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.

13 2013 2014 2015 2016 2017 2018 2019 • While development remains focused on the Boston skyline, select projects are moving forward in the Suburbs. Somerville landed another major NET ABSORPTION office user: Puma. The shoe company plans to relocate its 150,000-square- foot North American headquarters to Assembly Row in 2021, jumpstarting 1,500 construction on one of the development’s last available parcels. This new 1,000 project will include roughly 275,000 square feet of office space. Hobbs 500 Brook Management is set to replace its long-time headquarters on Wyman 0 Street in Waltham with a new 500,000-square-foot speculative office and () SQUARE FEET -500 lab building as well.

-1,000 • Several large blocks of vacancy are on the horizon. Most recently, Oracle -1,500 listed the entirety of 100 Crosby Drive in Bedford and eClinicalWorks put 2013 2014 2015 2016 2017 2018 2019 193,000 square feet on the market at 900 West Park Drive in Westborough.

ASKING RENTS Computershare will relocate and downsize from 250 Royall Street in Canton next quarter, Philips will be moving from Andover to Cambridge $70 $60 is early 2020 and Puma will decamp its long-time Westford home for $50 Somerville in a few years. Despite recent positive momentum, relocations, $40

$/SF $30 consolidations and right-sizing are still a risk to the Suburban outlook. $20 $10 • Not all firms are shifting operations downtown. Tesaro (200,000 SF), BAE $0 Systems (135,018 SF), Clean Harbors (103,500 SF), and Samsonite (96,000 SF) all executed renewals or extensions during the quarter, which points to the continued desirability of suburban office locations. Comparatively INNER SUBURBS ROUTE 128 WEST

ROUTE 495 WEST lower rents, proximity to executive housing and relatively shorter ROUTE 128 SOUTH ROUTE 128 NORTH ROUTE 495 SOUTH ROUTE 495 NORTH

FRAMINGHAM-NATICK commutes should encourage demand growth in the coming years, ROUTE 128 NORTHWEST ROUTE 495 NORTHEAST

ASKING RENT RANGE WEIGHTED AVERAGE especially for well-located, highly-amenitized assets.

TOTAL INVENTORY TOTAL VACANT TOTAL VACANCY Q1 NET ABSORPTION YTD NET ASKING RENT ABSORPTION (SF) (SF) RATE (SF) (SF) ($/SF)

Class A 59,236,293 8,195,581 13.8% 564,753 564,753 $29.18

Class B 54,494,549 8,338,583 15.3% 234,316 234,316 $22.65

Total 113,730,842 16,534,164 14.5% 799,069 799,069 $25.83

5 | METRO BOSTON OFFICE | Q1 2019 NOTABLE TRANSACTIONS

ONE CONGRESS STREET 325 MAIN STREET 10 SAINT JAMES AVENUE 1 LINCOLN STREET BOSTON CAMBRIDGE BOSTON BOSTON

Company State Street Bank Company Google Company Wayfair Company WeWork Size 505,980 SF Size 336,500 SF Size 302,000 SF Size 240,900 SF Submarket Financial District Submarket East Cambridge Submarket Back Bay Submarket Financial District

1000 WINTER STREET 455 GRAND UNION BOULEVARD 600-800 DISTRICT AVENUE 700 DISTRICT AVENUE WALTHAM SOMERVILLE BURLINGTON BURLINGTON

Company Tesaro Company Puma Company BAE Systems Company Charles River Develop Size 200,000 SF Size 149,840 SF Size 135,018 SF Size 123,700 SF Submarket Route 128 West Submarket Inner Suburbs Submarket Route 128 Northwest Submarket Route 128 Northwest

2 FINANCIAL CENTER 42 LONGWATER DRIVE 314 MAIN STREET 121 SEAPORT BOULEVARD BOSTON NORWELL CAMBRIDGE BOSTON

Company KPMG Company Clean Harbors Company Capital One Company Foundation Medicine Size 118,183 SF Size 103,500 SF Size 78,300 SF Size 64,027 SF Submarket South Station Submarket Route 128 South Submarket East Cambridge Submarket Seaport

6 | METRO BOSTON OFFICE | Q1 2019 OFFICE USING EMPLOYMENT GROWTH RESEARCH SPOTLIGHT 2010-2017

TRENDS IN SF PER OFFICE WORKER

495 NORTH EAST

495 NORTH COMPANIES RIGHT-SIZING 128 NORTH

128 NORTH WEST

128 WEST 495 WEST HOTELING FRAMINGHAM/ NATICK

128 SOUTH

FLEXIBLE WORK SPACE 495 SOUTH

19.5% — 38.5% 13.7% — 19.5% 7.7% — 13.7% 5.1% — 7.7% LOW UNEMPLOYMENT

430 BOSTON METRO OFFICE USING EMPLOYMENT 420

410 2,000

400 1,600 390

380 1,200

370 ()

EMPLOYEES 800 AVERAGE SF / OFFICE WORKER 360

350 400

340 0 2011 2017 2012 2015 2013 2016 1999 2018 2014 1990 1995 2000 2005 2010 2015 1998 2001 2010 2007 2002 2005 2003 2006 2009 2008 2004 2000

BUSINESS SERVICES INFORMATION FINANCE

7 | METRO BOSTON OFFICE | Q1 2019 CAPITAL MARKETS

SALES VOLUME • While the first quarter of 2019 lacked the blockbuster sales Boston has

$4,000 become accustomed to, the investment landscape remains incredibly $3,500 positive. Throughout the metro, $812 million in office assets changed $3,000 $2,500 hands during the first three months of the year. With several noteworthy $2,000

() transactions, including 75 State Street, set to close in the coming quarters, DOLLARS $1,500 a growing pipeline of sales and increasing pricing, Boston should see $1,000 $500 more action over the next year. $0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 • Urban development sites are in high demand. Most recently, the SUBURBAN URBAN Skating Club of Boston sold its two-acre Brighton property to the Davis MEDIAN PRICE/SF 4-Quarter Moving Average Companies for $26.25 million and Related Beal is under contract on a 6.5- $800 acre site owned by P&G in the Seaport. GE has also placed its Seaport site up for sale after abandoning plans to build the second phase of its $600 headquarters’ development. The sale includes two renovated buildings, $400 with a long-term lease commitment with GE, as well as a fully-permitted () DOLLARS vacant parcel. $200

$0 • In the suburbs, the sales of One Newton Place ($50.75 million) and 4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Burlington Woods ($23.4 million) dominated the investment narrative. SUBURBAN URBAN

TOP Q1 / INVESTMENT SALES

18 TREMONT STREET ONE NEWTON PLACE 15 COURT SQUARE 4 BURLINGTON WOODS BOSTON NEWTON BOSTON BURLINGTON

Saracen Properties/Cadre Buyer Jamestown, L.P. Buyer Buyer KS Partners Buyer GEM Realty Capital, Inc. Advance LLC

Price $102,750,000 Price $50,750,000 Price $29,000,000 Price $23,413,351

Total SF 202,033 Total SF 172,705 Total SF 81,000 Total SF 104,835

Price/SF $509 Price/SF $294 Price/SF $358 Price/SF $223

Cap Rate - Cap Rate - Cap Rate 5.0% Cap Rate -

SALES VOLUME NUMBER OF TOTAL MEDIAN MEDIAN ($) TRANSACTIONS SF ($/SF) CAP RATE $812M 63 1.9M $164 6.8%

8 | METRO BOSTON OFFICE | Q1 2019 OFFICE RECAP

TOTAL UNDER DIRECT SUBLEASE TOTAL Q1 NET YTD NET ASKING INVENTORY CONSTRUCTION VACANT VACANT VACANCY ABSORPTION ABSORPTION RENT (SF) (SF) (SF) (SF) RATE (SF) (SF) ($/SF)

Back Bay 14,097,979 - 572,152 48,944 4.4% 226,982 226,982 $65.85

Charlestown 2,589,875 50,000 40,934 2,751 1.7% 10,332 10,332 $38.53

Fenway/Kenmore 1,673,521 - 40,000 - 2.4% 76,674 76,674 $70.00

Financial District 35,813,446 750,000 2,560,687 298,124 8.0% 189,381 189,381 $62.19

Midtown 2,117,611 - 51,706 14,131 3.1% 7,651 7,651 $43.99

North Station 2,681,284 808,054 97,330 6,873 3.9% (5,816) (5,816) $51.09

Seaport 11,096,233 749,369 980,883 126,873 10.0% (390,178) (390,178) $61.15

South Station 1,174,568 - 66,321 - 5.6% 11,557 11,557 $54.47

Boston Total 71,244,517 2,357,423 4,410,013 497,696 6.9% 126,583 126,583 $61.71

East Cambridge 5,894,888 1,261,048 37,831 22,963 1.0% (8,648) (8,648) $78.20

Mid Cambridge 2,538,270 - 46,963 19,154 2.6% (14,092) (14,092) $68.69

West Cambridge 1,923,371 - 150,131 86,122 12.3% (10,829) (10,829) $57.56

Cambridge Total 10,356,529 1,261,048 234,925 128,239 3.5% (33,569) (33,569) $63.11

Framingham-Natick 4,624,266 - 77,577 21,466 17.3% (14,759) (14,759) $24.17

Inner Suburbs 6,465,044 391,215 598,659 18,802 9.6% (27,054) (27,054) $34.02

Route 128 North 14,107,289 - 1,761,194 75,176 13.0% 93,351 93,351 $24.99

Route 128 Northwest 13,531,719 - 1,460,980 84,931 11.4% 274,679 274,679 $31.80

Route 128 South 16,043,404 61,702 2,144,029 86,957 13.9% (85,844) (85,844) $25.97

Route 128 West 23,248,432 676,000 2,344,053 262,969 11.2% 400,089 400,089 $37.94

Route 128 Total 66,930,844 737,702 7,710,256 510,033 12.3% 682,275 682,275 $30.49

Route 495 North 13,288,300 - 3,051,427 129,688 23.9% (51,654) (51,654) $19.53

Route 495 Northeast 7,908,144 - 1,371,923 12,230 17.5% 76,342 76,342 $20.18

Route 495 South 3,292,373 - 363,448 4,788 11.2% 32,233 32,233 $19.60

Route 495 West 11,221,871 - 1,924,134 39,733 17.5% 101,686 101,686 $20.48

Route 495 Total 35,710,688 - 6,710,932 186,439 19.3% 158,607 158,607 $19.94

Suburban Total 113,730,842 1,128,917 15,797,424 736,740 14.5% 799,069 799,069 $25.83

Market Total 195,331,888 4,747,388 20,442,362 1,362,675 11.2% 892,083 892,083 $34.00

9 | METRO BOSTON OFFICE | Q1 2019 LIZ BERTHELETTE JOEY BIASI Director of Research Research Analyst 617.457.3306 617.457.3385 [email protected] [email protected]

METHODOLOGY Source: Co-Star, Hunneman. Prepared: March 2019.

Disclaimer: The above data is from sources deemed to be generally reliable, but no warranty is made as to the accuracy of the data nor its usefulness for any particular purpose. Average Rental Rates are asking rents on direct space. Vacant space includes both direct and sublease space.

303 CONGRESS STREET | BOSTON, MA 02210 | 617.457.3400 | HUNNEMANRE.COM