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Office Tenants Continue Migration To Urban Boston, But Investors Still Flock To The Burbs

Talent and tenants may want to be in downtown Boston, but real estate money is made in the suburbs.

Route 128 in suburban Boston

Office tenants have prioritized talent over real estate values this cycle, which has meant moving into some of the region's most expensive submarkets, like Kendall Square and the Seaport. Companies like Reebok, PTC, Alexion Pharmaceuticals, Philips and Puma have either moved or are planning moves from suburban New England to urban Boston this cycle.

But investors aren’t packing up for downtown Boston. If a firm wants to see a higher return on an investment, that is mostly found in suburban Boston, according to a new Marcus & Millichap report. 

“From a marketing standpoint, it can be nice to be able to say the herd is going one way or the other,” said The Davis Cos. Asset Manager Patrick Kimble, who is speaking at Bisnow’s Boston Suburban Summit March 12. “But it’s a bilateral relationship. The urban core can’t operate without a certain performance level of the suburban market and vice versa. The suburbs can’t stand up on their own without a certain output from the urban core.”

In Boston’s central business district, limited availability and compressed capitalization rates, an investment return indicator, have pushed investors seeking Class-B and Class-C properties to the outer suburbs, according to Marcus & Millichap’s 2020 North American Investor Forecast report. Suburban offices have more elevated first-year returns than urban product. 

Sales on Class-B and Class-C office in the inner suburbs were up 10% in 2019, and Interstate 495 offices between Chelmsford and Haverhill are seeing first-year yields in the mid-7% range. If an investor is looking for a value-add opportunity, the limited opportunities in the region are found in the suburbs, according to Marcus & Millichap.  

“You’re seeing instances where players who were normally able to seek out attractive opportunities in the urban core are saying, ‘For that same price per pound, I can make slightly more in Waltham, Watertown, Medford or Needham,” Kimble said.

A visualization of the renovations that have happened at The Center at Innovation Drive in Tewksbury, Mass.

Rather than accept urban office migration as the new normal, several suburban developers have pursued project repositioning in recent years. 

The Davis Cos. renovated the 300K SF One Cabot Road office complex in Medford, where Amazon inked a 50K SF lease for its Alexa division. The developer also completed a $14M repositioning at Waltham's Cityside, home to tenants like the Massachusetts Life Science Center and internet security firm GreatHorn

Rubenstein Partners invested $35M in upgrading the Center at Innovation Drive in Tewksbury, where Raytheon eventually signed a seven-year, 134K SF lease. Hobbs Brook Management is replacing its own 145K SF Waltham headquarters with a more than 500K SF speculative office and lab development. Spear Street Capital, the owner of Rebook’s former Canton headquarters, is expected to reposition the 42-acre property and add features like a food hall. 

"Incentives include lower rents or purchase prices, attracting tenants with easier commuting — though that still has its challenges — and amenities such as dining and other related development," EBI Consulting Director of Energy and Sustainability Mike Eardley said. “The Cambridge address is still very attractive, but the availability in the suburbs is hard to ignore."

Life sciences and technology companies still like the urban core for the ability to easily poach talent graduating from universities and looking to live in the city. Developers are following the trend: 92% of all office and 84% of all lab inventory under construction in Greater Boston is within 5 miles of Boston City Hall, according to Cushman & Wakefield. 

Suburban investors and developers are counting on companies hitting a breaking point on rent and congestion and reverting to a suburban value play, especially when it comes time to expand. While average office rents have eclipsed $110/SF in Kendall Square and $85/SF in Back Bay, rents on the Route 128 and 495 corridors are $35/SF and $23/SF, respectively, according to Perry data. 

Limited available space in urban submarkets could also begin to benefit the suburbs. 

“A developer can offer a big block of space in the suburbs and fulfill a tenant’s actual space demands, compared to just having a smaller, but good, piece of real estate downtown,” Kimble said. “Then, when the time is right, you can push rent in the suburbs and make a better return.”

CORRECTION, MARCH 3, 11:30 A.M. ET: A previous version of this story used an incorrect job title for Mike Eardley. This story has been updated. 

Hear more from Patrick Kimble and Mike Eardley at Bisnow’s Boston Suburban Summit March 12 at the Sheraton Boston Needham hotel.