BOSTON OFFICE MARKET REPORT SECOND QUARTER 2017 SUMMER MARKET OFF TO HOT START After limping through the conclusion of 2016 and coming out of the blocks sluggish last quarter, the Boston market gathered its momentum this quarter and produced strong statistical results. The Hub remained the 10th largest metro in the country with population growth exceeding San Francisco, New York and Los Angeles. Firmly rooted in education, technology and life sciences, the region’s diverse economic base has submitted strong job growth through increased recruitment and skilled labor retention from the area’s leading universities and institutions. The net effect on the surrounding real estate market has created one of the world’s strongest and tightest urban markets. Recent success has helped the city recruit and expand blue chip talent including both Amazon and General Electric. The influx of large corporate users reflects the strong appeal and international recognition of Boston as one of the premier Global Gateway markets and “must have” locations. As a result, both the vacancy and rental rents have responded favorably over the first half of 2017 with the second quarter recording 204,700 square feet net positive absorption and asking rate growth to $54.88 per square foot. Across Boston’s eight distinct submarkets the total vacancy rates measures 6.8% which is approaching its lowest level since the dot-com boom of the early 2000’s. Unlike that period of rapid growth, the market has slowly evolved and strengthened coming out of the Great Recession and fundamentals have been carved from the ground up on solid footing. Looking forward, expect sound market conditions and a diversified economy to guide the greater Boston commercial real estate market to a strong performance over the next several years. # 4.2% $ 4.0% # 2.9% 4th MAY JUNE ANNUAL HIGHEST GDP MASSACHUSETTS NATIONAL WAGE GROWTH PER CAPITA UNEMPLOYMENT UNEMPLOYMENT NATIONALLY MARKET TRENDS CLASS A - ASKING RATE BOSTON 10TH LARGEST VS. DIRECT VACANCY NATIONAL METRO Faster population growth than New York & San Francisco AverageDirect Asking Vacancy Rate (%) $61.00 16.0% $58.00 14.0% $55.00 12.0% VACANCY DECREASES TO 6.8% $52.00 10.0% Strong demand across all eight downtown submarkets $49.00 8.0% $46.00 6.0% $43.00 4.0% ASKING RATES RISE AGAIN $40.00 2.0% Demand continued out-pacing supply, modern space rules $37.00 0.0% 2017201620152014201320122011201020092008200720062005 Average Asking Rate Direct Vacancy LIFE SCIENCE SECTION SURGES now represents over 70% of R&D demand CLASS B - ASKING RATE VS. DIRECT VACANCY TENANTS FAVOR AverageDirect Asking Vacancy Rate (%) CREATIVE OFFICE $47.00 16.0% Open layouts, contemporary finishes and collaborative environments $43.00 14.0% $39.00 12.0% $35.00 10.0% INVESTMENT SALES QUANDARY $31.00 8.0% are seller’s expectations above willingness to pay? $27.00 6.0% $23.00 4.0% $19.00 2.0% $15.00 0.0% ADAPTIVE REUSE EMERGENCE 2017201620152014201320122011201020092008200720062005 when soaring constructions costs meet creative demand Average Asking Rate Direct Vacancy DIRECT VACANCY RATE BY SUBMARKET Midtown Financial District Back Bay Seaport Fenway North Station Charlestown South Station 0% 2% 4% 6% 8% 10% 12% QUICK GLANCE MARKET STATS VACANCY SUBLEASE AVAILABILITY ▼ ▼ 6.8% ▼ 1.7% 13.0% ABSORPTION CONSTRUCTION ASKING RATE ▼ (205K) sf ▼ 1.1 MM sf ▼ $54.88/sf North Station North End $48.39/SF Beacon Hill Financial District Back Bay $54.98/SF $60.50/SF Midtown $43.61/SF South End South Station $49.02/SF Seaport $57.71/SF CLASS A OFFICE $ 7.6% DIRECT VACANCY • Several significant leases were signed this quarter which clarified some uncertainty regarding a handful of the city’s largest requirements. Most notably, Amazon added to its WeWork location at 31 St. James by committing to roughly 150,000 square feet at 253 Summer Street in the Seaport. The lease which is rumored to average in the low-to-mid $50’s will fill one of the Seaport’s largest blocks of available space. # 1.7% • While not new to the market, in fact one of the older & largest SUBLEASE AVAILABILITY tenants, Mintz Levin recently signed a 15-year extension at One Financial Center. The legal giant will occupy seven floors (six contiguous) spanning 205,000 square feet. Despite its current 258,000 square foot size, both operational and design efficiencies will afford the law firm additional expansion space and fully renovated & expanded conference and common area facilities. • In the heart of Downtown along the newly activated and # 13.6% amenity rich Washington Street, VMware, a subsidiary of Dell Technologies, signed a long term 38,000 square foot commitment TOTAL AVAILABILITY at Lafayette City Center. The storage virtualization company is relocating from 355 Cambridge Street in Cambridge to the LCC. The relocation marks another win for Downtown as the emerging tech hub for companies seeking reprieve from massive supply and costs constraints in the surging Kendall Square and Cambridge market. • The investment sales market churned along with a handful of $ (174,000) SF closings and assets coming to market. One of the largest buildings in Boston, One Federal Street, was recapitalized by Tishman 12-MONTH ABSORPTION Speyer for roughly $630 PSF. Local fund, Rockpoint Group, continued its buying spree by acquiring 100 High Street for $678 PSF from CBRE Global as well as 160 Federal Street for $517 PSF from Beacon Capital. # $60.32/SF AVERAGE ASKING RATE CLASS A OFFICE NOTABLE QUARTERLY LEASES ADDRESS SUBMARKET TENANT SF One Financial Center Financial District Mintz Levin 205,000 253 Summer Street Seaport Amazon 150,000 888 Boylston Street Back Bay Accenture 53,000 20 Guest Street Fenway Global Atlantic Financial 42,300 500 Washington Street Financial District VMware 38,000 120 St. James Avenue Back Bay First Marblehead 32,200 125 Summer Street Financial District Analog Devices 21,000 125 High Street Financial District Broadridge 11,100 AVERAGE ASKING RATE AVERAGE DIRECT VACANCY BY SUBMARKET BY SUBMARKET $70.00 18.0% $65.00 15.0% $60.00 12.0% $55.00 9.0% $50.00 6.0% $45.00 3.0% $40.00 0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Financial District Seaport Back Bay RECENT INVESTMENT One Federal Street SALES 100 Northern Avenue 100 High Street 160 Federal Street One Federal Street 100 Northern Avenue $705,000,000 ($630/RSF) $475,000,000 ($923/RSF) Recap: Tishman Speyer Buyer: Deutsche Bank 100 High Street 160 Federal Street $370,000,000 ($678/RSF) $190,000,000 ($517/RSF) Buyer: Rockpoint Group Buyer: Rockpoint Group CLASS B OFFICE $ 5.2% DIRECT VACANCY • Over the past 24-36 months the Class B market has re-invented itself into the market leader for today’s creative & innovative tenants. The authentic character and boutique feel of the buildings coupled with modern technologies and contemporary finishes have elevated the market standard and influenced the Class A tower branding as well. The Class B vacancy rate has # 1.8% averaged between 5-8% and asking rates are now in the mid-high $40’s PSF for well positioned product with premium quality SUBLEASE AVAILABILITY assets extending into the low $50 PSF range. • After an ownership recapitalization last quarter, the new team at 10 Post Office Square between Synergy and LaSalle Investment Management renewed Boston Private Bank’s 24,100 square foot lease while also signing the Nature Conservancy to a 11,700 square foot agreement. It is rumored that a new restaurant concept will likely activate the retail portion of the building’s # 11.9 % currently sleepy streetscape along Congress Street. • The Seaport and Fort Point neighborhood continued strong TOTAL AVAILABILITY demand with the afore mentioned Amazon expansion at 253 Summer Street as well as Mass Robotics new 15,000 square foot lease at 12 Channel Center. In addition M&W Group renewed their 8,500 square foot lease at 285 Summer Street. • Investment sales activity picked up during the second quarter with multiple closings. Most notably, AIG recapitalized a 5-building portfolio with Synergy in the heart of Downtown along the # 11,70 0 S F Summer Street corridor. The Hive portfolio which features Class B’s first shared amenity space across multiple buildings achieved 12-MONTH ABSORPTION $503 PSF. Synergy also recapped 10 Post Office Square with LaSalle for $508 PSF, in addition to their acquisition of Center Plaza from Shorenstein for approximately $493 PSF. # $45.06/SF AVERAGE ASKING RATE CLASS B OFFICE NOTABLE QUARTERLY LEASES ADDRESS SUBMARKET TENANT SF 253 Summer Street Seaport Amazon 150,000 Constitution Wharf Charlestown Shoes.com 31,300 10 Post Office Square Financial District Boston Private Bank 24,100 12 Channel Center Seaport Mass Robotics 15,000 10 Post Office Square Financial District The Nature Conservancy 11,700 285 Summer Street Seaport M&W Group 8,500 AVERAGE ASKING RATE AVERAGE DIRECT VACANCY BY SUBMARKET BY SUBMARKET $50.00 20.0% $45.00 16.0% $40.00 12.0% $35.00 8.0% $30.00 4.0% $25.00 0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Financial District Seaport Back Bay RECENT INVESTMENT Center Plaza SALES 10 Post Office Square 50 Congress Street The Hive Tower Point Center Plaza 10 Post Office Square $305,000,000 ($493/RSF) $184,816,700 ($408/RSF) Buyer: Synergy & Green Oak Recap: Synergy & LaSalle Investment The Hive Tower Point 50 Congress $175,000,000 ($503/RSF) $86,850,000 ($553/RSF) $79,000,000 ($440/RSF) Recap: Synergy & AIG Buyer: Northwood Investors Buyer: Jumbo Capital &