Despite Mixed Q3 Results, Boston Recession No Longer Expected In 2018

As Boston’s real estate community has grown accustomed to new leadership in Washington, one analyst is no longer convinced next year will bring the end to the city's positive economic cycle.

“I think we probably won’t be in a recession in 2018,” NAI Hunneman Director of Research Liz Berthelette said. “We’re going to see more moderate growth for a longer period of time.”

Peak growth is in the past, Berthelette said, but there will continue to be late-stage, slower growth. The quarter ended with mixed results, per NAI Hunneman’s Q3 2017 Metro Boston Market Report. Absorption was positive, office construction increased and Amazon is dangling an 8M SF office carrot in the air. But sustained urban migration from the suburbs could be a threat to outlying submarkets.

“It’s not dead. We’re still seeing growth there, but there are some risks in the suburban market,” Berthelette said.

The suburbs had a decent Q3. There was nearly 260K SF of positive Class-A and B absorption. Steward Health Care will join SharkNinja at Needham’s 89 A St., where it leased 52K SF. NBC Universal finalized its purchase of the 165K SF 189 B St. in Needham for a regional headquarters in August. The media company paid nearly $42M ($124/SF) for the building, which is expected to open in early 2019. 

But the future may not be as bright.

“I’m a little concerned with the consolidation in the suburbs,” Berthelette said. “Any suburban tenant with a major office requirement is considering downtown offices as well.”

Needham-based PTC signed a lease in September for 250K SF at 121 Seaport, where it will move its headquarters in 2019. The following week, New Haven-based Alexion Pharmaceuticals announced it would take the remainder of the building and consolidate several locations, including one in Lexington, into its new Seaport headquarters. 

“Usually when downtown gets hot, a company moves to the suburbs,” Berthelette said. “This cycle is unique in that office tenants aren’t concerned with value. The focus is on talent, not rent.”

A significant continuation of urban migration could put the suburban office market in jeopardy, Berthelette cautions. But she points to other segments of the market as to why she remains optimistic. 

Q2 saw slower leasing, which she said stemmed from an uncertainty with how politics and federal legislation would impact the business market. But as business and real estate leaders have seen better-than-expected economic performance, the market appears to still have growing room this cycle.

Greater Boston’s industrial market continues to perform well, absorbing roughly 260K SF in Q3. Vacancies are at record lows and appear to be going lower, with vacancy rates in the urban core at 5.4%. Last-mile distribution from e-commerce, a strong housing market and tenants needing flex space are all driving industrial’s strong track record. National Development and Charles River Realty Investors bought a three-acre, two property industrial site in Boston’s Newmarket neighborhood in Q3, with one building fully leased and the other 84% occupied.

“You think it can’t get any better, but you continue to see more demand,” Berthelette said. 

At first glance, the continued decline in transaction volume in Greater Boston from a 2015 peak seems alarming, as it was down 28% in July from the same period last year. But this stems more from a lack of product and buyers and sellers not agreeing on a sales price than on a soft market. There is a lot of money on the sidelines, and prices remain stable.

“The sky hasn’t fallen, and things seem to be fairly positive,” Berthelette said. “We’re seeing strong labor markets, moderate economic growth and everyone is picking up steam again.”