From the Research Desk – CoStar State of the Office Market Recap

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:

bostonskyline-night-croped

  1. Boston remains relatively healthy. Expectations are for another two years of expansion before a true recession hits the market.
  1. 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.
  1. 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.
  1. 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.
  1. 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.

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