SUBURBAN MARKET REPORT I-495 & RT-128 | Q3 2020

he combination of a tumultuous economy, continued high rates of work from home, and lower levels of deal volume in the latter CLASS A Tparts of the summer meant that the greater Boston office market had a historically quiet third quarter of 2020. Little tenant activity Asking Rate vs. Direct Vacancy occurred as lingering uncertainty, simultaneously from an economic, political, and real estate perspective, caused most companies to Average Direct Asking Rate Vacancy postpone major office decisions to a later date. This lack of new $30.00 20% deals led to sharp levels of negative absorption, totaling 1.4 million $25.00 square feet for the greater Boston area, which sent vacancies above 10% for the first time since 2016. No area of the metro was spared $20.00 from the current climate as Boston, Cambridge, 128, and 495 all posted high levels of negative absorption for the second quarter in $15.00 15% a row. $10.00 The big story to emerge in the third quarter was the dramatic $5.00 rise in sublet space. Sublet availabilities increased by roughly 1.6 million square feet bringing the total to 6.5 million square feet $0.00 10% '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 metro-wide. Total sublet space on the market is now higher than Average Asking Rate Direct Vacancy the Great Recession and is perhaps only surpassed by the 2001 Tech Wreck. As is the case in many parts of the country, Boston’s urban submarkets saw the steepest rises. In fact, approximately 80% of the sublet space added since the start of the pandemic has been either in the city of Boston or Cambridge. While the suburbs could be poised to benefit from an urban exodus, sublet and direct CLASS B space have also risen there. The extent that this sublet space glut Asking Rate vs. Direct Vacancy becomes a lingering issue for the market has yet to be determined. Under pressure from investors to cut costs, many tenants may be Average Direct only testing the sublet market for now. Therefore, much of this space Asking Rate Vacancy $25.00 20% could be quickly withdrawn from the market as the economy begins to improve. $20.00 Landlords and tenants alike are in a wait-and-see mode. Despite rising availabilities, landlords for the most part have kept asking $15.00 rents the same from the previous quarter. Though some landlords 15% have reportedly lowered asking rents or increased concession $10.00 packages upon legitimate interest from a creditworthy tenant. From $5.00 a tenant perspective, any movement in rents or concessions hasn’t been enough to drive them out in droves to make a deal now. Office $0 10% investment activity too has mirrored the wait-and-see approach '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 of rents. Only a handful of pure office buildings traded in Q3 with Average Asking Rate Direct Vacancy essentially none occurring in Cambridge or Boston. The durability of rents and prices make sense given that the landlord pool is more institutionalized and long-term focused than it was in 2001 or 2008. Landlords don’t want to sell or drop rents in the current climate when hold periods can be for 10 years or more. LOOKING FORWARD $3.7B 35,500 The third quarter was a challenging one so it’s encouraging to note GREATER BOSTON JOBS ADDED that activity must pick up from here. For starters, the economy has VENTURE CAPITAL GREATER BOSTON begun to improve. Massachusetts added 291,000 jobs from April FUNDING (Q2 2020) (AUGUST 2020) to August 2020 helping to mend the losses early in the COVID-19 outbreak. Unemployment has begun to move in the right direction after spiking in Q2. The state unemployment rate decreased from a high of 17.7% in June to the current rate of 11.3%. Removing the uncertainty of a presidential election will also help provide more clarity about the future and perhaps boost business confidence. $3.3B 92 Finally, dozens of companies, many of them Boston-based, appear MASSACHUSETTS NIH MASSACHUSETTS to be making dramatic strides towards the development of a safe FUNDING (2020) COMPANIES CONDUCTING and effective COVID-19 vaccine. Time will tell when the treatment COVID-19 RELATED R&D will arrive and how effectively it will be distributed, but that should provide encouragement for a more active future. ROUTE 128 OFFICE TRENDS SUBURBS | Q3 2020

oute 128 closed Q3 on better footing than its urban counterparts but some of the same trends present there Rhave begun to trickle out to the suburbs. Negative absorption totaled 268,000 square feet, led by particularly sharp declines in DEAL HIGHLIGHTS Route 128 West. Sublet space has begun to rise, albeit not to the same level as downtown. VistaPrint added 135,000 square feet 1 ORCHARD WAY at 275 Wyman while The Rockport Group added 69,000 square SUBMARKET 128 South feet at 1210 Washington Street. These additions bring total sublet Harvard/Tufts Pilgrim availability to 1.7 million square feet, up by 330,000 square feet TENANT from the quarter before. SIZE 504,000 SF While present in previous quarters, lab conversion activity has ramped up to record levels. More than 630,000 square feet of 480 PLEASANT STREET formerly vacant office space is in various stages of conversion 128 West including 195 West, 200 West, 1560 Trapelo, 20 Maguire, 47 SUBMARKET Foundry, and Arsenal on the Charles. Many of these buildings have TENANT Markforged witnessed strong activity with 47 Foundry leased to Affinia and SIZE 36,300 SF 200 West under LOI from one large user. While this phenomenon isn’t directly applicable to office demand, the net removal of supply does effectively tighten the overall market. The same phenomenon 115 FOURTH AVENUE has long been present in the industrial market where widespread SUBMARKET 128 West demolition of near urban product has reduced availabilities and increased rents. TENANT FareHarbor The biggest development for Route 128, and perhaps greater SIZE 11,800 SF Boston, is Tufts Health Plan/Harvard Pilgrim’s planned building swap with Spear Street Capital. The two insurance companies, in the midst of a merger, purchased the 540,000 square foot 480 PLEASANT STREET former headquarters for Reebok in Canton dubbed “The SUBMARKET 128 West Block.” In exchange, Spear Street acquired Tufts’ former TENANT InCrowd building in Watertown, which will almost certainly be slated for SIZE 10,700 SF a lab conversion. This move alone was enough to overcome consolidations by Meditech and Oxford Immunotec and generate positive absorption for 128 South.

AVERAGE ASKING RATE DIRECT VACANCY

Average Vacancy Asking Rate Rate $35.00 25%

$30.00 20%

$25.00 15%

$20.00 10%

$15.00 5% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 South North West South North West

South North West INTERSTATE 495 OFFICE TRENDS SUBURBS | Q3 2020

95 had a historically quiet quarter even by its standard. Hardly any large leases were signed driving 443,000 square feet of negative absorption 4and sending vacancies to 16.5%. Though rising sublet space hasn’t been a phenomenon that has made its way to 495. Sublet availabilities stayed essentially level through the quarter and, unlike other segments of the market, are trending well below their record in the Great Recession. Rents continued on the similar trend of the previous quarter and held flat from Q2. While general office demand has declined, several segments of the local market are witnessing solid demand. Assets with flex elements have DEAL HIGHLIGHTS done well during the pandemic as the production and R&D capabilities these buildings offer can’t be replicated in a remote capacity. GMP (Good 111 LOCKE DRIVE Manufacturing Practices) demand has particularly ramped up. There are SUBMARKET 495 Mass Pike roughly 1.7 million square feet of GMP requirements in greater Boston, most of which will feed into 495 and out to Worcester. Much of this is due to TENANT Repligen maturity in biotechnology industry where companies who were created 5 SIZE 66,000 SF years ago or so now need manufacturing space to bring an approved drug to market. Further, with acute global supply chain issues during COVID-19, many pharmaceutical companies have considered moving large portions of 1700 WEST PARK DRIVE their supply chains to the US, bringing manufacturing jobs and GMP demand SUBMARKET 495 Mass Pike domestic. TENANT Merrill Lynch The big concern for 495 is large blocks of direct space on the market. SIZE 8,900 SF Approximately 36 assets in 495 have an availability greater than 50,000 SF and 17 have one larger than 100,000 SF. IBM recently put up 491,000 square feet at its Littleton campus, now one of the largest blocks of available space in the suburbs. IDG announced a relocation to Needham to PTC’s former space and put roughly 87,000 square feet for lease at its former Framingham location. These spaces, plus availabilities like Phillips former headquarters in Andover and eClinicalWorks in Westborough, have pushed 495 availabilities to 22.5%.

AVERAGE ASKING RATE DIRECT VACANCY

Average Vacancy Asking Rate Rate $25.00 30%

25%

20% $20.00 15%

10%

$15.00 5% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Northeast South Mass Pike Northeast South Mass Pike

Northeast South Mass Pike DEVELOPMENT SUBURBS | Q3 2020

resh off the heels of large acquisitions in Watertown and Newton, Alexandria extended its holdings in F128 West with a $330 million buy of the Reservoir Woods East campus in Waltham. The site comes with the potential for 400,000 square feet of additional lab development meaning Waltham’s lab pipeline should RESERVOIR WOODS EAST CAMPUS grow beyond 300 Third and 225 Wyman. Watertown’s lab pipeline is growing as well. WS Development is pivoting from retail to lab at 202 Arsenal Street while ARSENAL ON THE CHARLES Boston Development Group announced plans for 200,000 square feet of lab space at 66 Galen Street. Although the lab pipeline across the metro is growing, the current market is simply too tight to raise any alarm bells just yet.

UNDER CONSTRUCTION

Current Survey (SF) 3.0 Unlike Boston or Cambridge, office construction is well past its peak in the suburbs. Roughly 1.2 million 2.5 square feet is underway with only one building under 2.0 construction in 495. Excluding lab development, 1.5 build-to-suits are essentially the only projects 1.0 underway currently. This does eliminate the supply risk in the suburbs as high levels of speculative office 0.5 development appear, largely, a thing of the past. 0 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Q1 Q2 Q3 Q4 INVESTMENT SALES SUBURBS | Q3 2020

hile overall investment activity was down, the suburbs did see some notable office transactions close. Alexandria continued their rapid suburban expansion, purchasing the Reservoir Woods East campus from the Davis Companies. This transaction broke WWaltham record set last quarter by The Post and almost certainly means more lab supply as the site came with 400,000 square feet of potential development. Spear Street and Tufts Harvard Pilgrim completed a building swap between 705 Mount Auburn and One Orchard valuing each building at $617 and $252 per square foot respectively. Investment activity on the office front has broadly been quiet but listings have begun to hit the market. Office investment has been out of favor by capital but the comparable price differences between urban and suburban assets should generate investor interest.

RESERVOIR WOODS EAST

PRICE $330 Million PSF $751 BUYER Alexandria Real Estate Equities SELLER The Davis Companies

705 MOUNT AUBURN STREET

PRICE $307 Million PSF $617 BUYER Spear Street Capital SELLER Tufts Health Plan

ONE ORCHARD WAY

PRICE $146 Million PSF $252 BUYER Tufts Harvard Pilgrim SELLER Spear Street Capital

405 COCHITUATE ROAD

PRICE $12.4 Million PSF $291 BUYER RJ Kelly Company SELLER Private Seller OFFICE MARKET STATS SUBURBS | Q3 2020

Quarterly 12 Month Submarket RSF % Vacant % Sublease % Available Asking Rate Absorption (SF) Absorption (SF) TOTAL A&B 108,059,660 13.3% 2.4% 18.6% (710,274) (1,186,868) $27.21 Inner Suburbs 5,421,025 6.4% 1.7% 13.8% 1,210 77,497 $45.65 ROUTE 128 58,755,177 11.5% 2.8% 16.2% (268,200) (739,541) $29.65 128 West 23,532,504 10.4% 3.8% 17.4% (412,886) (447,986) $34.47 128 North 18,272,871 12.8% 2.2% 16.5% (79,623) (427,427) $28.95 128 South 16,949,802 11.7% 2.2% 14.1% 224,309 135,872 $23.72 INTERSTATE 495 43,883,458 16.5% 2.0% 22.5% (443,284) (524,824) $21.67 495 Mass Pike West 19,511,604 17.7% 2.5% 22.2% (190,833) (109,486) $22.18 495 Route 2 West 6,691,760 18.2% 0.9% 29.7% (42,192) 86,781 $19.64 495 Northeast 6,399,846 15.9% 2.3% 25.9% (78,633) (143,538) $22.43 Route 3 North 6,901,485 17.3% 1.1% 20.8% (50,308) (216,161) $22.39 495 South 4,378,763 8.5% 2.1% 10.8% (81,318) (142,420) $20.30

CLASS A 65,877,534 13.4% 3.3% 19.5% (285,672) (1,027,893) $29.80 Inner Suburbs 3,988,974 7.5% 2.2% 10.1% 2,860 34,308 $47.25 ROUTE 128 37,534,696 11.8% 3.8% 17.1% (60,161) (633,388) $32.16 128 West 15,095,049 9.2% 4.9% 17.0% (274,763) (225,452) $36.85 128 North 12,524,399 14.0% 2.5% 18.7% (61,348) (348,635) $31.84 128 South 9,915,248 12.9% 3.7% 15.1% 275,950 (59,301) $25.44 INTERSTATE 495 24,353,864 16.7% 2.7% 24.8% (228,371) (428,813) $23.30 495 Mass Pike West 12,214,628 18.0% 3.6% 22.9% (93,898) (99,577) $23.49 495 Route 2 West 2,777,028 10.0% 1.6% 31.9% (11,315) 5,985 $20.67 495 Northeast 3,880,004 21.2% 2.2% 35.3% (100,305) (147,062) $24.92 Route 3 North 3,828,849 17.8% 1.2% 23.0% (24,730) (191,930) $24.13 495 South 1,653,355 4.9% 2.1% 7.0% 1,877 3,771 $20.58

CLASS B 42,182,126 13.2% 1.1% 17.3% (437,377) (184,525) $23.18 Inner Suburbs 1,432,051 3.3% 0.3% 24.2% (1,650) 43,189 $41.20 ROUTE 128 21,220,481 11.0% 1.2% 14.6% (220,814) (131,703) $25.21 128 West 8,437,455 12.3% 1.9% 18.2% (150,898) (248,084) $30.22 128 North 5,748,472 10.1% 1.5% 11.6% (18,275) (78,792) $22.65 128 South 7,034,554 10.0% 0.1% 12.7% (51,641) 195,173 $21.29 INTERSTATE 495 19,529,594 16.3% 1.1% 19.6% (214,913) (96,011) $19.65 495 Mass Pike West 7,296,976 17.1% 0.6% 21.0% (96,935) (9,909) $19.99 495 Route 2 West 3,914,732 23.9% 0.4% 28.1% (30,877) 80,796 $18.91 495 Northeast 2,519,842 7.6% 2.5% 11.4% 21,672 3,524 $18.60 Route 3 North 3,072,636 16.6% 1.0% 18.1% (25,578) (24,231) $20.23 495 South 2,725,408 10.6% 2.1% 13.1% (83,195) (146,191) $20.13 AT A GLANCE SUBURBS | Q3 2020

QUICK MARKET STATS

ROUTE 128 VACANCY SUBLEASE 11.5% 2.8%

AVAILABILITY 12-MTH ABSORPTION 16.2% (739,541) SF

CONSTRUCTION ASKING RATE 1.1M SF $29.65/SF

INTERSTATE 495 VACANCY SUBLEASE 16.5% 2.0%

AVAILABILITY 12-MTH ABSORPTION 22.5% (524,824) SF

CONSTRUCTION ASKING RATE 150K SF $21.67/SF

PETER CONWAY Director of Research 617.951.4141 [email protected]

Lincoln Property Company | 53 State Street, 8th Floor, Boston, MA | 617.951.4100 | LPCBoston.com Lincoln Property Company’s Suburban Market Report is produced by the Boston Office’s research team in collaboration with our Boston Brokerage Group. If you have any questions regarding market conditions and the information found in this report, please contact Peter Conway.