Boston Posts Records In Negative Absorption, Sublease Listings In Q2
While locals expect Boston's office market to outperform other major metros during the coronavirus-induced recession, the second quarter showed it still experienced a sharp pullback in activity.
Data from Perry CRE shows that office leases fell 52% in the second quarter compared to Q1, as the worst health crisis in more than a century caused much of the world's economy to shut down.
Boston registered a negative absorption of 1.5M SF of office space in the second quarter, a record low, according to Colliers International. Vacancy rates soared by 2% to 10.6% from the first quarter, and the market's nearly 900K SF increase in sublease inventory since March 31 is one of the most significant gains Colliers has ever recorded.
"In the third and fourth quarter, we are hopeful that we will see better performance than we did in Q2. We would expect Q3 to be better than Q2 and Q4 to be better than Q3, simply because we are seeing a reopening of the economy," said Aaron Jodka, Colliers' managing director for research and client services in Boston.
Colliers pointed to several large tenant requirements — Facebook is on the market for 300K SF, and investment manager Eaton Vance is seeking 350K SF, it reported — as reasons for near-term optimism.
But in Q2, major tenants signed deals to renew their existing leases rather than take risks on new space. Jones Day renewed its lease at One High Street, Colliers reported, rather than follow through on a discussed move to One Post Office Square. Tenants have also been able to get more flexible leases: Instead of having to give a landlord a commitment of a decade or longer, property owners have been willing to sign deals of three years or fewer.
"Landlords have been hesitant to do short-term deals because they haven't needed to," Perry Senior Vice President Ashley Lane said in an interview. "Everybody is changing their minds."
While property owners have kept asking rents stable, they are offering other incentives, like boosting tenant improvement allowances.
For some Boston office users, the suburbs are starting to look like an attractive alternative in light of the pandemic. Jeremy Fried, a senior partner at Newton, Massachusetts, brokerage firm 128 CRE, has seen an increase in interest from executives eager to avoid Boston's brutal rush-hour traffic from various tech, life sciences and financial services firms, he said.
"[Companies] are considering alternative options to having everyone commute into corporate headquarters in a downtown, high-rise tower," Fried said.
Cummings Properties, a commercial real estate leasing company based in Woburn, is offering two months of free rent to entice businesses to locate satellite offices in the suburbs. Two small Boston law firms, Moris & O'Shea and Feener & Wehrli, recently signed leases with Cummings to relocate to Montvale Avenue in Stoneham, according to a Cummings spokesperson.
Boston office owners aren't necessarily in any rush for tenants to return either. They need to figure out the logistical challenges posed by social distancing, such as running elevators in multistory buildings. Boston office occupancy in June was about 10%, according to Colliers.
"It's been a big pause," Lane said. "None knows what they are doing yet. Everyone is waiting to see what everyone else is doing. It's going to be one, two, three quarters until we see the market movement coming out of COVID."
Even so, Jodka is optimistic about the office market's prospects.
"Despite the current conditions, there is stability in sight," he wrote in a recent report to clients. "Boston's economy is better diversified today than at any point in its history. The Boston area is full of innovative and creative firms and is a global center for healthcare and education. "