As we explored in our Q1 2016 market report, Downtown Boston’s Class B office market continues to attract investors. Since 2014 we’ve seen nearly $3 billion in transactions with sales volume surpassing $700 million during the first half of 2016 alone.
With this rising demand for Class B office properties in Boston, sales prices have skyrocketed. On an annual basis the median price-per-square-foot topped $450 in 2015 and has averaged more than $400/SF in the first half of 2016. Cap rates have also compressed by nearly 300 basis points from 2011 to 2015.
We can attribute these market conditions to three core factors:
- Limited Class A properties for sale: There is a limited number of Class A properties for sale in the Downtown market. Many of the city’s trophy office towers have already traded in this current cycle and a majority of these new owners tend to hold assets for 10 or more years.
- Increased appetite for risk: As the expansion cycle continues in Boston investors are willing to move further out along the risk spectrum, bolstering demand for non-core buildings.
- Tight fundamentals: Increased leasing activity, below average vacancies and rising asking rents have made Class B assets more desirable to potential buyers.
The following examples illustrate just how frenzied pricing is in this segment of the marketplace.
While it may be a great time to be a building owner, office tenants are facing severe ‘sticker shock.’ The aggressive underwriting accompanying these hefty price tags continues to put upward pressure on Class B office rents. “Demand for Class B space in Boston continues to rise and so are prices. 33-41 West St., a 38,000-square-foot Class B building in Downtown Crossing just sold for $16 million – which more than doubled its previous sales price,” said Bob Tito, EVP, Capital Markets Group. “We don’t see this increased appetite for Class B properties slowing down especially with limited Class A space available.” As a result, smaller, price-sensitive firms may have to look outside of the core downtown area for value options.