Recovery Continues For Boston's Office Market, While Lab Market Pain Worsens

Boston's office market posted positive fundamentals last quarter as tenants signed more leases, but the life sciences sector's three-year-long downturn continued to deepen, with vacancy rising to unprecedented levels.

The city's office sector recorded positive net absorption of 132K SF in the second quarter and nearly 500K SF of positive demand over the last year, the highest 12-month total since 2019, according to JLL's Q2 report. Boston's vacancy rate declined for the fourth consecutive quarter to 21.2%, JLL found.

For Greater Boston, Newmark reported overall vacancy continued to increase, but the rate of vacancy growth has decelerated and leasing activity has ticked up. 

While the office market shows signs of stabilizing, the life sciences sector continues to weaken.

The Boston-area lab market posted its 12th consecutive quarter of rising vacancy, with the overall rate hitting 35.6% at the end of the second quarter, according to Newmark. But researchers say the market now has nowhere to go but up.  

"We're in the early days of a potential bottoming of office and life sciences, but there seem to be inklings of green shoots," Newmark Head of Northeast Research Elizabeth Berthelette said. "There's still some headwinds that we're facing, but that's really the theme of this quarter."

CBRE also reported continued increases in lab market vacancy, but it found a slowing of occupancy loss: the Boston metro area posted 91,500 SF of negative absorption in the second quarter, down from 640K SF in Q1. 

"Tenant demand grew steadily throughout the quarter, suggesting potential for a stronger second half of the year," CBRE's Q2 lab market report says. "However, supply continues to outpace demand, leading to yet another quarter with a decline in asking rents."

With the office leasing market being more active than the lab market, some landlords that had been trying to lease buildings to life sciences tenants are now pivoting to office. 

Projects like Alexandria Real Estate Equities' Arsenal on the Charles in Watertown and 40 Sylvan Road in Waltham and Greatland Realty Partners and Barings' 275 Grove St. in Newton have all reverted fully or partially back to office, according to JLL's Q2 report. The projects were previously planned to remove more than 1.2M SF of office space from the market.

Berthelette said this trend is alleviating some of the pressure in the lab market.

"[Landlords] aren't ripping it out and turning it into offices. It's more core and shell where it's lab-ready, but they haven't put the actual infrastructure in for the lab," she said.

Some planned lab projects have also pivoted, like Bulfinch Cos.' Muzi Ford development in Needham, where it sought approval last month to switch from a 500K SF life sciences complex to instead build housing, medical office and a hotel.

"We're obviously seeing sentiment change or shift amongst developers and investors with some of the projects that originally had lab space planned for them," Berthelette said. 

But securing new office tenants for vacant buildings may be a difficult task, as the bulk of leasing activity in Greater Boston has hinged on renewals and expiration-induced departures.

Last quarter, Forrester Research downsized its lease at Bulfinch Cos. and Healthpeak Properties' 60 Acorn St. in West Cambridge, taking up 118K SF, and law firm Nutter McClennen & Fish renewed its 98K SF headquarters lease at Pembroke's Seaport West.

"We still have some time to work through the current fundamental situation, because although there's been more direct deals in the CBD, we're still seeing a fair amount of renewals from tenants," Berthelette said. "I feel like it's still taking longer for companies to make decisions." 

Another trend helping to bring down the oversupply in the lab leasing market has been occupiers buying buildings from landlords.

Northeastern University acquired the 190K SF Burlington BioCenter for $33M from MetLife in May. The university acquired the property for less than a third of its 2022 sale price.

"I think a user that is finding an advantageous capital markets landscape could help to reduce more of that vacancy inventory if we see more owner-user acquisitions," Berthelette said.

While life sciences construction has slowed considerably from its peak, there are still projects moving forward: 4.4M SF of lab space is under construction in the Boston and Cambridge submarkets, according to Savills.

In May, Blackstone and BioMed Realty received a special permit to convert 350 Massachusetts Ave. into labs. Nan Fung Life Sciences Real Estate won approval to convert part of its 14-story 470 Atlantic Ave. office building into life sciences space.

One of the biggest hurdles to recovery in the life sciences market has been the continued weakness in venture capital funding, which still hasn’t bounced back to the historic highs of the early 2020s. VC funding in the Boston-Cambridge life sciences market totaled $3.8B in the second quarter, an uptick from $3.7B, according to Savills.

"I think it comes back to the capital," Bethelette said. "Going into '25, I think everyone was a little bit more optimistic. … The uncertainty in the marketplace has added a layer of complexity to the recovery, and the access to capital is limiting the growth in early to midstage companies."