Research Overview

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Fundamentals in the Boston office market continued to struggle in Q4 2022. Vacancy and availability rates finished last year near record highs, at about 12% and 18%, respectively. The sublet rate also increased to 4.2%, its highest level in the pandemic-era. Net absorption was negative by more than 1.5 million SF last quarter and by about 2.5 million SF in 2022. Within the metro, Boston and the suburbs have the highest vacancy rates. Cambridge, with its heavy exposure to the tech industry, has the highest sublet rate. The market could have experienced worse vacancy expansion, if not for inventory reductions. Planned conversions to lab, industrial, and multifamily took more than 5 million SF out of the office stock last year. After holding up remarkably well for much of the pandemic, asking rents also started to soften towards the end of 2022.

Although a flight-to-quality has generally occurred throughout the pandemic, absorption losses were relatively even between Class A and Class B space in Q4 2022. Negative net absorption represented just under 1% of each segments’ total inventories. The bigger flight-to-quality story appears to be taking hold within the Class A segment, as demand gains steam in the market’s sizable supply pipeline. Several of the largest offices leases signed across the metro last year were for space in pipeline projects. These leases have been a mixed-bag for the market’s overall fundamentals, with some tenants expanding their overall footprints in the new towers, while most have consolidated and downsized space. As this flight-to-quality moves down the market, underperforming properties should continue to be targeted for conversion, which should alleviate some of the pressure on the office market. Nearly as much office space is underway or permitted for conversion as is under construction.

The Boston lab market came down to earth in 2022, following a red-hot first couple years of the pandemic. Macroeconomic concerns related to the stock market, inflation, and rising interest rates tightened up capital throughout the final three quarters of last year, and IPO activity and VC funding fell from its peaks reached in 2021. The effects of limited cashflow resources rippled throughout the market, as many startup and medium-maturity firms contended with drying funds, leading to thousands of layoffs and reduced space requirements. The sublet rate finished 2022 at 3.2%, up from 1.2% at the start of the year, while vacancies jumped from 1.5% to 3.7%. Pressures on demand hit as the supply wave reached its peak, and vacancy in newly delivered properties played a large part in rising vacancy rates. On the investment side, deal volume slowed throughout the year, and just a couple lab transactions closed in Q4 2022.

Despite last year’s headwinds, fundamentals in the Boston lab market remain in excellent position. While fundraising and demand may have cooled from the scorching levels reached in 2021, they still ranked near the strongest years on record. Vacancies also remain near a record low, while starting rents on new leases continue to increase. Vacancy expansion in Q4 2022 was mostly attributable to empty space in newly delivered properties, and net absorption still reached impressive totals of roughly 700,000 SF in Q4 2022 and 800,000 SF for all of 2022. The market’s increased sublet rate may even represent a healthy overcorrection, as several sublandlords are companies that defensively overexpanded footprints during the intensively competitive battle for space across 2020-21. Most of the sublet space listed is in the Class A segment, which will provide relief for tenants in the market for quality space. While less mature companies have burned through cash and laid off employees during the stock market downturn, Big Pharma has picked up some of the slack. Several of the largest leases of 2022 were from Takeda, AstraZeneca, Eli Lilly, and other industry giants. Big Pharma has also been active in the M&A scene, and the top firms reportedly have about $500 billion in cash, with the ability to buy roughly 650 smaller public companies.

Vacancies in the Boston industrial market finished Q4 2022 at 2.8% in the warehouse segment and 4.7% in the flex segment, both record lows. Despite limited available space on the market due to tight occupancy rates, net absorption topped 370,000 SF last quarter and 1.8 million SF last year. The warehouse segment generated stronger demand on an absolute basis last year, but flex received stronger demand as a percentage of inventory and experienced greater vacancy compression. Plenty of deal volume also occurred in the market’s sizable pipeline, with under construction space totaling roughly 2 million SF and 14 million SF for flex and warehouse, respectively. Rent growth continued at a swift pace, especially in the flex segment which reached 11% in 2022. Flex rent growth last year matched its cumulative total across 2019-21. Industrial rent growth also reached 10% for the second consecutive year.

While the market’s fundamentals are in excellent shape, several macroeconomic trends presented headwinds last year. Combined net absorption for warehouse and flex space fell to its lowest total since 2019. E-commerce companies are contending with global supply chain disruptions and inflation-driven pressures on consumer spending. After several disappointing earnings reports, Amazon scaled back its national logistics footprint by 10-30 million SF. This included several closures in Massachusetts, but the company is still expanding its local inventory at a much faster rate than it is shutting locations. Biotech was affected by struggling public markets, with IPO activity slowing significantly and industry stocks underperforming the broader economy in 2022. Rising interest rates have also presented additional obstacles to dealmaking.