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While much of the suburbs, as well as pockets in Boston and Cambridge, continue to have a high inventory of office space, rents keep rising as vacancy is dropping in the area’s hottest submarkets — Boston’s Back Bay and East and Mid-Cambridge. Class A vacancy in the Back Bay now averages 6 percent while it’s even lower for Class A space in Mid-Cambridge and East Cambridge (1 percent in Kendall Square and 1.5 percent in Central Square).
Average rents for Class A office space in the Back Bay are over $57 per square foot and almost $78 per square foot for high-rise space. In Cambridge, average Class A office and lab space rents are in the high $50s.
Other Boston Trends
• With demand increasing in the Seaport and even the low-rise tower space, many tenants from Cambridge are looking in other submarkets. In fact, Downtown Crossing has become the new Seaport, and North Station is seeing an uptick of activity as well. Average Class A rents in the Seaport are up to $52 per square foot, with much better value available in Downtown Crossing and North Station, where rents are in the mid-$30 range per square foot.
• Demand for Class B space has also increased, with many companies seeking second-generation, rehabilitated “creative space.” For example, Arnold Worldwide has committed to lease 120,000 square feet at the Burnham Building, the former site of Filene’s Basement in Downtown Crossing.
• Another continuing trend is rising investment sales, with many buildings changing hands, including about one-third of the buildings in the Seaport. Overall Boston sales activity increased approximately 50 percent over the same period last year.
• In addition, new construction continues to attract large corporate tenants, especially in the Seaport, with PricewaterhouseCoopers’ recent lease to build new offices and Goodwin Procter’s commitment to lease space in a new hotel and office building at Fan Pier. More than 90 percent of the space under construction is pre-leased.
• Overall, perhaps the strongest indicator of the health of Boston’s market is that fact that unemployment is down to 5.2 percent, as the city has regained all the jobs it lost during the economic downturn.
Other Cambridge Trends
• Beyond the sizzling markets in East and Mid-Cambridge, where very few large blocks of space are available, even West Cambridge and Alewife are showing more velocity.
• Fueling the boom in Cambridge are the technology giants that have either expanded their footprints in recent years or have established a presence for the first time. In addition to mainstays like Google, Microsoft, and Amazon.com, Twitter has recently joined the tech parade. These companies are growing and looking to recruit and maintain top talent. For this reason, space near MIT and Harvard is at a premium.
• This area’s workforce includes the country’s largest concentration of people aged 18 to 34. A common lifestyle characteristic of this group is the importance of live-work-play balance. For example, many young professionals are seeking alternative means of transportation in their commutes; they utilize public transit lines, with many commuters walking and biking to work as well.
• While parking in downtown Boston can eclipse $500 per month, the parking ratio in Kendall Square is one space per 1,000 square feet leased. It’s all about proximity, not only to the universities but also to the MBTA.
• Overall, big companies in Cambridge are buying smaller startups, and they’re willing to pay the price to land their choice space and location.
Takeaway for Tenants
What is our advice to companies that want to be in Greater Boston’s hottest markets? They should understand that the landlord is now in the driver’s seat in the primo locations, where space is limited and rates can be through the roof.
On the other hand, the market is still bifurcated, with areas like South Station in Boston and Lechmere in Cambridge recording high vacancy and more value opportunities. The same is true in most of the outlying suburbs (with exceptions of 128 West and Framingham/Natick).
Whatever the market conditions, tenants, especially those that are credit-worthy, need to practice due diligence and protect their interests when negotiating with landlords.
In this environment, tenants should be nimble and prepared to strike — because while the summer temperatures may be cooling, the forecast for the office market in Greater Boston is likely to remain hot.
— Brandon Leitner, vice president, and John Coakley, vice president, Cresa Boston