The Boston-area office market remains steady, but difficulties in leasing existing office and the cost of construction have been challenges for competing landlords. The market is also dealing with some disruption, with the fast-growing Seaport District overshadowing the bellwether Back Bay district and suburban markets looking for ways to compete and grow.
The 2016 relocation of GE’s Connecticut headquarters to Boston’s Seaport District has continued a national trend of companies shifting suburban headquarters locations into more urban downtown markets to attract millennial talent pools.
At a more localized level, it was also the latest signal that for some tenants, the Seaport has become an attractive option.
“For years, the Back Bay has been the heart and soul of the Boston market,” says John Boyle, Vice Chair at Cushman & Wakefield in Boston. “It’s still the cultural center of the city. However, in Corporate America of late, it appears some prefer the Seaport over Back Bay for an office location.”
The list of companies clustering in the Seaport is impressive, with Reebok, PwC, Goodwin Procter, and Boston Consulting Group (among others) all committing in the past 24 months.
A number of new developments have also been put in motion. Speculative projects, combining for more than 1.0 MSF of office space, are planned across the Seaport, attracting tenants seeking quality, efficiency, and a greater concentration of modern urban conveniences.
These developments, in addition to a significant number of condo, apartment and casino projects across the region, are particularly notable given the rising costs of materials and labor. In fact, this sharp increase in construction costs has slowed momentum on a number of relocations in existing buildings. Landlords have responded by dramatically increasing tenant improvement allowances, Boyle says, taking lower incomes to incentivize deals.
The biotech hub of Cambridge continues to boast astronomically high rents, but the white-hot market may be starting to level off. A number of users have dropped previously active requirements, creating opportunities for tenants of varying sizes and industries. However, it remains to be seen whether that will be part of a larger shift or a temporary pause.
Areas of Urbanization Continue to Grow
Not every company is following the pattern of urban migration, with many choosing to remain, and expand, in the suburban markets.
The Route 128 Central market, in particular, has been driven by growth in the technology and life science sectors. Between Needham and Burlington, life science users alone occupy 8.5 MSF of space, accounting for more than 20 percent of the overall R&D inventory. They also account for over 1.0 MSF of new leasing activity in the past 12 months.
As with Downtown properties, amenities are quickly becoming the dominant theme in the suburban market. The areas attracting the most attention are the so-called “areas of urbanization,” where a rich density of city-like amenities has attracted companies looking away from the city itself. No two locations represent this trend more clearly than Waltham and Burlington.
“Burlington has always had a great deal of amenities, but the new discussions have really refocused attention on that,” said Michael O’Leary, Managing Director at Cushman & Wakefield in Boston. “Areas without strong amenities are adding them quickly, and even parks that already have them are doubling down.”
A prime example of this trend is The District in Burlington. The 1.3 MSF complex is located adjacent to a major shopping center, but also boasts five additional on-site restaurants, a fitness center, cycle studio, and a roof deck, among other features.
Impact of Workplace Trends Continues
The designs of new spaces continue to be shaped by the growth of open office workplaces. Rather than just empty floors, the designs are becoming far more thoughtfully laid out to increase collaboration among employees and maximize density in the space.
“These designs may seem very minimal, but what we’re really seeing now are open plans which are very detail-driven,” says O’Leary. “The floor plans can be tremendously nuanced, helping create more collaboration among employees without generating the excessive noise which sometimes comes to mind when you first mention an open office.”
Companies continue to express preferences for fewer columns and creative open space at the center of the floor. Current open office designs have dropped the average space per employee from 200-250 SF just five years ago – down to 150-180 SF per person.
While technology has allowed for greater flexibility for employees to work remotely, perhaps reducing the amount of time they are actually in the office, that increased usage and employee density continues to challenge properties from both a leasing and an investment perspective.
From an investment perspective, that higher usage puts a greater strain on base building systems and common areas, which can increase maintenance and capital investment costs over the long-term.
The tighter floor plans also mean that parking allocations of 3.0 spaces per 1,000 SF, which seemed generous several years ago, are now very tight. To counter that perception, and attract millennial-focused tenants with employees who rely on public transportation, many properties are adding dedicated shuttle service from nearby transit locations.
The Future is Mobile
All in all, the Boston market remains steady, with both suburban and downtown markets each showing promising signs for the future.
However, like with every office market across the globe, it remains to be seen precisely what the continued impact of mobile devices will have on commercial real estate. Already the concept of having a dedicated space for each employee has shifted in many industries.
It is sometimes difficult to believe that the iPhone is only celebrating its tenth anniversary this year. What the office landscape might be in another five or ten years remains to be seen.