By Liz Berthelette – Director of Research
Last week CoStar Portfolio Analytics hosted a presentation on the State of the Office Market. Their commentary highlighted trends in both the local and national office markets. Below are 5 key takeaways from the event:
- Boston remains relatively healthy. Expectations are for another two years of expansion before a true recession hits the market.
- Vacancy compression in the Boston office market is likely over. Rates are expected to flat line over the next 2-3 years and begin to tick up in 2020 or 2021. This shift in fundamentals will be driven by what some are calling a “demographic cliff.” With the Baby Boomers’ peak year of retirement expected to hit over the next five years, Boston’s working-age population will decelerate and impede office demand.
- The flight to quality has been much stronger this cycle. At the metro level, office demand has been concentrated in the Class A market. Despite rising rents, value tenants haven’t been shifting back to Class B assets as in previous cycles.
- Rent growth in urban areas will outperform in the near term. While urban landlords will be able push through above-average gains during the first half of the five-year outlook, growth is expected to match the suburban markets on the back end of the forecast.
- Investors chasing yield will shift toward suburban assets. Office properties in urban Boston have gotten very pricey. With such low cap rates and a deceleration of rent growth on the horizon, suburban assets (particularly in prime locations like Waltham) might be a better bet over the next 5 years.
Though overall sentiment remained positive for the near term outlook, CoStar’s market experts believe that 2015 was likely the top of the cycle.