Greater Boston Office Market
Q2 2023 OFFICE MARKET OVERVIEW
BOSTON, CAMBRIDGE & SUBURBS
Despite some indicators of a strengthening economy, the Boston office market continued to struggle in Q2 2023, with a sixth consecutive quarter of negative net absorption recorded. The market shed almost 150,000 SF of occupied space last quarter, which on the bright side, was a significantly smaller drop than was recorded in Q1 2023. Net absorption was negative by about 2.4 million SF over the last 12 months, and total availabilities have increased to about 20%. Asking rents have held up reasonably well considering the market conditions, but effective rents have dropped as tenants hold more leverage to obtain large concession packages. Vacancy rates are highest in Boston and the suburbs, while sublet rates are highest in Cambridge.
Flight-to-quality trends have taken hold throughout the pandemic and this dynamic may continue to create winners and losers in the office market. Several of the largest offices leases across the metro in recent quarters were in new developments. Tenants will continue to have plenty of options in new construction, with more than 2 million SF of under construction space available for lease, in addition to about 400,000 SF in the recently completed Winthrop Center. As this flight-to-quality persists, underperforming properties may 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 economy has improved in recent months, with interest rate hikes tapering off and the stock market rallying. Employment in Boston’s professional and business services sector also increased by more than 3.5% over the last 12 months, which exceeded the national average. A stronger economy should encourage more firms to expand their real estate footprints, particularly in the tech and biotech sectors, which have been stifled by the difficult funding climate over the last year. But in the post-pandemic world, employees returning to offices on a consistent basis remains the most critical factor for the health of the office market. Firms are increasingly setting firmer return-to-office expectations, but such mandates have already been met with effective resistance in prior instances. Per Scoop, Boston ranks as the seventh most work-from-home friendly large metro in the country, with 45% of companies allowing employees full flexibility. This is down from 54% last quarter, however, which is an encouraging trend for physical office occupancy.