Greater Boston Office Market
Q4 2022 OFFICE MARKET OVERVIEW
BOSTON, CAMBRIDGE & SUBURBS
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.
Rising interest rates, struggling public markets, layoffs from major firms across tech and other industries, and additional indications of an economic downturn have added to the now typical pandemic-era pressures on the office market. If the job market weakens enough, leverage could return to companies wishing to bring employees back to the office. So far, return-to-office mandates have been largely ineffective, with workers holding firm in the tight labor market. Per Kastle Systems, office usage rates remain stubbornly below 50% nationally, with the largest and densest cities, such as Boston, lagging that average. While recessionary pressures may incentivize employees to spend more time at the office, they could also drive companies to take a harder look at their balance sheets, beyond payrolls. Reducing long-term liabilities, like office leases, may be among the most common cost-saving measures taken. While the future of the office market remains uncertain, hybrid work arrangements seem likely to persist in some form for the foreseeable future.