GREATER BOSTON MARKET VIEWPOINT 3RD QUARTER 2014 Accelerating success. MARKET VIEWPOINT | Q3 2014 Boston Overview The vacancy rate in the 62.8-million-square-foot Boston office The largest third quarter leases represented Financial District market dropped to 11.1% during the third quarter, and nearly Class A buildings, with select transactions including: 800,000 square feet of positive absorption was recorded. The core Financial District and Back Bay submarkets were largely Tenant Address SF Submarket Financial responsible for the increased occupancy, with 522,000 and Sonos (n) Lafayette City Center 170,000 District 248,000 square feet of absorption, respectively. Financial CDM Smith (n) 75 State Street 170,000 While most of the smaller peripheral submarkets report single- District Financial State Street Bank (r) 100 Summer Street 167,000 digit vacancies, the vacancy rate in the Financial District is 13.1%, District a marked improvement from early 2011 when it topped 20%. Financial Choate Hall & Stewart (c) Two International Place 135,000 District Statistics in the core submarkets are as follows: Financial Jewish Vocational Service 101 Federal Street 42,200 District Supply Market Segment SF Available Vacancy Rate Financial Atlantic Trust 100 Federal Street 40,000 (SF) District Financial District – Class A 27,544,321 3,847,840 14.0% (n) = relocation from Cambridge (c) = contraction (r) = renewal Financial District – Class B 6,054,905 542,551 9.0% Back Bay – Class A 10,863,855 1,131,593 10.4% • The Financial District accounts for a slightly disproportionate Back Bay – Class B 2,030,085 311,428 15.3% share of the leasing activity thus far in 2014, with roughly 60 Seaport – Class A 3,067,295 209,696 6.8% percent of transaction velocity, compared to the Back Bay and Seaport – Class B 4,545,896 343,677 7.6% Seaport at 23 percent and 11 percent, respectively. SUPPLY AND DEMAND • While generally considered to be static or even in contraction mode, the FIRE (Finance, Insurance, Real Estate) and Legal • Supply totals 62.8 million square feet of which 29.2 million sectors accounted for nearly half the leases executed through square feet represents Class A tower space in the Financial the first three quarters of the year, including some expansion District (32 buildings, 22.1 million SF) and the Back Bay (9 requirements. While dominated by the FIRE and Legal sectors, buildings, 7.1 million SF). Technology, Architectural and Engineering, and Business Services firms are increasingly making their mark in the • At the end of the third quarter there were approximately 200 downtown markets. A depiction of the lease velocity by tenants in the market seeking an aggregate of close to 4 industry is provided below: million square feet of space. Although the median requirement is 10,000 square feet, some of the larger requirements include: Transaction Velocity by Industry (SF Thousands) Tenant SF Industry FIRE Legal BNY Mellon 350,000 Financial Services Technology Putnam Investments 275,000 Financial Services Architectural/Engineering Business Services Wells Fargo 250,000 Financial Services Health/Life Sciences Government/Non-prot The Boston Globe 150,000 Media Electronics Houghton Mifflin 150,000 Publishing Media & Publishing Advertising/Marketing Education VELOCITY Telecommunications Hospitality/Retail • Velocity (signed lease activity) totaled over 1.2 million square 0 200 400600 8001,000 1,200 feet during the third quarter, representing over 40 transactions. An additional 25 tenants representing close to ABSORPTION AND VACANCY 700,000 square feet of leases had commitments pending at quarter-end. Year-to-date transaction velocity is 3.7 million • The quarter-end vacancy rate of 11.1% compares favorably to square feet, which is on pace to exceed 2013 totals. the 12.3% vacancy rate reported at the end of the third quarter 2013. p. 2 | Colliers International MARKET VIEWPOINT | Q3 2014 • Absorption was positive in both the Back Bay and Financial • The trend of East Cambridge rents surpassing those of the District submarkets, due to a number of mid-sized leases at Financial District has been the case since late 2011 and is 501 Boylston Street and 200 Clarendon Street in the Back likely to remain the case for the foreseeable future. Bay, as well as the CDM Smith and Sonos leases in the Financial District. Average Class A Asking Rents $80 • Continued positive absorption is anticipated over the 2014 to 2018 forecast period and the market is expected to reach the $70 “equilibrium” rate, generally believed to be 10%, by 2017. $60 $50 Projected Vacancy & Absorption $40 2,000 20% Forecast $30 1,500 15% 8.9% 1,000 10% $20 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 Q3 10 Q3 11 Q3 12 Q3 13 Q3 14 500 5% Financial District East Cambridge 0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -500 SF (Thousands) SF Space Type Rental Range/SF -1,000 Class A – High Rise $55 - $80 -1,500 Class A – Mid Rise $50 - $60 -2,000 Total Boston Absorption Total Boston Vacancy Rate Class A – Low Rise $42 - $50 Class B $30 - $47 RENTAL RATES DEVELOPMENT • Rental rates are firming across the market, with the most notable increases in Class B buildings in the Seaport and for • In the Back Bay, Boston Properties had an October ground- Class A space in the Back Bay. breaking at 888 Boylston Street, a 17-story building in the Prudential Center complex anchored by Natixis Global Asset • It is significant that two of the larger leases executed in the Management’s 128,000-square-foot lease and scheduled to Financial District during the quarter were Sonos and CDM open in late 2017. Smith, both relocating from East Cambridge in order to achieve more favorable rental rates. Given the scarcity of • Other office development activity across the city includes two space in East Cambridge, and the 14% Class A vacancy rate in build-to-suit office buildings for PwC and Goodwin Procter in the downtown market, the Financial District is an attractive the Seaport (420,000 SF and 360,000 SF, respectively); a option for tenants seeking value as well as excellent access to build-to-suit headquarter building for Converse near North public transportation. Station (187,000 SF); and speculative construction at 1325 Boylston Street, Samuels & Associates mixed-use project in • Class A rents in the Financial District historically tended to the Fenway submarket (230,000 SF). lead the market, but given rising rents in Cambridge and the Seaport that trend has reversed over the past two years. TRENDS Tenants seeking value options are finding suitable options in • Gradual rent growth is anticipated over the next 24 months. the Financial District’s low-rise office space. • City-wide, landlords will look to both traditional and non- traditional tenants including start-ups and technology firms and out-of-market migration in order to absorb the available space. CONTACT: Mary Sullivan Kelly | [email protected] Colliers International | p. 3 MARKET VIEWPOINT | Q3 2014 Cambridge Overview Conditions in the 20.8-million-square-foot Cambridge office and BioMed Realty Trust’s 50 Hampshire Street. CDM Smith, an lab market are heated. The overall vacancy rate of 10.7% is engineering and construction services firm, will vacate 180,000 hardly indicative of market reality as lab and office tenants of all square feet and relocate to less expensive low-rise space at 75 sizes are finding options scarce, particularly in the ever- State Street, Boston. This reflects an opportunistic move by tightening Kendall Square market. Net absorption registered BioMed, as CDM’s lease was not scheduled to expire until 2018. nearly 250,000 square feet during the third quarter, bringing the BioMed was able to create a large block of vacancy in the year-to-date total to over 700,000 square feet. Although incredibly tight core Kendall Square market and will likely quarterly absorption in the office market was negative for the achieve current market rents in the mid- to high-$60s, first time in two years primarily due to a new large block of compared to the mid-$40s per square foot rent they were availability at 50 Hampshire Street, demand is strong and rental collecting from CDM Smith. Absent the 50 Hampshire block, the rates continue to rise. The lab market fundamentals are office vacancy rate in the core Kendall submarket market is incredibly strong with Big Pharma/Big Bio companies continuing 3.5%, with the next largest block of space 23,350 square feet at to pile into Kendall Square as well as the continued expansion of 101 Main Street. both existing and homegrown early to mid-stage biotech companies. Another example of a large Cambridge tenant migrating to Boston was Sonos, a California-based wireless speaker Key statistics at the end of the third quarter include: company that currently occupies 56,750 square feet at 25 First Street. Sonos is experiencing explosive growth and when faced Supply SF Vacancy Absorption (000s) Market/Submarkets with both rising asking rents and the limited number of large- (000s) Rate Q3 2014 YTD block options in East Cambridge, opted to sign a Total Cambridge* 20,831 10.7% 247 722 169,600-square-foot lease at Lafayette City Center in Downtown Office 11,012 9.5% (154) (5) Crossing. Ultimately Lafayette City Center will allow Sonos a Lab 8,947 13.1% 397 703 phased occupancy and flexible expansion rights at rents *Includes R&D space significantly below those of East Cambridge. Investor interest in the robust Cambridge market has been Rents Cambridge-wide are influenced by the strength of the East intense over the past year, and the third quarter was no Cambridge submarket, which have risen steadily over the past exception.