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Boston Lab Demand Reaches New Highs — Again — Boosting Lagging Office Market

Boston's already red-hot life sciences market picked up even more steam in Q4, with leasing velocity setting a new record, and the lab boom is also helping the office market recover from its pandemic doldrums. 

The view of Downtown Boston from the Seaport Boulevard bridge.

Leasing velocity in the Boston-area lab market totaled a record-high 2.4M SF last quarter, according to CBRE's Q4 report, and the market experienced 1.9M SF of positive net absorption during the quarter. 

"What really struck me about the 2.4M SF is the profile of the tenants," CBRE Executive Vice President Eric Smith said. "The numbers were not dominated by any one large pharmaceutical company taking down a big block of space, but really well-rounded demand from a variety of early to mid-stage companies, and certainly a couple well-established pharma companies and institutes that grew incrementally."

Among the largest deals of the quarter was a 149K SF lease with Prime Medicine at the redevelopment of the Sears building at 60 First St. in East Cambridge. Also in East Cambridge, a group of Flagship Pioneering-backed life sciences companies leased 390K SF at Alexandria Real Estate Equities' One Rogers Street and One Charles Park complex — which it acquired for more than $800M last year.

Smith said he was also struck by the wide geographic distribution of the demand last quarter. In Waltham, Elevate Bio leased 155K SF at 225 Wyman St., according to CBRE. And in Boston's Fenway neighborhood, The Wyss Institute leased 107K SF at 201 Brookline Ave. 

"It was not only well-rounded demand in terms of the size of the companies committing to the space, but the demand in terms of geography was well-rounded too," Smith said. "Cambridge, Boston and [Route] 128 all experienced banner years."

A graph from CBRE's report showing the strength of Boston-area lab demand in 2021 compared to prior years.

The Boston area's surging life sciences demand last quarter was driven in large part by venture capital funding. Of the 50 new leases CBRE tracked in the fourth quarter, 18 of the tenants closed a VC funding round sometime last year. That group raised a combined $2.5B and leased over 1M SF last quarter, according to CBRE. 

Massachusetts-based life sciences companies raised a record $15B in venture capital last year, part of the state's record $39B in total venture capital funding, according to Colliers data compiled from Crunchbase. 

"A lot of life science companies are dependent on venture capital funding to help fund research, hires and leases for real estate," Colliers Research Director Jeff Myers said. "That’s a very important component of the ecosystem at this point."

This rapid demand growth has made it difficult for prospective tenants to find available space in the market. The lab vacancy rates last quarter were 0.1% in Boston, 0.5% in Cambridge and 2.9% in the suburbs, according to CBRE. 

"Vacancies are amazingly low," Myers said. "It's rare to find a life science building in the Boston metro that isn't spoken for."

This low vacancy has led many developers to pursue conversions of office buildings to lab space. Myers said the new developments and conversion projects in the pipeline are pre-leasing quickly, making additional development necessary. 

"What you actually need in Boston is you need new buildings, you need those conversions in order to make room for companies to grow and expand and for new companies to move in," Myers said. 

The growth of the lab market has helped improve the fundamentals of Boston's office market, a sector that has experienced more pain during the pandemic. 

These benefits go beyond the conversions taking older, vacant office buildings out of the inventory, Myers said. Life sciences companies themselves typically need more office space as they grow, and adjacent sectors such as business service firms and venture capital firms also expand their office footprints as the biotech market grows. 

"A lot of times people aren’t necessarily thinking of the spillover effect," Myers said. "Yeah you have lab space and [manufacturing] space, however, there’s a lot of affiliated industries and sectors that benefit from life sciences that aren’t going to be in lab space."

The Boston office market recorded 1.5M SF of positive net absorption last quarter, according to Colliers' Q4 office market report. This marked its second consecutive quarter of occupancy growth after recording 5.5M SF of losses in the earlier portion of the pandemic. 

The One Post Office Square building, undergoing a major renovation, landed Eaton Vance last quarter.

Among the largest office leases signed last quarter was SimpliSafe's 150K SF deal at Rockpoint Group's 100 Summer St. Also last quarter, Eaton Vance reached a 200K SF-plus deal to relocate to One Post Office Square, a 40-year-old building in the financial district undergoing a $300M renovation, as Bisnow first reported

This demand growth reduced the city's office vacancy to 14.1% as of year-end, down from 15.7% in mid-2021 but still well above the historical average of 11%, according to Colliers. 

The office market in Cambridge and the suburbs also experienced demand growth last quarter, recording a combined 279K SF of positive net absorption, according to Colliers. 

"Landlords across the metro area are seeing occupancies improve, and that's good news," Myers said. 

While many companies still haven't brought their employees back to the office, Myers said this isn't stopping some tenants from signing long-term office leases.

"Given the pandemic and companies trying to understand and right-size their square footage needs, you’d expect there to be some hesitancy from some companies, but other companies are out there actively looking for space," he said. "Leases are turning over all the time, new properties are coming to market, and there’s going to be movement."

He said most companies still see a need for maintaining an office in the future, and the question is how much space they're going to need post-pandemic. While the presence of long-term remote or hybrid workers may reduce square footage requirements, he said this is counteracted in many cases by companies hiring new people and growing their overall employee base over the last two years. 

"The office-using employment base has recovered quicker than other parts of [the] economy," Myers said. "Some of those companies are actively hiring more workers. So there are companies out there making these leasing decisions, hiring more workers, and until they're ready to go back, these workers are remote."