METRO BOSTON OFFICE MARKET REPORT FIRST QUARTER | 2019 303 CONGRESS STREET | BOSTON, MA 02210 | 617.457.3400 | HUNNEMANRE.COM BOSTON OFFICE MARKET OVERVIEW The Greater Boston office market experienced one of the strongest first-quarter expansions in the last 15 years. The overall market posted close to 900,000 square feet in positive absorption, which pushed vacancies down to just 11.2%. On the leasing front, renewals dominated the suburban narrative this 11.2% quarter, while large user activity was prevalent in the urban core. State Street Bank, Wayfair, WeWork, Google and Puma accounted for 1.5 million square TOTAL VACANCY RATE feet in new leasing during the first three months of 2019. The groundbreaking of Amazon’s build-to-suit in the Seaport pushed total square feet under construction to 4.7 million. However, 87% of this space is already committed. Asking rents held steady over the quarter but conditions remain frothy in select pockets of Cambridge and Boston. WeWork continues to make waves in the Boston commercial real estate market. With its recent 241,000-square-foot lease at 1 Lincoln Street, the coworking giant’s urban footprint is now roughly one million square feet. Though it 892,083 remains unconfirmed, a 241,000-square-foot enterprise user is reportedly expected to commit to the entirety of WeWork’s newest location. Looking Q1 NET ABSORPTION ahead, WeWork has letters of intent out on an additional 1.1 million square feet (SF) throughout the urban markets. 100 Summer Street and 200 Berkeley Street are two of the large blocks of available space rumored to be associated with the coworking firm. There is no question that WeWork is changing the commercial real estate game and its impact on the market bears watching. Space banking, a trend more commonly associated with the Dot Com boom, has regained some momentum in Boston. Tight market fundamentals coupled with rapidly rising rents have tenants taking down more space $34.00 than they currently need in anticipation of future growth. These tenants will ASKING RENT then sublease out this underutilized space. PTC and Cengage Learning both ($/SF) subleased some of their new space in the Seaport over the last few quarters, and Philips recently put two floors of its future Cambridge Crossing office on the sublease market. While space banking became quite problematic when the Dot Com bubble burst, as large swaths of unused office space came back to market, the trend has been more measured this cycle. Consensus among most economists is that 2019 will remain a year of growth. However, uncertainty is weighing on sentiment. A yield-curve inversion (the 10-year versus the 3-month Treasuries), trade conflicts and global economic 4,747,388 instability have emerged as potential economic risks. Many are looking to 2020 UNDER CONSTRUCTION as a potential inflection point in what will likely be the longest U.S. economic (SF) expansion in history. 2 | METRO BOSTON OFFICE | Q1 2019 BOSTON OFFICE TOTAL VACANCY • The Boston market was especially dynamic during the first quarter, 12 as headline-grabbing transactions dominated activity. While market 10 fundamentals were adversely impacted by John Hancock Financial’s consolidation, State Street Bank, WeWork and Wayfair all announced major 8 moves this quarter. Vacancies breached 7% for the first time since 2001, 6 rents maintained their upward trajectory and the development pipeline is 4 swelling to levels we haven’t seen since the Dot Com era. 2 • Several blockbuster leases were executed during the quarter. State Street 0 Bank announced it plans to anchor HYM’s One Congress Street development, 2013 2014 2015 2016 2017 2018 2019 taking down more than 500,000 square feet and relocating from its long- 5-YEAR HISTORICAL AVERAGE VACANCY RATES time home at 1 Lincoln Street. Accordingly, WeWork swooped in to backfill a large portion of the State Street space and signed a 250,000-square-foot NET ABSORPTION lease. KMPG and Foley Hoag renewed their leases at 2 Financial Center and 1,200 155 Seaport Boulevard, respectively. Wayfair agreed to sublease more than 1,000 300,000 square feet from Liberty Mutual at 10 Saint James Avenue in the Back 800 600 Bay and Toast is expanding into 125,000 square feet at 401 Park Street in the 400 Fenway. Though there are fewer large tenant requirements in the market () 200 SQUARE FEET now, demand for urban office space remains on solid footing. 0 -200 • As headcounts continue to grow, small-to-mid-sized technology firms are -400 -600 driving expansions in Boston, especially in the Financial District. DataRobot 2013 2014 2015 2016 2017 2018 2019 is moving from One International Place and expanding into 57,000 square CLASS A CLASS B feet at 225 Franklin Street. GrubHub is planning to double its footprint and ASKING RENTS has leased 75,000 square feet at Center Plaza. Buildium, Cantina, Attivio and Nexthink have executed leases recently as well. $100 $80 • With 2.4 million square feet underway, changes are coming to Boston’s $60 skyline. Work recently began on Amazon’s 430,000-square-foot Seaport $/SF $40 tower. With State Street as an anchor tenant, One Congress is expected to $20 break ground soon and rumors are swirling around the groundbreaking $0 of the South Station Tower (with Salesforce as a supposed anchor). The SEAPORT redevelopment of Hood Park in Charlestown could result in three new BACK BAY MIDTOWN office/lab buildings totaling close to 800,000 square feet. Developers are CHARLESTOWN SOUTH STATION NORTH STATION FENWAY/KENMORE FINANCIAL DISTRICT likely to move forward with new projects in the coming quarters. ASKING RENT RANGE WEIGHTED AVERAGE TOTAL INVENTORY TOTAL VACANT TOTAL VACANCY Q1 NET ABSORPTION YTD NET ASKING RENT ABSORPTION (SF) (SF) RATE (SF) (SF) ($/SF) Class A 50,628,250 3,248,700 6.4% 79,842 79,842 $65.97 Class B 20,616,267 1,659,009 8.0% 46,741 46,741 $52.77 Total 71,244,517 4,907,709 6.9% 126,583 126,583 $61.71 3 | METRO BOSTON OFFICE | Q1 2019 CAMBRIDGE OFFICE TOTAL VACANCY • Cambridge’s narrative remains the same. Office space is virtually non- 1,000 existent here and any movement in the market can impact fundamentals. 800 While vacancies ticked up slightly during the first quarter, momentum remains positive here. At 3.5%, rates are well below the market’s historic 600 average. Developers struggle to keep pace with such frothy demand, and () SQUARE FEET 400 most leasing activity has been occurring off-market. The lack of available 200 space makes tracking rent observations difficult, but asking rents in East 0 Cambridge have topped $100/SF in select spaces. 2013 2014 2015 2016 2017 2018 2019 DIRECT SUBLEASE • Cambridge Crossing is this market’s next big super cluster, and space is filling up quickly. Following Sanofi’s blockbuster deal for 900,000 square feet of office and lab space across two buildings, Sage Therapeutics is NET ABSORPTION reportedly in talks for up to 350,000 square feet of office space within the 300 development. The pharma company would consolidate its operations, 200 which totals close to 100,000 square feet. While Cambridge Crossing will 100 likely continue to attract both office and lab users in the coming years, 0 commercial availabilities will be scant if the Sage deal is finalized. () SQUARE FEET -100 • Tenants continued to take down space in new construction as Cambridge’s -200 supply-demand imbalance leaves few options. Google signed a lease for -300 336,500 square feet at 325 Main Street, which Boston Properties plans to 2013 2014 2015 2016 2017 2018 2019 redevelop into a new tower for the firm. Google also plans to sublease 177,000 square feet from Akamai while their office is being developed. Capital One took down three floors at MIT’s 314 Main Street in Kendall LAB VS. OFFICE SUPPLY SHARE Square, joining Boeing, for a total of 78,300 square feet. Reportedly, the 48% building has commitments on several other floors as well. 46% • Developers are getting creative when it comes to adding office space in 44% Cambridge. New England Development already announced plans to 42% convert the top floor of the CambridgeSide mall into 140,000 square feet 40% of office space, and is now proposing another addition. The new project OFFICE SHARE OF SUPPLY 38% would involve replacing the mall’s anchor tenants and a parking garage 36% with 625,000 square feet of office, lab and residential uses. As large users, 34% like Foundation Medicine and CarGurus, look for space they will likely turn 2012 2013 2014 2015 2017 2018 2019 to relief valve markets like Waltham, Lexington and the Seaport. TOTAL INVENTORY TOTAL VACANT TOTAL VACANCY Q1 NET ABSORPTION YTD NET ASKING RENT ABSORPTION (SF) (SF) RATE (SF) (SF) ($/SF) Class A 6,928,989 210,013 3.0% (11,468) (11,468) $60.59 Class B 3,427,540 153,151 4.5% (22,101) (22,101) $65.12 Total 10,356,529 363,164 3.5% (33,569) (33,569) $63.11 4 | METRO BOSTON OFFICE | Q1 2019 SUBURBAN OFFICE TOTAL VACANCY • The Suburban office market posted its strongest quarter of net absorption 17 in more than two years, leading the metro in gains during the first three months of 2019. Continued growth over the last few quarters has helped 16 mitigate the impact of tenants migrating to Boston. Core Route 128 submarkets account for the lion’s share of activity and vacancies are 15 nearing 11% in both the Route 128 West and Northwest regions. Location 14 and quality are key factors in recent performance as talent retention weighs heavily on corporate decision makers.