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New Data Shows Boston's Office Market Keeps Falling, But Experts See 'Potential Green Shoots'

Boston's office market is still worsening, with new data from the second quarter showing rising vacancy and negative absorption. 

Those trends aren't expected to reverse in the coming months, as experts told Bisnow the market still has further to fall before it turns around, but they see some positive signs in the macroeconomic picture and the return-to-office efforts that signal a rebound could be just beyond the horizon. 

Toast planned to vacate most of its headquarters at 401 Park Drive by June 30.

“This is not going to be a sprint to clear these hurdles. This is going to take time,” said Jeff Myers, research director at Colliers. “The biggest hurdle is probably time. If you look at vacancies now, you’re not going to get all of that demand back today.”

The office vacancy rate in the Boston area rose to 19.7% last quarter, surpassing the peak it reached during the Global Financial Crisis, according to Colliers' quarterly report. More than 36M SF of office space was available across the Boston area at the end of the quarter, according to Colliers’ Q2 Office Report, including around 9M SF of sublease space.

The Boston area recorded 1.2M SF of negative net absorption in the second quarter, which marked the fourth consecutive quarter of occupancy losses but still represented an improvement from the 3.4M SF of net vacancy added in the first quarter, according to Colliers. 

“I don’t think the office market has reached the bottom yet,” Myers said. “This quarter is better than last quarter, even though it was still negative. If we could string a couple of quarters together we will have a trend, but we don’t have that yet.”

In May, restaurant tech company Toast revealed it planned to give back the entirety of its 132K SF at 401 Park Drive by the end of the year. The company had to pay a $16M early termination fee to the landlords, Alexandria Real Estate Equities and Samuels & Associates

“Some are still making decisions and testing the water to see if they can recoup any value,” CBRE Director of Research Suzanne Duca said. “It’s really just due to companies figuring out their hybrid situation all around.”

CBRE's second-quarter report pegged Boston's negative net absorption at 500K SF, with the Seaport and Back Bay areas contributing the most to that occupancy loss.

The market's net effective rent sat at $54.49 per SF in the second quarter, according to CBRE, down from the first quarter and roughly 12% below the average rent price in 2020. 

The effective rent metric factors in concessions like tenant improvement allowances and months of free rent, which landlords are using to help draw tenants to their buildings in the down market.  

“What can help landlords navigate time quicker: rents,” Myers said. “If you lower rents, you become more competitive.”

Myers and Duca said they see some bright spots that could help the office market improve, such as workers returning to offices and the economy stabilizing. 

The 691-foot-tall Winthrop Center development in Boston.

Duca said she has seen tenants take their sublease listings off the market and decide to reoccupy the offices as they have more employees returning to in-person work.

“Some companies have started to see more density of employees coming back to the office on a regular-day basis than they were six to nine months ago,” Duca said.

Myers pointed to three pieces of macroeconomic news that show there could be more certainty coming to the commercial real estate markets: the Federal Reserve deciding not to raise interest rates in June; the consumer price index coming in at 3% last week, a sign of slowing inflation that could lead the Fed to keep slowing rate hikes; and the U.S. continuing to record job growth every month. 

"I do feel like there are some signals out there that aren’t so bad, that are actual potential green shoots to where we may be going," Myers said. 

There were some major deals to close in the quarter that could also provide optimism for office owners, including Athenahealth taking over sublease space formerly occupied by Bose Corp. at Boston Landing’s 80 Guest St. in April, the Boston Business Journal reported.

Near the end of the quarter, Deloitte signed on for 138K SF at MP Boston’s Winthrop Center in the Financial District. While these large office leases have been few and far between, Duca said there has been a stream of small leases that don't get as much attention. 

“It’s not doom and gloom,” Duca said. “Things are not happening quickly, they’re happening at a smaller scale, but they’re still happening. To some degree, we got a little too used to some really big transactions happening on a regular basis. In general, the office market is poised to hold its own and stay steady.”