Hunneman
Update
10/01/20
Hunneman Q3 Metro Boston Office Market Report
The COVID pandemic continues to have an adverse impact on the office market, producing another quarter of heavy negative absorption. While the market did not take quite as big a hit as last quarter, most of the themes brought on by the pandemic that came to fruition in the second quarter, have only gained more traction this time around. Despite a decrease in the Massachusetts unemployment rate month-over-month since June, there has not been an increase in office occupancy, being that many operations are still enforcing or allowing work-from-home protocols. The economic reopening efforts brought on by Phase 3 of the Commonwealth’s “Reopen Massachusetts” COVID-19 plan has allowed employers to host up to 50% of their workforce in office space, yet most companies are not occupying the full 50%. This has brought on another increase in sublease space, particularly in Boston where nearly 2.3 million square feet has hit the market since the start of the pandemic. Historically this is a larger ratio of office inventory compared to the Great Recession of 2008 and is closing in on the Dot-Com Bubble of the early 2000’s. The suburbs, on the other hand, have not been hindered as much as the urban markets, although sublet space is mounting as well in select submarkets, which already have had above average vacancy rates and are starting to see rental rates decline. Companies looking to get out of Boston and Cambridge due to the higher levels of risk associated with the pandemic in densely populated areas are adding to the demand being seen outside Boston and Cambridge, particularly along the 128 belt. However, this is not expected to be enough to pacify the amount of available supply coming to the market and most suburban areas are expected to see a further decline in square foot pricing by years-end.
With the exception of asking rents, which have remained relatively steady and have not seen any significant drops, market fundamentals were not strong in the third quarter. Just over 1.2 million square feet of negative net absorption registered with the total vacancy rate, increasing to 11.1%, which was mostly influenced by sublease space coming to the market. The Financial District, Back Bay and Seaport alone accounted for more than half of the negative net absorption seen in third quarter, giving back just over 774,000 square feet to the market, which was primarily concentrated in office towers. While minimal compared to Boston and the suburbs, Cambridge also saw a giveback of over 125,000 square feet of space, which is rare for a city that is known for having one of the tightest office markets on the East Coast.
Despite having a large supply pipeline, which tends to show developer confidence in the market, most of this new product went unleased during the third quarter. As these projects approach their respective delivery dates, the lack of leasing activity threatens to produce a large supply injection to the market in 2022. While a three-month construction pause in Boston and Cambridge has helped push these projects back and has allowed for a slightly larger window for preleasing, it is becoming clearer that some of these projects will be delivered without a tenant.
Looking ahead, there is still time for the market to rebound. With much of the negative absorption accumulating due to the sublease market, a loose timeline has been placed for when these availabilities need to be taken before the landlords can market them to a larger set of tenants. The majority of subleases average between two to three years, which is constraining many requirements that require a longer lease term and has deterred the demand that is capable of satisfying the vacancy. The implications that vaccinations will help reopen our economy next year is expected to lead to more leasing activity heading into 2021. While some of the space is currently vacant due to businesses folding, most is due to companies hitting the “pause” button. When office users decide to “press play” again, they will have better and more options to work with than before, leading to what is expected to be an active year in 2021. The flu pandemic of 1918 brought on the Roaring 20s, will this pandemic do the same for Boston? We think so.
