Boston Office Demand Still Down, But Experts See Vacancy ‘Leveling Off’

Boston’s office market performance remained weak through the final three months of 2023, but new reports showed signs that things could start to normalize this year.

The fourth quarter had the lowest leasing activity of the year in Boston, but the vacancy rate in the city dipped to 17% from 17.2% in the previous quarter, according to data from Cushman & Wakefield. This comes after the vacancy rate shot up throughout the year from 13.1% at the end of 2022.

With the rate of new sublease listings slowing and more companies implementing return-to-office mandates, experts told Bisnow that the market could begin to recover later this year. But it will likely take some ups and downs to get there.

"We do expect vacancy to increase in 2024 before leveling off," Cushman & Wakefield Senior Research Manager Riley McMullan said. "We are still tracking plenty of tenants, and there is still interest in the Boston market. It sort of helps us feel good about getting back to a healthy market by the end of this year or next year."

Office leasing totaled 800K SF in Q4 2023, bringing the total demand throughout the year to 5.5M SF, a 47.2% decrease from 2022, according to Cushman & Wakefield. Q4 was the first quarter since 2020 in which leasing activity was under 1M SF.

"Requirements have shrunk a little bit," McMullan said. "We have seen a few users who are looking for space in the market shrink the footprints of what they're looking for."

There is 4.2M SF of sublease space available in Boston, but the rate at which sublease space was added into the market slowed for the second quarter in a row with a 2.1% increase, below the 12% average in the last five quarters, according to Savills. The market is predominantly filled with large blocks of sublease space, Savills Senior Director of Northeast Regional Research Marisha Clinton said.

“It's good for larger companies there's an abundance of high-quality sublease blocks over 10K SF in the market, but it's scarce for finding blocks under that threshold, which makes it difficult for those smaller footprint clients,” she said.

McMullan said she doesn't anticipate much more sublease space entering the market, and that the vacancy rate will begin to plateau this year.

"Much like vacancy, I do see it leveling off," McMullan said. "I think the big users who were reevaluating their space needs and reacting to the economic conditions of 2023 have already made those decisions, so I do see a flattening of new spaces coming to the market."

Overall asking rents decreased 3.5% year-over-year, according to Savills' Q4 report, in part due to sublet activity and landlords offering concession packages to entice tenants.

"At the end of the day it's the higher quality that's being leased and the lower-quality product being left behind," Clinton said. "If there is any movement in asking rents it's because of that bifurcation in the market, not necessarily landlords dropping their rents."

Clinton said that while Q4 leasing activity was down 17.7% from 2022, according to Savills, the majority of the activity happened in the financial district. Last quarter's deals were smaller than previous years, with just seven of the top 10 leases being over 10K SF.

"[The Financial District] accounted for nearly two-thirds of the activity in Q4," Clinton said. 

These new leases also strayed away from Boston's traditional financial and legal firms. They included healthcare company Cyberdontics signing a 19K SF sublease at 179 Lincoln St., Anti-Defamation League renewing its 9K SF lease at 40 Court St. and tech firm Cylindo signing a 7K SF lease at 2 Oliver St.

The largest office lease to come out of Q4 came from biotech company EMD Serono, which took roughly 61K SF at 200 Pier Four Blvd. in the Seaport. The company, the U.S. arm of Germany-based Merck, will relocate from its headquarters in Rockland this summer, the Boston Globe reported. One-fourth of the company's 400 employees are working remotely.

Ron Perry, executive managing director of Savills, said that although many companies are still trying to navigate return-to-office mandates and the evolving work schedule, Boston, like other major East Coast cities, has the benefit of attracting financial, law and consultant firms that have made the biggest push to bring workers back into the office on at least a three-day schedule.

"The companies that we are dealing with and tracking, on average, are coming in three days a week," Perry said. "Employers are still trying to figure out how much of a mandate they're going to make it."

MFS Investment Management, which quietly renewed its 300K SF lease at Boston Properties' 111 Huntington Ave., has committed to bringing workers back to the office at least three days a week, Perry said.

In July, law firm Ropes & Gray announced that it would be bringing workers back to the office four days a week, the Boston Business Journal reported. The law firm is the largest in the state with over 600 lawyers based in Massachusetts and 17 floors of offices at the Prudential Center.

"Although this is clearly a different market and is clearly in transition with a lot of work to be done, the diversity of this market will help us to recover," Perry said.