Improvement remains gradual in the 126-million-square-foot Boston general purpose, multi-tenant office market, as the market continues to work off the consequences of the early 2000s tech bust. The vacancy rate has been relatively elevated for this market since 2001, with 19.0% of that vacancy accounted for by sublet space compared with just 11.0% nationally. But a decade of modest new supply may soon restore the market to balance.
The second quarter 2012 vacancy rate is 14.4% according to Reis, down 20 basis points from the prior quarter and down 40 from a year earlier. While overall vacancy had peaked at 15.1% in the second quarter of 2010, Class A vacancy rose no higher than the 14.0% recorded in that quarter. As of the second quarter of 2012 the Class A rate was just 12.6%, down 40 basis points from the prior quarter and down 70 from a year earlier. The Class B/C rate was still high at 17.0%, up 10 basis points both over three months and over twelve months.
Jones Lang LaSalle reports an availability rate of 20.1% in Greater Boston, while Cushman & Wakefield reports an overall vacancy rate of 12.6% in the Central Business District (CBD), down 200 basis points from a year earlier, but unchanged from the prior quarter “tenants weighed their market options and renewed in place.” This source puts the rate at 21.4% in the suburbs, down from 22.2% both a quarter and a year later. Cushman & Wakefield predicts the suburban rate will fall below 19.0% by the end of 2012. As measured by Reis the year-end vacancy rate was below 10.0% for most of the late 1990s, but in the 2000s it fell no lower than the 11.1% recorded in 2007. Then again, whereas the vacancy rate soared to more than 19.0% in the early 1990s and early 2000s, the recent peak was lower. Reis predicts the moderation trend will continue, with the rate falling modestly to 14.3% at year-end 2012 and 12.4% at year-end 2016.
SUPPLY AND DEMAND
As implied by the vacancy rate trends, there is a flight to quality underway in metropolitan Boston. Net absorption totaled 293,000 square feet in the second quarter, with a Class A total of plus 330,000 square feet partially offset by minus 37,000 for Class B/C. The year-to-date totals are plus 437,000 square feet for Class A, and minus 31,000 for Class B/C; the 2011 totals similarly favored Class A space. Overall net absorption was modest during the 2000s compared with the prior two decades here, and Reis predicts modest demand will continue. Net absorption is forecast at just 320,000 square feet during the second half of 2012, and the annual average predicted for 2013 to 2016 is a modest 2 million square feet.
The real estate industry responded to low demand for Class B/C space with office to residential conversions during the 2000s, and with new supply limited, the overall inventory was just 1 million square feet higher at the end of 2011 than it had been at the end of 2004. Most of those conversions, however, were in central locations; finding alternative uses for obsolete suburban office parks has been more difficult.
In the meantime, new supply is heating up to an extent, though not to the extent of the late 1990s or the 1980s. Just 25,000 square feet completed construction in the first half of 2012, and this was on the periphery of the metro area outside established Reis submarkets. That, however, left 2.8 million square feet under construction, including 1.9 million in the City of Boston and Cambridge. Most of the approximately 800,000 square feet of planned space with announced development schedules is also in projects in central locations. While there are plenty of proposed and approved projects in the suburbs, few are moving forward. Following the completion of 290,000 square feet this year, Reis predicts annual new supply within established submarkets will average 1.55 million from 2013 to 2016. Given the modest level of net absorption expected, the decrease in vacancy will be slow.
The Boston area, like other markets with limited new supply, has a history of soaring and plunging rents, but the current trend is moderate increases. In the second quarter both the average asking rent and the average effective rent increased 0.4% to $36.27 psf and $30.11 psf, respectively. The year-over-year gains are 2.1% and 2.7%, respectively, down slightly from the gain of 2.9% by both measures recorded in 2011. As for vacancy, Class A asking rents are somewhat stronger, with a 0.5% increase for the quarter and 2.3% year-over-year to $44.05 psf. The Class B/C asking average of $25.28 psf is up 0.2% over three months and 1.4% over twelve.
Jones Lang LaSalle reports an average asking rent of $29.97 psf in Greater Boston. In a bifurcated market, according to this source, tenants are willing to pay up for strong submarkets such as Cambridge, the Seaport District in Boston, and the Waltham/Burlington corridor, with “modest improvement” elsewhere. Rents are still not high enough to justify speculative construction according to this source, and with large blocks of prime space becoming scarce, there is growing interest in build-to-suit. Cushman & Wakefield reports an overall weighted gross rental rate of $40.21 psf in the CBD, and $19.68 psf in the suburbs. “In the submarkets of 128 North and 128 West rents have bottomed out and are beginning to rise,” according to Cushman & Wakefield, which believes the trend “will spread to other submarkets with job growth and positive absorption of space.”
Reis predicts marketwide asking and effective rent increases of 2.0% and 2.4% for all of 2012, with gradually improving increases thereafter culminating in gains of 3.8% and 4.9% in 2016. These would be more modest gains than those recorded in past market upturns, a trend Reis predicts will occur throughout the Northeast and nation. While remaining far below the wild peak of 2000, Reis expects the effective average to surpass the subsequent peak of year-end 2008 by year-end 2015.