MarketWatch Q1 2016
Greater Boston GREATER BOSTON OFFICE Economic Indicators Q1 15 Q1 16 MA Employment 3.40M 3.41M MA Unemployment 5.1% 4.5% U.S. Unemployment 5.6% 4.9% Office Market Indicators Overall Vacancy 10.5% 9.6% Net Absorption (YTD) 675K (689)K Under Construction 4.54M 3.30M Average Asking Rent (Gross) $32.01 $32.62 Economic Overview In commercial real estate, we tend to focus on job growth as an indicator of demand for office space. Historically, it s been a logical association. But as we all know by now, an evolving workplace landscape including shared work spaces, remote work policies and densification means we can t just rely on employment indicators. This is especially true in greater Boston - where technology and life sciences get high billing. So while we certainly acknowledge macroeconomics, we ve learned that our own experiences in the broker business are more valuable when it comes to anticipating supply and demand. So far, this approach is serving us well. Based on the tenants we ve seen in the market for space this quarter, demand is solid and stable. Traditional users continue to consolidate which is balanced by increasing demand from the innovation sector. Market Overview In Boston, rents are approaching historical highs - we ve seen some proposals starting in the mid-$80s. As a result, some tenants are beginning to consider trading prestigious addresses for more reasonably priced space. In Cambridge, the first quarter of 2016 was more of the same continually rising rents and virtually no availability. First quarter market movement is largely attributed to the delivery of 300 Mass Ave (250,000 SF) which was leased to Millennium/Takeda Pharmaceuticals. And in the suburbs, where new construction is still the headliner, we are keeping an eye on life science activity. Shire s footprint continues to grow in Lexington and, at last count, there were at least four Cambridge mega-tenants considering space in 128 Central. Rents are significantly lower than in Cambridge and tenants get urban amenities with suburban convenience at a fraction of Cambridge prices. Outlook With few exceptions, the first quarter of the year is generally a statistical snoozer at least in Boston. But as we all know by now, there is always a story behind the numbers. When a blockbuster lease is signed or a new building delivers, it s not a result of activity in that given quarter it s the outcome of months (and sometimes years) of negotiation. Based on what we see in the pipeline, we expect greater Boston s real estate market to remain strong for the foreseeable future. cushmanwakefield.com 2
BOSTON MARKET Market Indicators Inventory Breakdown Overall Vacancy 8.6% 7.0% Net Absorption (YTD) (119)K (363)K Avg Effective Rent (Gross) $44.76 $47.14 Fenway Midtown 1.9 MSF 2.0 MSF 3.0% 3.3% Govt. Center/ North Station 3.3MSF 5.0% Seaport 8.3 MSF 12.5% South Station 2.9 MSF 4.6% Back Bay 12.3MSF 19.7% Charlestown 1.7 MSF 2.8% Class A&B Historical Availabilities and Rents Financial District 30.9 MSF 49.0% 25% $70 Market Overview In downtown Boston, the year began with just over 350,000 square feet of negative absorption most of which was expected: Natixis former space at 399 Boylston Street came online this quarter. The firm will vacate 140,000 SF and move into 127,000 SF at 888 Boylston Street later this year. Houghton Mifflin s space at 500 Bolyston Street (148,000 SF) also hit the market ahead of its move to 125 High Street. And at 222 Berkeley Street, 175,000 SF became available offices that will be vacated by both Houghton Mifflin and Liberty Mutual. State Street also listed 135,000 SF for sublease at Copley Place. This availability was planned on the heels of its relocation to the Seaport we re told it was not a result of recently announced layoffs. Despite all of this space hitting the market this quarter, overall vacancy stands at a scant 7.0% - down 1.6 percentage points in the past year. A micromarket that s been tightening recently is mid-rise (floors 13 to 22) class A space specifically in Back Bay. In the past year, vacancy has shrunk 3.4 percentage points to just over 8.0%. Accordingly, rents in this micromarket are beginning to jump a recent proposal for mid-rise offices quoted asking rents in the low $80s PSF. Market Highlights 15% 10% $50 WeWork continues to grow. The company took 112,000 SF at 31 St. James Ave in Back Bay this quarter bringing the company s total Boston footprint to nearly 300,000 SF. WeWork is also in the market for another 75,000 to 100,000 SF in the Seaport. Class A Rent Class B Rent 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Class A Availability Class B Availability Q1 2016 $20 Boston s largest deal this quarter was Optum, Inc s (a branch of United Health Group) lease at 1325 Boylston Street in the Fenway. The company is consolidating its Brighton, Waltham and Wakefield operations into 125,000 SF in JP Morgan s spec building the Van Ness. It s now common knowledge, but we would be remiss if we failed to mention General Electric s short-term sublease of Bullhorn s space at 33-41 Farnworth Street in the Seaport. GE s new permanent headquarters will be on Necco Street - also in the Seaport. cushmanwakefield.com 3
CAMBRIDGE MARKET Office Market Indicators Overall Vacancy 6.9% 4.7% Net Absorption (YTD) 86K 185K Avg. Effective Rent (Gross) $62.36 $72.69 Laboratory Market Indicators Overall Vacancy 6.4% 1.1% Net Absorption (YTD) 181K 60K Avg. Effective Rent (NNN) $58.12 $64.01 Cambridge Inventory 9.5 MSF 11.5 MSF Lab Office Office Market Overview At 4.7%, office vacancy in Cambridge is approaching historical lows. In both East Cambridge and the Mass. Avenue Corridor, vacancy is under 4% (3.8% and 1.6% respectively). As a result of limited availability, leasing activity has slowed but absorption is still positive at 185,508 SF. The delivery of 300 Massachusetts Avenue added 250,000 SF to inventory, but being 100% preleased to Millennium/ Takeda did little to act as a relief valve in the market. And with the majority of current construction projects preleased to the likes of Bristol Myers Squibb, bluebird bio and Genzyme, an addition of vacant new supply is not on the horizon. Large tenants in the market for an entire building now have only six development sites from which to choose. In the past year, East Cambridge rents have climbed 9.3% (to $68.19); Mass Ave Corridor rents are up 9% (to $45.25); and Alewife/West Cambridge rents are up 2.3% (to $43.10). While these are average, to our knowledge, at least one major deal is being negotiated in the low to mid-$90 s in East Cambridge. Laboratory Market Overview In the past year, East Cambridge lab rents have climbed 7.7% (to $67.70 NNN); Mass Ave Corridor rents are up 16% (to $68.16 NNN); and Alewife/West Cambridge rents are up 40% (to $41.21 NNN). Direct Available Vs. Sublease vs. Available Sublease Available 2,000,000 Sublease Office Direct Office Sublease Lab Direct Lab As a result of ongoing demand, we are beginning to see office and industrial product converted to laboratory. At 75 Moulton Street (previously industrial), 36,000 SF was recently converted - and is priced in the mid-$40 s NNN. Fifty Hampshire Street (previously office) is also being converted to lab. Square Feet 1,500,000 1,000,000 500,000 Blackstone s (BX) acquisition of BioMed Realty (BMR) added 9 buildings to its Cambridge portfolio and put the private equity giant in a tie with Alexandria Real Estate (ARE) as the second largest landlord of existing space in Cambridge (each own 11.5% of inventory). MIT still tops the list with 13.1% of market share. 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 cushmanwakefield.com 4
SUBURBAN MARKET Office Market Indicators Overall Vacancy 12.6% 12.3% Net Absorption (YTD) 707K (510)K Avg. Effective Rent (Gross) $26.62 $34.72 R&D Market Indicators Overall Vacancy 15.5% 13.7% Net Absorption (YTD) (168)K (510)K Avg. Effective Rent (NNN) $14.19 $14.65 Office and R&D Inventory 81.7 MSF 46.2 MSF Office R&D Market Overview In the suburbs, new construction - specifically mixed-use continues to be the headlining story, though statistically speaking, the market was quiet this quarter. As tenants space needs grow more sophisticated, older suburban product is becoming obsolete. Instead buildto-suits are the desired options - especially for larger companies. Construction at 400 Wheeler Road, Burlington, also known as The Summit, is well under way. EMD Millipore has comitted to the project and plans to consolidate its multiple suburban offices in the summer of 2017. It is also getting harder to ignore growing demand from life science companies for suburban space. One of the highest profile deals in the suburbs this quarter was Shire s 177,000 SF lease of a former Cubist Pharmaceuticals building on Hayden Avenue in Lexington. In the past three years, Shire has acquired at least 12 companies for more than $50B. As its acquisition spree continues, we expect its demand for space in 128 Central will as well. We know that Shire is already back in the market for 150,000 SF of office space. On a side note, a large suburban landlord recently told us that of the 15 tenants touring the suburbs for more than 50,000 SF, more than 30% were life science companies. As a result, some buildings on Hartwell and Hayden Avenues in Lexington are slated for conversion to lab space. Outlook Direct Availability vs. Sublease Availability 20,000,000 Sublease Office Direct Office Sublease R&D 15,000,000 Direct R&D In the past twelve months, 15% of suburban office inventory has traded hands. And nearly 10% of those sales commanded close to $500 PSF. As a result, new owners are underwriting high rents to justify their investments. Smaller tenants (for whom a BTS does not make sense) are declining to pay these prices and instead relocating into the city. The only way to thwart this migration is for landlords to be bold and pull back rents. Square Feet 10,000,000 5,000,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Additionally, construction costs are rising. So in the past when a landlord offered $50 PSF in tenant improvements, it was a reasonable deal. Now that a comparable buildout requires $80 PSF, tenants are uninterested in making up the difference. As long as suburban landlords continue to price their buildings like downtown assets, many tenants will continue to opt for actual downtown space. cushmanwakefield.com 5
BOSTON CNSTR AVERAGE AVERAGE INVENTORY AVAILABILITY VACANT BLDGS AVAILABLE ABSORPTION DELIVERIES ASKING RENT ASKING RENT (OFFICE) (CLASS A) Back Bay 52 12,332,624 2,234,057 18.1% 991,936 8.0% (412,846) 0 $54.85 $57.91 Charlestown 14 1,748,336 308,343 17.6% 176,298 10.1% 20,566 0 $30.02 $34.00 Fenway 24 2,130,192 201,736 9.5% 69,412 3.3% 127,386 0 $33.75 N/A Financial District 124 30,081,701 4,068,360 13.5% 2,137,274 7.1% (29,426) 0 $48.47 $50.31 Government Center/North Station 35 3,307,104 628,985 19.0% 187,960 5.7% (30,850) 0 $43.17 $48.33 Midtown 21 2,012,109 186,600 9.3% 109,548 5.4% (111,409) 0 $39.04 N/A Seaport 52 8,436,369 1,116,283 13.2% 657,394 7.8% (25,245) 0 $41.35 $57.52 South Station 10 2,897,521 135,990 4.7% 95,062 3.3% (2,173) 0 $37.87 $57.00 Totals 332 62,945,956 8,880,354 14.1% 4,424,884 7.0% (363,997) 0 $47.51 $52.41 CAMBRIDGE OFFICE CNSTR AVERAGE AVERAGE INVENTORY AVAILABILITY VACANT BLDGS AVAILABLE ABSORPTION DELIVERIES ASKING RENT ASKING RENT (OFFICE) (CLASS A) Alewife/West Cambridge 16 1,851,983 367,759 19.9% 234,913 12.7% 9,272 0 $43.10 $43.43 East Cambridge 43 6,938,453 390,830 5.6% 260,591 3.8% 42,109 0 $68.19 $69.05 Mass Ave Corridor 32 2,696,345 170,403 6.3% 44,190 1.6% 134,127 250,000 $45.25 $55.00 Office Totals 91 11,486,781 928,992 8.1% 539,694 4.7% 185,508 250,000 $55.46 $56.11 CAMBRIDGE LABORATORY BLDGS INVENTORY AVAILABILITY AVAILABLE VACANT Alewife/West Cambridge 10 521,297 48,000 9.2% 10,000 1.9% 30,125 0 $41.21** N/A East Cambridge 26 5,496,755 67,788 1.2% 19,686 0.4% 14,892 0 $67.70** $70.00** Mass Ave Corridor 32 3,505,856 197,289 5.6% 76,959 2.2% 15,020 0 $68.16** $73.96** Laboratory Key Lease Totals Transactions Q4 2015 68 9,523,910 313,077 3.3% 106,645 1.1% 60,037 0 $62.74** $73.41** ABSORPTION CNSTR DELIVERIES AVERAGE ASKING RENT (LAB) AVERAGE ASKING RENT (CLASS A) SUBURBS CNSTR AVERAGE AVERAGE INVENTORY AVAILABILITY VACANT BLDGS AVAILABLE ABSORPTION DELIVERIES ASKING RENT ASKING RENT (OFFICE) (CLASS A) 128 Central 450 37,422,336 6,964,158 18.6% 3,718,985 9.9% (304,152) 286,000 $31.75* $36.47* 128 North 158 15,380,651 2,832,727 18.4% 1,392,059 9.1% (95,548) 0 $21.88* $25.53* 128 South 148 13,722,142 2,657,233 19.4% 1,780,608 13.0% 31,221 0 $21.28* $22.50* 3/24 South 32 1,902,564 255,184 13.4% 179,888 9.5% (11,461) 0 $20.29* $22.53* Metrowest 66 4,200,499 807,304 19.2% 515,458 12.3% (82,270) 0 $26.07* $27.45* 495 West 142 12,328,178 3,340,601 27.1% 1,930,902 15.7% (238,706) 0 $18.81* $19.92* 495 North 282 33,008,601 10,384,348 31.5% 6,025,470 18.3% (66,905) 0 $19.21* $21.09* 495 South 55 4,044,431 706,405 17.5% 464,460 11.5% (92,374) 0 $18.74* $18.73* Inner Suburbs 60 5,970,560 764,710 12.8% 421,540 7.1% 28,540 0 $28.33* $28.00* Overall Totals 1,393 127,979,962 28,712,670 22.4% 16,429,370 12.8% (831,655) 286,000 $23.67* $26.53* 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) Copyright 2016 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 6
KEY LEASE TRANSACTIONS Q1 2016 PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET 50 Binney Street 267,000 Genzyme Relocation East Cambridge 45-55 Hayden Avenue 177,000 Shire New 128 Central 320 Bent Street 105,000 Momenta Pharmaceuticals Relocation East Cambridge 65 Network Drive 91,791 Veracode Renew/Expansion 128 Central 500 Rutherford Avenue 62,287 Symbiota Relocation Charlestown 55 Network Drive 44,241 EXA Relocation 128 Central 800 Boylston Street 37,586 Partners in Healthcare Relocation Back Bay KEY SALES TRANSACTIONS Q1 2016 PLACE MAP HERE PROPERTY SF SELLER/BUYER PRICE SUBMARKET 160 N Washington Street 234,643 Beal Co/Metzler RE $150.0M Govt Center/North Station 415 Main Street 231,000 Boston Properties/MIT $105.4M East Cambridge 10 Milk Street 203,209 Synergy RE/Goldman Sachs $94.5M Financial District 45-55 Hayden Avenue 190,080 Cubist/Merck & Co $94.4M 128 Central 1 Hampshire Street 104,150 Draper Labs/Schlumberger $89.5M East Cambridge Ashley E. Lane Vice President, Research Ashley.Lane@cushwake.com About Cushman & Wakefield Cushman & Wakefield is a global leader in commercial real estate services, helping clients transform the way people work, shop, and live. The firm s 43,000 employees in more than 60 countries provide deep local and global insights that create significant value for occupiers and investors around the world. Cushman & Wakefield is among the largest commercial real estate services firms in the world with revenues of $5 billion across core services of agency leasing, asset services, capital markets, facilities services (branded C&W Services), global occupier services, investment management (branded DTZ Investors), tenant representation and valuations & advisory. To learn more, visit www.cushmanwakefield.com or follow @Cushwake on Twitter. Matthew B. Smith Senior Research Analyst Matthew.Smith@cushwake.com Evianne Netherwood- Schwesig Research Analyst Evianne.Netherwood-Schwesig@ cushwake.com Tel: +1 617 279 4555 Fax: +1 617 279 4556 cushmanwakefield.com 7