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Boston Office Rents 'Defying Gravity' As Lab Conversions, Leasing Pickup Stabilize Market

Life sciences conversions and an increase in leasing activity from tenants big and small have stemmed the bleeding in Boston’s office market following a year of historic struggles.

Major tenants including Amazon and Sasaki made new Boston commitments while five leases topping 40K SF were recorded in the suburbs in the first quarter of 2021, according to Hunneman. Sublease availability fell as some deals were struck and other companies took space offline ahead of a return to the office. Further, millions of square feet in office to lab conversions have mitigated vacancy and absorption numbers.

Boston's Back Bay as seen from the Prudential Center.

Tenants are enjoying some negotiating power in the sublease market with more rent-free months and tenant improvement allowances, researchers said. But asking rents are, to this point, not falling far.

Vacancy rose to 15.7% across Greater Boston, according to Colliers, and negative absorption reached 1.2M SF; both numbers dropped at a slower pace than last year’s free fall. Average Class-A asking rents sat at $68.45 per SF, a 3.1% decline over the past year. 

“Historically, when we have seen a vacancy movement of that magnitude, we’ve seen a more acute response in rents,” Colliers National Director of Capital Markets Research Aaron Jodka said. “That has not happened this time, which is why we’re saying it's defying gravity.”

Meanwhile, Class-A sublease rents are currently 17.1% below direct asking rents, according to Colliers. Reasons for the resistant asking rent rates could include the lack of distress and bankruptcies among Boston companies, keeping the net operating income of landlords intact, Jodka said.

Ownership in Boston’s central business district is characterized by institutional investors who have entered the market in the past five to 10 years, Newmark Director of Research Elizabeth Berthelette said.

“They’re well-capitalized, they’ve had very strong occupancy up until the beginning of the pandemic, there just hasn’t been enough downward movement to flash rents,” Berthelette said.

Massachusetts, which sported the nation’s highest unemployment rate at one point during the coronavirus pandemic, has since rebounded as vaccinations are becoming more widely available, prompting employers to determine return-to-work plans.

A rendering of WS Development's One Boston Wharf Road tower in the Seaport.

The major leases signed in the first quarter included Sasaki’s 16-year lease with MC Real Estate Partners at 110 Chauncy St. near the Chinatown MBTA station, and Amazon’s 630K SF lease in the Seaport with WS Development for its new Alexa hub

As more office leases got signed, sublease availability started to dwindle as some master leases are expiring and companies are deciding to take their space off the market ahead of a return to office, Cushman & Wakefield Director of Research Brendan Carroll said. Sublessors also may not give tenants renewal rights.

“The sublease market is like going to TJ Maxx — you might get a great deal, and it might work for you and it might be perfect,” Carroll said. “If you want a good deal with no surprises, you want to know what you’re getting, you have to go to Macy’s.”

Eating into the office market's overall inventory — which shrank by 467K SF in Q1 after growing by 109K SF in Q1 2020, according to Colliers — is the growing list of lab conversion projects, as developers try to capture the exploding life sciences demand amid limited supply.

Alexandria Real Estate Equities is responsible for at least 2M SF of the 4.7M SF of total office under conversion now exempt from office market data, according to Hunneman. BioMed Realty Trust and Related Beal account for a majority of the remaining conversion space in separate Seaport projects.

Boston isn’t the only life sciences cluster to see conversion projects pop up, but likely has the most or close to it among major metros, Berthelette said. The rise in conversions is part of the life sciences market’s trend in speculative development, Carroll said. Major office-to-lab conversions like BioMed’s 601 Congress, 321 Harrison and Oxford Property Group’s 125 Lincoln St. are all currently pegged as spec.

Developers nonetheless expected to deliver millions of square feet of office in the CBD between 2022 and 2025, including approximately 2.7M SF of still-available space across four Boston projects: South Station Tower, One Congress, One Post Office Square and the Winthrop Center, according to Hunneman. Outside of State Street’s lease at One Congress, the four towers are projected to deliver largely vacant.

With each project already rising, a repositioning for life sciences accommodations would have been tricky, White said.

“I think the ones that deliver in the next year or two will probably feel a little bit of the headwinds,” White said. “Towers like South Station that are three to four years out, maybe they’ll deliver at a great time when the market hits its stride, when we’re well through recovery.”