Boston’s office market stands among the nation’s most resilient in the past year, hitting significant investment and subleasing benchmarks despite metrics suggesting visitor traffic is down more than 50% over pre-pandemic volume in the city's downtown.

An ultra-competitive banking market continues to drive investors to Boston office assets, while landlords have clung successfully to steady average asking rental rates through the coronavirus pandemic. Landlords believe the dynamics point to a looming end to tenants’ pandemic-era negotiating power in demanding free rent and larger tenant improvement allowances.

“People see Boston as really a safe haven,” Newmark Executive Managing Director David Douvadjian said last week in Boston at Bisnow’s Preparing for Boston’s New Office Landscape event. “It's really a developers market because there's so much money out there right now.”

Some of the nation’s largest office investment sales in the past 12 months happened in Boston, pushing the city past Manhattan as the nation’s most liquid commercial real estate market for the first half of 2021, according to a Real Capital Analytics report. While office users signed massive nine-figure SF leases, a quiet yet large pullback of sublease availability just gave the market its first positive quarter since the onset of the pandemic.

Workers haven’t yet returned to their workplaces, with visitor volume to downtown Boston as of last week down 51.9% from a pre-pandemic average, according to Avison Young’s Vitality Index. Nevertheless, investors continue to chase office assets either in pursuit of trendy office-to-lab repositionings or in plays to revitalize some of Boston’s century-old office buildings.

“This is one of the best, if not the best bank market in the country,” said Carlos Febres-Mazzei, founder and managing principal of Quaker Lane Capital. “You can get nonrecourse financing from the banking community here at pretty attractive pricing by comparison with the credit funds that might go a little higher on the leverage.”

Much of the attention in Boston’s banking community has focused on a flurry of bank mergers and acquisitions this year. Local banks have quietly stepped up with commercial real estate lending, specifically in deals sized in the $10M to $30M range, Febres-Mazzei said. Quaker Lane Capital and Alcion Ventures in August, for example, purchased a 63K SF downtown Boston office building for $24M and worked with Cambridge Savings Bank in the acquisition, Suffolk County land records show.

The trend of local bank lending in Boston isn’t unique to the market — smaller banks in 2021 have accounted for 51% of all recent real estate lending, compared to a 41% market share five years ago, according to a November Reonomy report. They account for 66% of all new CRE loans and are now offering more aggressive underwriting.

Febres-Mazzei lauded Boston’s local banks and compared the local pool of lenders to Philadelphia, where Quaker Lane would have just a quarter of Boston’s options, he said.

Douvadjian said, half-jokingly, Boston firms don’t know what recourse loans are anymore.

“It’s so competitive, I hear it all the time,” he said. “‘Hey Dave, we can’t lend in your market. I’m not going to waste my time because you’re going to beat my deal by 50 basis points.’ And we’re seeing it more and more.”

In another boon for local lending, the Boston office market saw its first Commercial Property Assessed Clean Energy loan, a new lending mechanism tied to energy upgrades. The C-PACE loan allows property owners to secure low-cost, long-term funding for energy-efficiency upgrades, and MassDevelopment and Greenworks Lending from Nuveen closed their first C-PACE loan in northwest Massachusetts this summer. Cargo Ventures last week secured a $788K C-PACE loan for a 121K SF warehouse in East Boston, which it will use for a new roof, HVAC upgrades and LED lighting.

“They’re not ultimately paying the entire cost of that debt service, they’re able to get a better building without increasing rents while also sharing savings and costs with their tenants,” said Michael Doty, Greenworks Lending from Nuveen energy-efficiency director. “We’ve seen a great opportunity with the pandemic to help get deals done.”

The thriving life sciences market has buoyed Boston’s offices by taking millions of SF of existing and planned offices offline in repositioning efforts, including across the Central Business District. Many of the tricky projects will be delivered in late 2022 and beyond, giving office landlords a reprieve from the record-setting millions of SF of availability to compete with last winter.

Boston’s average asking rents throughout the past year have only wavered slightly, prompting one researcher to define them as “defying gravity.” Class-A rents declined by 2% in the past year, according to Colliers’ 21Q3 Office report, averaging $69.52 per SF at the end of the summer. Alongside the slight rent fluctuations, tenant improvement allowances have skyrocketed. Deals that included TI allowances between $110 and $130 per SF are now typically $200 per SF in TI, Fortis Property Group CEO Jonathan Landau said, and leases still include free rent periods.

“That’s not going to last, but it’s here today,” Landau said. “The good news is the rents per square foot have not dropped significantly and therefore the market is still intact.”

If TI allowances do evaporate, rents have nowhere to go but up. Tenants are increasingly interested in their offices’ green energy bona fides, and municipalities, including Boston, have signed into law fines for building owners not hitting carbon reduction targets. Electrification upgrades are costly, although their long-term benefits are worth it, experts say. Those costs, however, are just some of the burdens that will get passed on through rent increases to tenants, Febres-Mazzei said.

“Then think about supply chain impacts, think about inflation and think about how all of those will ultimately impact the actual cost of doing business if you’re a landlord,” he said. “So the punchline is rents are going to keep going up from here.”

CORRECTION, NOV. 23, 6:52 P.M. ET: A previous version of this story misspelled the name of Boston Realty Advisors' Wil Catlin in a photo caption. The caption has been updated.