As you can see in our Q4 2017 Submarket reports not all office markets are created equal; particularly during this most recent expansion cycle.
While fundamentals in the Greater Boston office market are arguably the strongest they’ve been in some time, we’re certainly seeing some bifurcation. Looking at office vacancies, in the chart below, urban locales topped the list of submarkets with the lowest vacancy rates in the fourth quarter of 2017. Given the exodus of suburban office users (by tenants like Reebok, Bose, and PTC) to Downtown Boston, it’s not surprising that many of the same markets have had above average vacancy declines when compared to 2010-2012’s peak rates.
Office Vacancies by Submarket
Route 495 West represents one of the few exceptions, as leasing and expansions have been brisk in this market over the past few years. Despite sitting more than 500 basis points above the metrowide average, vacancies in this submarket have plummeted since peaking in 2012.
Turning our attention to rental rates a similar trend emerges. The urban markets maintain some of the highest rents in the metro area and most have posted outsized rent gains from 2014–17. Again, there are some exceptions. In the Fenway submarket, for instance, the delivery of 1325 Boylston Street brought new product, and above-market rents, to a tertiary office market. Once the building leased up, asking rents fell back in line with the area’s historical averages.
Urban landlords have clearly benefitted from shifting tenant demand. As companies follow young talent into the city, demand for office space and subsequently lease rates have risen. Many of these users have been willing to pay top dollar in order to attract the right employee base. Given these fundamentals, one would expect developers to have ramped up construction in Boston’s urban markets. Outside of the Seaport, however, most of this cycle’s office development has been focused in the metro’s suburbs. As seen in the following chart, the Seaport, Inner Suburbs, and Route 128 West accounted for the lion’s share of new deliveries on a square-foot basis.
While it seems like Greater Boston’s urban market have dominated this past cycle, close-in suburbs like Somerville, Brookline, Waltham, etc. have fared well too. As the war for talent continues to rage on, look for continued growth in more urban areas of the metro.