Office Leasing on Pause in Q2 As Life Science Remains Resilient
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MARKETVIEW BOSTON DOWNTOWN OFFICE Boston Downtown Office/Lab, Q2 2020 Office leasing on pause in Q2 as life science remains resilient Office Availability Lab Availability Office Lease Rate (Gross) Lab Lease Rate (NNN) Under Construction 15.0% 8.9% $67.71 $82.36 5.1 MSF * Arrows indicate change from previous quarter Figure 1: Office Vacancy vs. Lease Rate Figure 1: Office Vacancy vs. Lease Rate Vacancy Rate 8.6% Average Asking Lease Rate (Gross) Vacancy $67.71 Rate: 8.6% Average Asking Lease Rate: $67.71 10% $70 9% $65 8% $60 7% $55 6% $50 5% $45 4% $40 3% $35 2% $30 1% $25 0% $20 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 Source: CBRE Research, Q2 2020. Life and business in Boston came to a halt in mid- sublease space being added throughout the city. In Q2 March as strict stay-at-home orders went into effect, there was more than 725,000 sq. ft. added to the but the region began a phased re-opening in late May sublease market, ending the quarter with more than as COVID-19 numbers stabilized. Non-essential 2.0 million sq. ft. of available sublease space. The 2.0 employers were allowed to re-open offices at 25% million sq. ft. of sublease space on the market has capacity in the city of Boston in early June, and as a surpassed the high in 2010 from the Great Financial result it is anticipated the Boston office market will Crisis but has not surpassed the all-time high of 3.0 begin to show gradual signs of normalcy. million sq. ft in 2001. TAMI tenants make up over 50% of the sublandlords that added sublease space in Boston recorded the second consecutive quarter of Boston this quarter. Projections are for an increase in negative growth with almost 930,000 sq. ft. of negative sublease availabilities over the next few quarters as absorption in the second quarter. Availability and companies continue to reassess their vacancy both increased 110 basis points (bps) to 15.0% office-using needs. and 8.6% respectively, largely due to a spike in Q2 2020 CBRE Research © 2020 CBRE, Inc. | 1 MARKETVIEW BOSTON DOWNTOWN OFFICE/LAB Figure 2: Historical Sublease Available DowntownSF Office Historical Available Sublease 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CBRE Research, Q2 2020. After an unprecedented period of growth over the last May. Boston employment rebounded by 0.7% in May, decade, the downtown market showed signs of with a net employment gain of 10,900 jobs, or 3.2% of slowing demand earlier this year, but the pace of the jobs lost since February. Overall, office-using slowdown was accelerated by the sudden impact of employment in Boston is down 30,900 jobs since COVID. The downtown market had been on pause February, a loss of 5%. with limited to no tour activity since mid-March, but tenants have begun touring new spaces again in recent Leasing activity continued to be driven predominately weeks. At the end of the second quarter there was 4.1 by lease expirations and less by growth-driven needs, million sq. ft. of demand in the market (requirements as many companies take a wait-and-see approach to over 20,000 sq. ft.) with 76% of the requirements their real estate needs and focus on re-opening their active, and 24% temporarily paused. In comparison offices. Asking rents continued their tick upward with there was 4.9 million sq. ft. of demand at the end of overall city rents up slightly to $67.71 per sq. ft. but it 2019 and 3.4 million sq. ft. three years ago. FIRE is anticipated that rents will begin softening in the companies now make up more of the demand than second half of 2020 and into early 2021. Though signs TAMI companies for the first time in 18-24 months. of a return to normal are beginning to show, significant challenges in the Boston office market lie The moratorium on construction projects in the city ahead in the next few quarters as companies balance was lifted at the end of May after more than two decisions around de-densification in the office and the months. There is currently 5.1 million sq. ft. of new flexibility of employees working remotely as the office and life science construction underway, with workplace continues to evolve. almost 4 million sq. ft. set to be delivered between 2021 and 2023. At this point projects that were CBD financed and permitted are moving forward while • The CBD saw more than 300,000 sq. ft. of sublease uncertainty continues to surround other projects that space become available in the second quarter and were in the planning stages. posted more than 480,000 sq. ft. of negative absorption. Sublease availability in the CBD rose to The US economy showed a surprisingly strong 2.8%, up 40 basis points quarter-over-quarter as rebound in employment in May, with a 1.9% increase more than 30 spaces (all less than 30,000 sq. ft. in total nonfarm employment. However, the Boston each) became available. employment numbers lagged the national trend, • reflecting the region’s cautious reopening strategy. Despite the headwinds, Class A rents continued to The reference period for May’s employment report was increase, rising more $0.40 per sq. ft. to $78.20 per the week of May 16, which falls short of Massachusetts’ sq. ft. phase one reopening, which began in the final week of Q2 2020 CBRE Research © 2020 CBRE, Inc. | 2 MARKETVIEW BOSTON DOWNTOWN OFFICE/LAB • Two law firms completed two of the larger • Seyfarth Shaw completed the largest transaction of transactions of the quarter. Jones Day executed a the quarter, relocating and consolidating into 66,000 37,000 sq. ft. renewal at 100 High Street and Eckert sq. ft. at 2 Seaport Lane. Seamans Cherin & Mellot renewed 25,000 sq. ft at OUTLOOK Two International Place. DataDog also expanded and extended at 225 Franklin Street in 63,000 sq. ft. Virology, not the business cycle, has dictated the course of the world’s economy this year. COVID-19 • Augustech and FitBit both subleased 20,000 sq. ft. at forced a nationwide shutdown of most economic 99 High Street and 101 Federal Street, respectively. activity in March, with the largest economic centers, • Fidelity Investments acquired 245 Summer Street, especially the Northeast and Pacific coast, facing the the 891, 000 sq. ft. building they have occupied as strictest lockdowns. The economic fallout proved their headquarters location since 2012, from severe, pushing U.S. unemployment to over 15% and Benderson Development for $782.5 million ($816 causing the economy to contract by more than 30% per sq. ft.) per annum in the second quarter. BACK BAY These morbid economic conditions inspired many • After growing more than 11% in the last two years, governors to ease lockdowns, especially in Sunbelt asking rents in the Back Bay declined in the second states where the case count was less severe than in quarter, falling below the $70 mark to $69.59 per sq. more densely populated regions. These re-openings ft. Class A rents also declined to $75.82 per sq. ft., a have energized activity. Several high-frequency 3% decline quarter-over-quarter. indicators, such as hotel occupancies, restaurant traffic and hours worked, suggest the US economy • Vacancy rose 100 basis points to 4.5% and sublease bottomed in April and has been trending slightly availability increased by 120 basis points to 2.3%. upward since. This has renewed demand for labor as Limited leasing activity was offset by several many hard-hit sectors, such as hospitality and sublease availabilities added to the market, healthcare, began to bring back furloughed workers in including those by Wayfair and MFS. May. • Lincoln Institute of Land Policy signed the largest lease of the quarter, subleasing 19,000 sq. ft. at 116 On the downside, COVID-19 is ramping up in states Huntington Avenue. that were quick to reopen. In Texas and Florida the SEAPORT 7-day moving average of daily new cases has hit fresh • The Seaport had 89,000 sq. ft. of negative absorption highs approaching 2,000. Local political commentary in the first quarter with availability and vacancy suggests authorities in these states have little appetite both increasing to 14.0% and 11.0% respectively as to re-impose stricter lockdowns. Although a significant limited demand for office space continued into the uptick in cases that pummels consumer confidence is second quarter. a risk, it is quite plausible that a mild escalation of COVID-19 can coincide with pent-up consumer • While overall asking rents declined nominally in the demand that restrains economic losses this year to a second quarter to $67.93 per sq. ft., Class A rents fall in GDP of just over 6%. increased slightly to $77.33 per sq. ft. Figure 3: Office Transactions of Note Tenant Address Sq. Ft. Submarket Type Seyfarth Shaw 2 Seaport Lane 66,000 Seaport Relocation/Contraction DataDog 225 Franklin Street 63,000 CBD Expansion/Extended Jones Day 100 High Street 37,000 CBD Renewal Eckert Seamans Cherin & Mellott Two International Place 25,000 CBD Renewal Augustech 99 High Street 20,000 CBD Sublease FitBit 101 Federal Street 20,000 CBD Sublease Lincoln Insitute of Land Policy 116 Huntington Avenue 19,000 Back Bay Sublease Funnel 175 Federal Street 16,000 CBD New Source: CBRE Research, Q2 2020.