Boston Starts 2017 With Positive Absorption, But Signs Point To Downturn

After a lackluster 2016, Boston’s office market has posted a strong start to 2017 with more companies than ever actively looking for space. But the market could slow as it lumbers toward an inevitable economic downturn. 

There was 433K SF of positive office absorption in Q1 2017 and vacancies are at 10.8%, down from the 11.4% vacancy rate seen at the close of last year, according to the Colliers International Greater Boston Market Viewpoint. The Seaport continues to be a main driver with large Q1 transactions like Reebok committing to 220K SF at Jamestown’s Innovation and Design Building.

Fenway/Kenmore is also a major source of Boston’s overall growth, with 78K SF and 37K SF absorbed at Longwood Center and Landmark Center, respectively. 2017 has the potential to be Boston’s year with a large number of companies looking for office space and high prices and lack of space driving businesses from Cambridge. 

“There are 250 tenants actively looking for space in the market,” Aaron Jodka, director of research at Colliers International, said. “We’ve never tracked a number that high.”

The companies are collectively seeking over 5M SF and, while Jodka said most need less than 25K SF, there are some large-scale space requirements that could boost 2017’s performance. Education and technology company Cengage Learning is looking for 100K SF and the law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo is expected to have a deal for 200K SF in Q2. 

WeWork has expanded to four locations in greater Boston, including a Back Bay location on St. James that lured Amazon out of Kendall Square. The e-commerce behemoth is expected to stay on this side of the Charles when it finds a more permanent space, and Facebook is also looking for space outside of tech-centric Kendall Square.

WeWork competitor the Yard arrived to the Boston market in Q1 when it signed a lease for 32K SF at 120 St. James (the building formerly known as John Hancock Tower), and the 110K SF Hatch Fenway at the Landmark Center is drawing more startups to Fenway.

Tech, advertising, media and information companies are key players this cycle, which has left Back Bay out of the growth equation along the waterfront. The neighborhood dominated by financial, insurance and law firms has a 13.9% vacancy rate, with most movement seen lately in low-rise and Class-B space. Along with new co-working spaces, local e-commerce company Wayfair’s expanded Copley Place office and Amazon’s arrival are beginning to give the neighborhood a new aesthetic. 

“We see Back Bay as an opportunity for tenants today,” Jodka said. “It’s starting to get that tech base and have that entrepreneurial and startup feel.”

Despite the promising start, signs do point to an inevitable downturn in the local market. The New York and San Francisco office markets, which Jodka said Boston tends to lag by six to 12 months, have both been softening. Uncertainty regarding potentially significant National Institutes of Health funding cuts and healthcare reform are giving pause to the the local healthcare and education-dominated economy, as Boston receives $1.7B from the agency.

“The regional economy is heavily driven by eds and meds, which has been a great backstop compared to other volatile industries,” Jodka said. “But trees don’t grow to the sky. We’ve had a long positive cycle.”