Savills Studley Research Boston Savills Studley Report Boston office sector Q1 2018 SUMMARY Market Highlights LEASING DECLINES RENT RISES "Boston's economy and office market has taken Following a strong fourth quarter of activity, The average asking rent for the entire region a different route in this cycle, deviating from with 4.0 million square feet (msf) leased – increased by 0.7% to $32.38. The Class quarterly activity inched down to 2.6 msf. A asking rent was essentially flat, inching the weak population and job growth displayed Tenants have leased 11.6 msf in the four down by 0.4% to $40.33. in many older Northeast and Midwest metros most recent quarters, 29.5% below the - and locally during prior cycles. This time has long-term market average of 16.4 msf. SALES DOWN SHARPLY truly been different for Boston. The willingness As of March 2018, office sales volume in AVAILABILITY RATES PUSH LOWER Boston totaled $1.9 billion in the last six of many companies to pay top dollar for months, down sharply compared to the $4.9 Boston's expertise in a wide variety of high-tech The market's overall availability rate billion sold in the previous six months. decreased by 50 basis points from 12.7% sectors has been a game-changer." to 12.2%. The Class A availability rate fell by 60 basis points to 13.2%. Steve Woodworth, Managing Director Savills Studley Report | Boston Recovery Covers a Lot of Office-Using Employment Trends Ground, Region a FrontRunner for HQ2 Millions 0.60 5% The duration, magnitude and scope of 0.58 Boston’s expansion in this cycle has been 3% impressive. As of March, the region was 0.56 more than 95,000 office-using jobs above 1% 0.54 its low point hit in late 2010 - a 19.4% jump. Demand for office space and rent growth 0.52 -1% have spread far and wide, spilling across 0.50 much of the region, particularly areas close -3% to Cambridge and Boston. 0.48 -5% 0.46 Excluding the most remote suburban locations, most areas in Boston have seen -7% 0.44 some material decrease in availability rates 2010 2009 2011 2013 2014 2015 2016 2017 2018 0.42 2012 -9% over the last two years. Cambridge (with Boston Office Emp. Boston % Change U.S. (% Annual Change) an availability rate of 3.7%) remains the Source: Bureau of Labor Statistics^ tightest submarket of all, but options in the Financial District (10.9%) and Seaport (10.1%) are also very limited. First-quarter Availability Rate Trends leasing activity further depleted the pool of space in early 2018 as DraftKings 105,000- (%) Availability Rate Trends sf lease at 222 Berkeley/500 Boylston Street 25% was finalized. The interconnected building is filling up as Wayfair is expected to expand to 400,000 sf. 20% 17.6% 17.4% In Cambridge, as options in existing 16.7% buildings dwindle, tenants are pushing 15% 13.9% 15.2% to new projects such as DivcoWest’s 12.2% Cambridge Crossing. The 45-acre campus 11.9% recently inked its first lease. Health tech 10% innovator Philips has already exercised expansion options and leased 341,000 sf at 250 North Street in East Cambridge. 5% They will move operations from Andover. 3.7% Additionally, Cambridge Innovation Center Boston Region Financial District Cambridge Route 128 Corridor signed a 92,500-sf lease at 255 Main Street. 0% Q1' 13 Q1' 14 Q1' 15 Q1' 16 Q1' 17 Q1' 18 WeWork a Big Spender Adding to the competition for space in prime districts, WeWork took 123,500 sf at Asking Rent Trends 501 Boylston and leased more than 70,000 ($/sf) Rental Rate Trends sf at 33 Arch Street. While WeWork has $70 been growing in Boston, its expansion has $61.39 been much slower than in Manhattan or Los $60 Angeles. The two new locations, both in $52.52 very high-rent submarkets, will bring them to $50 $47.70 nearly 10 centers in Boston, compared to 43 in Manhattan and 15 in Los Angeles. $40 $37.15 Tenants were also active in the Financial $32.38 District in early 2018. Salsify took 53,900 $30 $26.67 sf at 101 Federal Street, nearly doubling $21.43 $25.78 from the 30,000 sf they currently occupy at $20 3 Center Plaza. Nixon Peabody committed to 100,593 sf at 53 State Street. WeWork, $10 DraftKIngs and Salsify are expanding. Boston Region Financial District Cambridge Route 128 Corridor Nixon Peabody, like many other law firms, $0 is reducing its occupancy, shrinking from Q1' 13 Q1' 14 Q1' 15 Q1' 16 Q1' 17 Q1' 18 the 167,000 sf they currently occupy at 100 Summer Street. 02 Q1 2018 Nixon Peabody will leave behind a much- Availability Rate Comparison Overall Rental Rate Comparison needed block of space once it moves out. Overall Rental Rate Comparison Cambridge 3.7% Companies looking for bigger blocks have Back Bay $85.95 Neighborhoods District 3.7% Boston/Suff Cty $63.25 a dwindling pool of options. Among existing Boston/Suff Cty 9.0% Financial District $61.39 buildings within Boston/Suffolk County there Route 495 South 9.1% Cambridge $52.52 are only 14 buildings offering 50,000 sf or Southern New Hampshire 10.1% Neighborhoods District $41.72 more. New construction will not alleviate South Station/Ft Pnt Chnl 10.1% South Station/Ft Pnt Chnl $37.65 the shortage – Congress Square and 400 Back Bay 10.4% US Index $33.80 Northern Avenue at Innovation Square are Worcester 11.1% Route 128 West $33.66 Financial District 11.9% Boston Region the two remaining buildings underway in the $32.38 Boston Region 12.2% Close-In Suburbs North $29.26 city with a block of 50,000 sf or more that Route 128 North 13.2% Route 128 Corridor $25.78 has not been pre-leased. Route 128 West 13.9% Route 128 North $23.83 Route 128 Corridor 13.9% Route 128 South $21.07 Similar to many other markets nationwide, Route 128 South 15.0% Worcester $20.95 tenants clearly have a strong preference Route 495 North East 15.3% Route 495/Mass Pike West $20.84 Close-In Suburbs North for new product in urban settings. The bulk 16.4% Route 3 North $20.58 US Index 17.4% Route 495 South $20.56 of the new product has delivered and then Route 495 Corridor 18.8% Southern New Hampshire $20.10 been quickly pre-leased in Boston — much Route 495/Route 2 West 20.5% Route 495 Corridor $19.93 of the remaining unleased development Route 3 North 23.3% Route 495/Route 2 West $19.43 pipeline is in suburban locations. This Route 495/Mass Pike West 26.2% Route 495 North East $17.60 includes Dunham Ridge in Beverly and 152 (%) 0% 5% 10% 15% 20% 25% 30% 35% ($/sf) $0 $20 $40 $60 $80 $100 Grove Street in Waltham. It will take quite some time before proposed construction in the Financial District, the Back Bay and Major Transactions Cambridge alleviates the space crunch. Tenant Sq Feet Address Market Area Philips 341,000 250 North St Cambridge Wide-Ranging Rent WeWork 123,500 501 Boylston St Financial District Leasing activity, rent growth and Cengage Learning 117,900 Pier 4 Seaport development have spread far and DraftKings 105,000 222 Berkeley St/500 Boylston Back Bay wide. Even so, Boston is still a market Nixon Peabody 100,593 53 State St Financial District characterized by an wide differentiation in Cambridge Innovation Center 92,500 255 Main St Cambridge term of rents. Rents range from $80-plus Everbridge 73,300 25 Corporate Dr Route 128 North for lab space in Cambridge and view space Salsify 53,900 101 Federal St Financial District in the Back Bay, to office product priced in Olympus Scientific Solutions 45,141 48 Woerd Ave Route 128 West the high teens in the Route 495 Corridor. Future Technologies Group, Inc. 21,323 2 Batterymarch Park Route 128 South Between these two ends of the spectrum, Sum of Top Leases 1,074,157 most space is priced between $40/sf and $70/sf. Tenants in nearly every price range have seen steady rental rate growth. Asking the high price of operating or living in rent averages are approaching $70/sf in the Boston. This, coupled with local organic But these cities lack the depth of talent Financial District and Seaport, rent for a few growth, has more than offset any trickle in AI/machine learning that Boston and Route 128 Corridor buildings has pushed of firms to other regions. There are many San Francisco have. This niche holds above $50/sf. reasons Boston's economy has taken a lot of potential, it is also one of the a different path this go around. One in most undersupplied in terms of qualified Most companies prefer proximity to mass particular stands out — expertise. Despite labor. McKinsey Global Institute recently transit, or at least major transportation spiraling wages and salaries, Boston’s calculated that AI innovations and routes. Businesses focused on recruiting economy continues to charge along. Top techniques such as neural networks and younger talent have recoiled from the tech firms and employers have been willing deep learning could create $3.5 trillion and suburban periphery. In turn, tenants can to pay top dollar for talent in Boston. $5.8 trillion in value to the global economy. still find sub-$30/sf space in some sections Boston is fortunate to have one of the top of the Route 128 Corridor and much of the concentrations of AI and machine learning Route 495 Corridor.