As Office Market Continues To Weaken, Boston Execs 'Very Concerned' About City's Future

The problems in Boston’s office sector keep getting worse, with no clear resolution in sight.

As tenants continue to consolidate footprints in an effort to brace for more economic pain, top Boston commercial real estate executives told Bisnow they are worried about the future of the city’s office assets. And they called on local, state and federal officials to aid the situation by bringing more workers back to the office and finding solutions for the large stock of older office buildings that aren’t competitive today.

“I’m very concerned,” HYM Investments CEO Tom O’Brien, one of Boston's largest commercial real estate owners, told Bisnow. “We’re in a very different place than we’ve ever been.”

Earlier this month, restaurant tech company Toast terminated its 130K SF lease at Alexandria Real Estate Equities and Samuels & Associates’ 401 Park Drive five years before its expiration. It is the latest in a growing list of firms that have put space back on the market, leaving landlords fighting to attract new tenants.

Boston’s office market has been struggling in recent quarters under the pressure of macroeconomic headwinds like high interest rates, and over the last two months, multiple bank failures have accelerated the pullback of office demand.

In the first quarter, the city’s vacancy rate has matched that of the Great Financial Crisis over a decade ago at 18.8%, according to Colliers. Boston recorded 3.4M SF of negative net absorption during Q1, the fourth consecutive quarter of negative absorption, as more companies have put space back on the market.

Cushman & Wakefield Executive Vice Chair John Boyle, a top broker in the firm's Boston office, said the firm estimates that office demand is at least 50% down from its peak levels. 

“They're well aware of the challenges that lie ahead,” Boyle said of Boston's office owners. “These people are very thoughtful, curious, smart people. And they don't need me to say, 'You better be careful,' because they're well aware of it.”

Toast’s lease termination isn't the first — and likely not the last — pullback to occur as more companies tighten their budgets. Boston saw 3.6M SF of sublease availability in the first quarter.

The Fenway/Kenmore area, where Toast's office was located, saw vacancy rise to 6% from 4.3% in the same quarter last year.

Technology company Whoop in 2021 signed a 121K SF lease in the neighborhood at Related Beal’s One Kenmore Square. The firm is also in the process of subleasing 30K SF at the Samuels & Associates building at 1325 Boylston St., Melisa Millman, senior director of office experience and operations at Whoop, told Bisnow.

“Fenway and Kenmore is almost like its own special niche,” Millman said. “It's a microcosm of vacancy. … I think we are seeing more space come to the market with recently Toast returning a very large chunk of their lease and other tenants in our building that are subleasing space as well.”

Millman said the company has two leases at Boylston Street, one a direct lease and the second a sublease from when it had to expand operations. The process of subleasing its space hasn't been easy given the state of the office market.

“There definitely hasn't been a lot of activity,” Millman said. “I do feel like the tenants are very interested in being in the area, but I think activity is definitely slower than we'd like.”

Although Whoop faced its own pain when it laid off 4% of its corporate workforce in January following an earlier string of layoffs in July that impacted roughly 94 employees, Millman said that the company is still planning on moving into the entire 121K SF office.

The rise in space coming back on the market is partly due to companies like Whoop that are moving into new offices, but it also comes from companies that are going into cost-saving mode and pushing a hybrid workforce. This is especially true for publicly traded companies that have shareholders, C&W’s Boyle said.

“Many times those shareholders are pressuring companies that may not be doing as well as they can to find avenues for cost savings, and that oftentimes is pushing those public companies to put space on the market as a result of their need to cut costs as a public company," Boyle said. 

As more space sits vacant in Boston, landlords and city officials have been hit with the difficult challenge of what needs to be done to these buildings to attract people back into the city. The city has 17M SF of Class-B space with a 25.8% vacancy rate as of the first quarter, according to Colliers. Rents for these buildings also fell by 13%.

“You have new towers, like the one where we're delivering right now this year, that do well during times like this, but there are Class-B and C buildings, which really are not doing well,” HYM's O’Brien said. “We have literally millions of square feet of space that will be difficult to fill because of everything that's happening in the market on all those fronts.”

O'Brien said the city government plays an important role in helping revitalize downtown, especially through updating zoning guidelines and reimagining specific buildings for new uses.

“The city will need to be flexible,” O’Brien said. “I think about what individual building owners or developers need in order to put these buildings back online and make them the kind of taxpaying buildings that they've been in the past.”

In October, Mayor Michelle Wu released a report about the challenges Boston’s downtown is facing and recommendations for revitalization, including reintroducing the city’s PLAN: Downtown initiative. Last year, Boston’s Central Business District saw foot traffic remain 55% below 2019 levels, the report said.

“This report presents a roadmap for a truly inclusive, round-the-clock neighborhood filled with new homes, diverse businesses, world-class public spaces, vibrant nightlife, and a thriving arts and culture scene," Wu said in a statement at the time of the release. 

Boyle said that some of Boston's older office assets can be renovated and modified to attract new tenants like Anchor Line Partners’ $300M transformation of One Post Office Square or The Chiofaro Co.’s $100M renovation of International Place, but there will be buildings that can't escape their fate.

“Some, however, are going to be building sales, demolished, and there will be new types of real estate developed, whether that's multifamily or senior housing or whatever it may be,” Boyle said.

Office-to-residential conversions aren't predicted to be a large-scale solution in Boston, with only 12% of 84 buildings studied for conversion being feasible, according to a Gensler study reported by the Boston Globe.

Boston officials aren't the only ones that can play a part in revitalizing and activating the Central Business District. State and federal officials have also been slow to bring their own workers back to offices in the city, and real estate leaders say they should speed up that effort. 

“There are various layers of government in which those government agencies have not yet encouraged or even pushed their employees to come back to work,” O’Brien said. “The federal government agencies and the state government in Massachusetts, there are substantial sections of those agencies in which people are not back to work, and the government needs to be a leader.”

Remote work guidelines for state workers haven't been updated since 2021 when then-Gov. Charlie Baker planned to implement a permanent hybrid work model for roughly half of the state’s 44,000 full-time workers.

The state government is launching one major effort to revitalize downtown Boston with a $1B project to transform its Charles F. Hurley building from an underutilized 347K SF office building into a mixed-use development including 200 new housing units, a lab building and new office space for Massachusetts employees. The state in August chose Leggat McCall Properties for the redevelopment project.

Nationwide, almost half of federal employees were eligible for remote work in the 2021 fiscal year, and 94% of those workers utilized that eligibility at least three days a week, according to Congress’ annual report.

The federal government owns five buildings and leases 11 in Boston, according to the General Services Administration, accounting for over 3M SF across the city. O’Brien said that as office volatility continues to ramp up, the government needs to do a better job of bringing employees back downtown.

"The government needs to play a lead role here and say, 'Hey, we want our employees back in the office at least three days a week, four days a week,'" O'Brien said.