Boston Office Market's Big Problem? Not Enough Demolition, Execs Say

Though the recovery of the Boston-area office sector continues to feel slow, top players in the market say it’s doing better than the data suggests.

Overall vacancy ticked up in the first quarter to 18.5%, but eight of the city's 19 submarkets either held steady or posted improvements, according to Cushman & Wakefield. These improvements are being seen by some market leaders, who say the vacancy rate reflects the city's vast stock of obsolete buildings and that tenant demand for top-tier buildings is robust.

Brokers, landlords and tenants speaking Thursday at Bisnow's Boston Office and Workplace event — held at the Blue Sky Center campus in Burlington — said that as companies continue to seek more office space, and as less-desirable buildings are redeveloped to other uses, a healthier market will appear. 

"We have an under-demolished market," Cushman & Wakefield Executive Vice Chairman John Boyle said. "We just have buildings that need to come down, and they do affect the color of the market."

Boyle said there is 43M SF of available office space in the region, much of which is in buildings that are likely to never see office tenants again. But tenants are still active in the market. They are just targeting higher-quality buildings in downtown Boston and the close-in suburbs.

"You think 43M SF of available space, and you think, 'Boy, that's a terrible time to own real estate,' and that's not necessarily true," Boyle said. "There is certainly high demand for high-quality space, but there's just a lot of space available."

He added that, for some new office buildings, rents for recent deals have reached "unprecedented" levels.

In the first quarter, downtown office users flocked to Class-A space, which captured 76.6% of the deal volume, according to Cushman & Wakefield. Class-A offices fetched premiums of nearly $21 per SF over Class-B buildings.

CBRE’s data also shows a disparity in how the market segments are performing. Class-A offices in the central business district and Back Bay last quarter recorded positive net absorption of 97K SF, while the Class-B and C segments in those submarkets posted net occupancy losses of 125K SF.

The largest deal last quarter was JPMorgan Chase's 250K SF lease at Hines' South Station Tower, which came after the financial giant instituted a five-day in-office mandate. This month, TD Bank doubled its footprint at 2 International Place to 39K SF, while requiring workers to come in four days a week.

BXP Senior Vice President Patrick Mulvihill said the office REIT spent $40M building out an amenities center at its 200 Clarendon St. office tower in the Back Bay. That submarket had the lowest vacancy rate in the city last quarter at 15.9%, according to Cushman.

"In the city of Boston, the Back Bay, things are performing very well," Mulvihill said.

"I would agree with what people are saying, the fight to quality thing, it seems like an overused term these days, but we are experiencing it, and we're leaning into it in a big way," he added.

At the firm's other Back Bay property, 111 Huntington Ave., Troutman Pepper Locke LLP signed a 57K SF lease renewal last quarter, according to Cushman's quarterly report. 

The available space is also beginning to be erased by adaptive reuse projects around the Boston area.

Last week, four office-to-residential conversion projects were approved, totaling 434 housing units across the city, the Boston Business Journal reported. In total, nearly 1,800 units have been proposed, are under construction or have been completed.

Suburban office parks are also increasingly being eyed for housing. Mulvihill said certain suburban markets have seen rising demand and decreasing supply due to the space coming offline for redevelopment.

"In Waltham, which is where most of our suburban portfolio is, the supply of office is actually decreasing significantly, which is helping the fundamentals," Mulvihill said. "If I look ahead five, seven or 10 years, the quality of the product of Waltham is going to be much better."

BXP's suburban portfolio includes its 1.5M SF mixed-use City Point campus, its 393K SF Winter Street properties and its 546K SF Bay Colony campus.

As tenants are bringing employees back to the office, some say they need to have a presence in the city and the suburbs. 

Analog Devices in 2018 moved into its headquarters at 804 Woburn St. in Wilmington, consolidating operations from offices in Norwood and Chelmsford. The firm also has a space in downtown Boston at 125 Summer St.

"It's a balance between people and cost," Analog Devices Director of Real Estate Robert Griffin said. "For us, the majority of the space is out in the suburbs. It's cheaper space. There's more room for us there, but ultimately, we have to maintain that office in downtown Boston."

Suburban properties have attracted tenants who are looking for more space at more attractive prices. These areas are also becoming more attractive for scouting new talent, as employees want to work closer to where they live.

"There's a lot of migration into core submarkets like Waltham and Burlington," Mulvihill said. "There's a period of time right now where folks that otherwise couldn't afford being in Waltham are now doing it. They want to be there for talent, for access, etc., because getting back to the office is so important."