater Boston. 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 cushmanwakefield.com 4
Greater Boston Suburbs SUBURBAN MARKET Office Market Indicators Overall Vacancy 12.8% 13.5% YTD Net Absorption (sf) -69k 242k Avg. Asking Rent (psf) $25.83 $25.19 R&D Market Indicators Overall Vacancy 12.2% 11.3% YTD Net Absorption (sf) 111k 95k Avg. Asking Rent (NNN) $10.53 $11.67 Office and R&D Inventory 84.0 MSF 45.5 MSF Direct Availability vs. Sublease Availability 20,000,000 Sublease Office Direct Office Sublease R&D 15,000,000 Office R&D Direct R&D Market Overview For the past year, the suburban story has been about new construction and the influx of life science companies. Limited availability and continually rising rents in Cambridge have created an ongoing exodus of tenants in search of availability and affordability. These tenants (especially those in the life sciences) are finding new homes in the Inner Suburbs - an approximately 4.4- million-square-foot lab market predominantly clustered in Alewife/Watertown/ Brighton and Lexington/Waltham. This market has benefitted greatly from increasing demand by Cambridge life science companies seeking alternatives to the booming East Cambridge. As a testament to its urban proximity and economical rents, the Inner Suburbs have recently attracted companies like Mass Innovation Labs, C4 Therapeutics, Addgene, Visterra, Bioverative and Proteostasis - all relocating from East Cambridge. This demand has led to a vacancy rate of just over 9.0%. And the ongoing demand, paired with the availability of new construction, means rental rates for inner suburban life science space have increased 15% to 20% over the last 24 months - ranging from $45 to $65 psf NNN. Speculative lab construction is in full swing with King Street Properties 828 Winter Street in Waltham (144,000 sf). King Street also has a large-scale renovation underway at the former Cubist/Merck facility on Hayden Avenue in Lexington as well as a possible lab conversion of 33 New York Avenue, Framingham. All of these projects are experiencing significant tenant demand - King Street recently signed a 50,000-sf lease with Concert Pharmaceuticals on Hayden Avenue. Developers who understand the market are building on spec and are seeing excellent leasing results. The suburban office market is also performing well - absorbing more than 240,000 sf in the last three months. EMD Millipore recently moved into its 350,000-sf office at The Summit in Burlington and Astellas committed to 250,000 sf at 9 Technology Drive, Westborough. Square Feet 10,000,000 5,000,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Demand for both office and lab space continues, in large part, as a result of unprecedented venture capital funding and a cooperative IPO and M&A market. Capital is the life blood of many of these companies and there is abundant funding focused on Greater Boston particularly in the life science industry. Suburban companies have attracted more than $3.2B in capital since January 1, 2017. Outlook As Cambridge conditions become increasingly prohibitive, we expect suburban demand from life science companies to escalate. Cushman & Wakefield is currently tracking 1.4 msf of life science tenant demand for suburban space. cushmanwakefield.com 5
Greater Boston BOSTON BLDGS INVENTORY TOTA L AVAILABLE AVAILABILITY VACANT VACANCY YTD NET ABSORPTION UNDER CNSTR (OFFICE) ( A) Back Bay 53 12,757,624 1,760,596 13.8% 1,035,425 8.1% 155,362 0 $59.19 $62.68 Charlestown 15 1,773,336 75,338 4.2% 56,738 3.2% 3,781 0 $45.00 $45.00 Fenway 24 2,130,192 197,924 9.3% 122,705 5.8% -45,479 0 $41.66 N/A Financial District 125 30,921,319 4,043,073 13.1% 1,997,399 6.5% 85,410 365,000 $56.81 $59.08 Government Center/North Station 37 3,416,104 586,380 17.2% 383,782 11.2% 60,502 175,000 $52.72 $54.84 Midtown 21 2,012,109 382,213 19.0% 42,915 2.1% 49,196 0 $48.51 N/A Seaport 58 9,331,997 1,217,443 13.0% 718,502 7.7% 59,615 887,000 $52.59 $64.08 South Station 10 2,897,521 168,617 5.8% 68,450 2.4% 10,758 0 $50.71 $54.00 Boston Totals 343 65,240,202 8,431,584 12.9% 4,422,916 6.8% 379,145 1,427,000 $55.47 $59.68 CAMBRIDGE OFFICE BLDGS INVENTORY TOTA L AVAILABLE AVAILABILITY VACANT VACANCY YTD NET ABSORPTION UNDER CNSTR (OFFICE) ( A) Alewife/West Cambridge 14 1,493,792 362,958 24.3% 109,120 7.3% -19,131 223,668 $40.63 $49.26 East Cambridge 42 7,101,253 402,061 5.7% 104,165 1.5% 15,413 1,538,059 $77.31 $78.37 Mass Ave Corridor 33 2,771,345 36,295 1.3% 29,774 1.1% 46,074 0 $59.10 $59.67 Cambridge Office Totals 89 11,366,390 801,314 7.0% 243,059 2.1% 42,356 1,761,727 $54.73 $62.83 CAMBRIDGE LABORATORY BLDGS INVENTORY TOTA L AVAILABLE AVAILABILITY VACANT VACANCY YTD NET ABSORPTION UNDER CNSTR (LAB) ( A) Alewife/West Cambridge 11 744,535 52,827 7.1% 45,500 6.1% 19,805 0 $48.24** $N/A** East Cambridge 27 5,691,679 41,664 0.7% 36,854 0.6% 32,288 1,284,000 $78.17** $82.00** Mass Ave Corridor 32 3,505,885 26,171 0.7% 4,000 0.1% 105,595 0 $75.00** $N/A** Cambridge Key Lease Laboratory Transactions Totals Q4 2015 70 9,942,099 120,662 1.2% 86,354 0.9% 157,688 1,284,000 $54.28** $82.00** SUBURBS BLDGS INVENTORY TOTA L AVAILABLE AVAILABILITY VACANT VACANCY YTD NET ABSORPTION UNDER CNSTR (OFFICE) ( A) 128 Central 457 38,996,813 7,017,990 18.0% 4,412,933 11.3% 347,827 336,009 $32.32* $36.75* 128 North 155 15,145,651 2,011,497 13.3% 1,157,544 7.6% -21,933 365,000 $23.32* $26.59* 128 South 149 13,613,533 2,411,068 17.7% 1,364,694 10.0% -9,089 0 $22.02* $23.25* 3/24 South 32 2,099,834 237,484 11.3% 169,649 8.1% -28,440 0 $21.03* $22.64* Metrowest 66 4,205,976 965,231 22.9% 594,482 14.1% -25,295 0 $24.74* $26.19* 495 West 140 12,589,611 3,105,208 24.7% 1,791,857 14.2% 267,696 0 $19.56* $20.20* 495 North 274 32,127,683 8,287,572 25.8% 5,889,460 18.4% -269,777 0 $19.86* $22.25* 495 South 56 4,092,097 754,327 18.4% 467,019 11.4% -68,017 0 $20.09* $20.57* Inner Suburbs 64 6,639,499 836,236 12.6% 610,797 9.2% 144,036 215,152 $35.72* $36.77* Overall Suburban Totals 1,393 129,510,697 25,626,613 19.8% 16,468,435 12.7% 337,008 916,161 $25.19* $27.72* Suburban statistics include both offi ce and R&D unless otherwise specifi ed. *Average of offi ce rents only. **Lab rents quoted on NNN basis. Offi ce Asking Rents are Full Service (FS) cushmanwakefield.com 6
Greater Boston KEY LEASE TRANSACTIONS Q1 2018 PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET 120 Causeway Street, Boston 147,000 Rapid7 Relocation Gov t Center/North Station 140 Northern Avenue, Boston 117,000 Cengage Relocation Seaport 33 Arch Street, Boston 100,000 WeWork New Financial District 1 Patriots Park, Bedford 67,165 Homology Relocation 128 Central 490 Arsenal Way, Watertown 66,052 Kala Pharmaceuticals Relocation Inner Suburbs 101 Federal Street, Boston 53,912 Salsify Relocation Financial District KEY SALES TRANSACTIONS Q1 2018 PROPERTY SF SELLER/BUYER PRICE/$PSF SUBMARKET 1895 JW Foster Boulevard & 104 Royall Street, Canton 680,000 Reebok Intl/Spear Street $88M/$129 128 South 51 & 95 Sawyer Road, Waltham 296,838 Equus Capital/Albany Road $47.5M/$160 128 Central 101 Station Drive, Westwood 208,134 National Dev/AEW Capital $53.1M/$255 128 South 40 Court Street, Boston 110,005 Stars Invst/Exan Capital Partners $54M/$491 Financial District Ashley E. Lane Director, Research ashley.lane@cushwake.com Matthew B. Smith Senior Research Analyst matthew.smith@cushwake.com Travis A. Crocker Research Analyst travis.crocker@cushwake.com About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm with 45,000 employees in more than 70 countries helping occupiers and investors optimize the value of their real estate. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter. Copyright 2018 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. cushmanwakefield.com 7