Office and Lab Markets Strong, But Some Headwinds Worth Watching

Liz Berthelette, director of research, NAI Hunneman

BOSTON—The Greater Boston commercial real estate market continues to capitalize on the positive momentum the region enjoyed last year. With major lease deals garnering Boston national headlines, tenants can expect fewer choices and higher rents in 2016. The first quarter of this year saw the likes of BNY Mellon, Putnam Investments, Optum and Kronos sign major lease transactions. However, GE’s selection of Boston for its corporate headquarters is sure to provide a boost to an already strong commercial office market here. According to a report released by NAI Hunneman , net absorption was positive and vacancies continued to fall, while office rents continue to go higher. The overall office vacancy rate for Greater Boston at the end of the first quarter was 11.7%, with net absorption at 1.12 million square feet. The direct asking rent came in at $31.84-a-square-foot and the brokerage firm estimates that there is currently 4.53 million square feet of office space under construction. NAI Hunneman director of research Liz Berthelette tells Globest.com that conditions are tight, particularly for large space requirements in Greater Boston. “Tight market conditions have led to a scarcity of large blocks of available space, especially among newer, more modern properties,” she states. “Tenants with requirements of 100,000 square feet or more have few options when looking for space built within the last 10-15 years.” She adds that while the suburbs have more options for those large firms, “many of the available properties are less desirable and are quickly becoming functionally obsolete. This bodes well for future market fundamentals and may also incite more space to come out of the ground during the latter half of the next five to seven years.” Berthelette says the GE headquarters lease has “created a buzz” and there is a belief among business and real estate interests in the city that the deal will bring more interest and potentially more business to Boston. “This move helps solidify the city’s standing as a global tech hub and has the potential to incite more growth from companies looking to locate near GE,” she says in the report. She says that the Class B market has driven leasing activity in Boston of late with smaller tenants accounting for the largest market share of activity. The office vacancy rate for Class A and B space are both well below 10% at 8.8% and 7.4% respectively. While very positive on the outlook for Boston later this year, Berthelette says her “antenna is up” on several potential negative trends—a slowdown in venture capital funding and an uptick in sublease availability. She adds that increases in sublease office availability sometimes are a precursor to market corrections. Sublease space has increased Downtown and in the Back Bay, particularly from companies that are in the process of relocating to other sections of the city. “Boston is beginning to mirror San Francisco in that venture funding for tech companies slowed to roughly half of year-ago levels,” she states in the report. If venture capital funding does slow, this could impact both the office and lab markets in Boston and Cambridge. The Greater Boston lab market posted another strong quarter with net absorption surpassing 600,000 square feet and vacancies reaching record lows, at just 3.3%, the report states. Cambridge’s lab vacancy rate fell to just 2%. This scarcity of space has led tenants to execute forward lease commitments, look outside of Cambridge (and even the premier suburban markets) for lab space and consider build-to-suit construction.   •••••••••