The Need For Speed: Boston’s Tight Office Market Fueling Co-Working's Rising Influence
Nine years since the U.S. limped out of its last economic downturn, the cycle is showing little sign of slowing down, particularly in Boston. The city’s office market is so robust that large tenants are having to look at alternatives to a traditional lease to satisfy rapid growth needs.
There has been 100% annual growth of co-working space in Boston since 2013, and 8% of new downtown leasing activity in 2017 was attributed to co-working companies, according to a March Cushman & Wakefield “Co-Working in Boston” report.
“There’s a paradigm shift in how tenants are using space. We’re on the cusp of a big change here,” Cushman & Wakefield Director of Research Ashley Lane said. “WeWork came to Boston in 2013 with a 100K SF lease. That is big, but it’s not going to impact a 63M SF market. Now is really the first time we’ve seen it move the barometer.”
WeWork has gone from its initial 100K SF in Boston to its current 800K SF footprint, and more growth in the region is expected. The industry’s local increase is helped by healthy rounds of fundraising by some of the city’s biggest co-working companies.
Cambridge Innovation Center closed on a $58M round of funding from European real estate developer HB Reavis in March. CIC will use the equity investment to expand globally. It already operates locations in Greater Boston, Miami, St. Louis and Rotterdam in the Netherlands.
WeWork completed $3B in Series G funding in July that pushed its valuation past $20B. The company is marketing large blocks of space on the sublease market, where its offices now appear on databases like CoStar, Lane said.
Large firms like Liberty Mutual and Amazon operate from WeWork’s 31 St. James location in Back Bay. General Electric has housed its Current subsidiary at WeWork’s 745 Atlantic Ave. branch since first moving to Boston in 2016. CIC was initially home to Google’s New England headquarters when the tech giant opened a local presence in 2005.
“We are spending a lot of time understanding this dynamic and the mid- to long-term effects on the market,” C&W Executive Vice Chair Robert Richards said. “One of the biggest changes is larger companies, some greater than 10K SF, are contemplating this alternative as a solution. The co-working companies are looking to take advantage of opportunities, and we are seeing aggressive growth plans."
The co-working boost comes as Boston’s office market is getting tighter each quarter. Q1 was Boston’s best first quarter since 2006, and 2018 is forecast to perform extremely well with 1.1M SF of new, occupied space scheduled to deliver by year’s end, according to C&W’s Q1 2017 Greater Boston report.
Companies like Philips and PTC are migrating from the suburbs to Boston’s urban core. The sustained demand has led to more cutthroat negotiations, as there are only seven blocks of contiguous space in Boston available for active tenants seeking at least 100K SF, according to the C&W Boston report.
“If you have a large tenant, that tenant needs to have a first, second and third choice because the cadence of negotiation has accelerated, and there’s a high likelihood a space could be leased from underneath you,” Lane said.
Boston’s office vacancy rate was 10.9% at the end of Q1, down from its 2017 close of 11.7%. While it might be well above Cambridge’s 2.9% vacancy, experts say it is primarily less desirable space that is available. Active tenants do not let attractive offices remain on the market for long.
“Most people can attest to the fact that, if there is a good piece of space on the market and built out that is attractive to the tenant users, there is a lot of competition for that space,” Colliers International Executive Vice President Kristin Blount said. “We were working with a full-floor tenant that didn’t move fast enough for two opportunities that moved quickly. There’s a lot of competition for pre-built or spec suites.”
A record number of tenants are looking for space in Boston, and Blount said 25% of them are coming from outside the city, either from the suburbs or new markets entirely. While interest from out-of-town tenants may not be a new concept, the speed at which they need available space is a career first for Blount.
“Tenants used to be in the market way far in advance of a lease expiration or their renewal notice time period,” she said. “Because their business is changing more rapidly than before and the newer kind of TAMI [technology, advertising, marketing and information] tenants make up a lot of growth, the speed to market and need to move quickly is something that is really important to them.”
Developers have previously told Bisnow tenants that used to take two years to find an office now do it in as little as three months. This need for near-instant availability and flexible terms by the TAMI tenants dominating this cycle has fueled further demand for co-working space, which one Boston co-working executive is more than happy to provide.
“As the space needs get standardized, other features such as flexible terms, convenience and an inviting collaborative atmosphere that will attract talent become more important,” Workbar CEO and co-founder Bill Jacobson said. “Co-working provides these things as a service.”