Developers Say New Leases Represent ‘Early Indicator’ Of Boston Office Market’s Recovery
Boston has a host of new office spaces under construction, but a string of major new leases has given developers a renewed sense of optimism that the market may be turning a corner from the era of pandemic-related uncertainty.
Executives from MP Boston, Hines and WS Development, which each have major office projects under construction, said Thursday at Bisnow's State of the Office Market Event that the leasing market appears stronger than it did last year. While developers of new Class-A product have secured big wins, concerns remain about the viability of the region's older office stock.
“We're no longer a commodity,” MP Boston principal Joe Larkin said at the event, held at the W Boston hotel.
Earlier this month, MP Boston landed McKinsey & Co. for a 95K SF lease at Winthrop Center, an 800K SF mixed-use tower near Government Center, which is set to be completed in late 2023.
That project represents a portion of the 3.6M SF of office supply under construction in Boston as of Q2, according to Colliers’ latest Boston office report. The report found that pre-leasing was moving along steadily as many tenants migrated to new buildings with better amenities, communal spaces and a feeling of community with neighbors.
The McKinsey lease was the third this year at the building, following Cambridge Associates' lease for 115K SF in February and Income Research + Management's 39K SF lease in May.
Larkin said McKinsey was attracted to the project because of the amenities and the commitment to sustainability at the building. Winthrop Center is on track to become the largest passive house development in the city.
“They are an early indicator here,” Larkin said. “They've decided, they thought as they looked over the horizon, that their success, their company's and the companies' that they support, are triggered by people being together, and they looked long and hard for a place.”
Last week, the landlords of One Lincoln Tower, Fortis Property Group and investor David Werner, signed an 11-story lease with HarbourVest Partners, one of the biggest deals since the start of the pandemic.
One of the other largest deals of the pandemic era occurred in January 2021, when Amazon agreed to lease 630K SF at WS Development's 1 Boston Wharf Road, a 17-story, 707K SF mixed-use building in the Seaport. That project, now fully leased and expected to be completed in 2024, is slated to become the city's largest net-zero office building.
“This was very important both to us and our clients," WS Development Senior Vice President Yanni Tsipis, speaking at the event, said of the sustainability initiative.
Another major office deal was signed in June when Bain & Co. leased the top eight floors of developer Ron Druker's new project in the Back Bay.
Hines has a 678-foot-tall office and condo building under construction near South Station that is scheduled for a 2025 completion. The office portion, on the 12th through 34th floors, remains 100% available, Banker & Tradesman reported Tuesday, but Hines Senior Managing Director David Perry said the firm is optimistic about its prospects.
“With the flight to quality that we'll talk about in the new construction garnering the lion's share of the absorption and relatively new supply … the fundamentals are more favorable now than they were a year ago,” Perry said.
Some owners of older Class-A buildings have reverted to extensive renovations to add new amenities and modern designs, a strategy that has garnered more attention from prospective tenants.
A major example of this is One Post Office Square, where the owners embarked on a $300M adaptive reuse of the over 40-year-old building. Anchor Line is leading the development on behalf of the owner, Morgan Stanley.
Eaton Vance late last year agreed to lease 250K SF at One Post Office Square, multiple outlets reported, and the landlord was in advanced talks with Goulston & Storrs for a 100K SF lease, according to the Boston Business Journal, though neither lease has been officially announced. The building has signed renewals with seven existing tenants, including Sullivan & Worcester, Appleton Partners and JLL's Boston office, plus a new lease with Citi.
"As the overall inventory of Class-A office product ages, there will be a continued need to modernize in a sustainable manner," Anchor Line Managing Partner Brian Chaisson told Bisnow previously. "The adaptive reuse strategy that we employed at OPOS is a realistic path toward maintaining one’s competitiveness in an ever-more-demanding office environment."
Along with the HarbourVest lease, One Lincoln Tower secured $1B in refinancing this month, with $200M of it going toward new upgrades to the 19-year-old building that State Street is departing.
While new buildings and substantial renovations have secured big leases, not all office owners are seeing the same success.
Rents in Class-B buildings have dropped by 11% to somewhere between $40 to $60 per SF over the past year, according to Colliers.
“In terms of the market overall, I think we have certainly some bright spots, some larger deals and some newer buildings,” Synergy CEO David Greaney said. "When you look at the overall stock, there are significant challenges right now, like decreasing rents, dip in demand and increasing operating expenses.”
Greaney said that while some older buildings are pursuing conversions to residential or lab space, the financial math doesn't always work for those projects, and many owners are left in a challenging place.
"It's a difficult time to be an office landlord," Greaney said. "We fundamentally believe in the space in the market, but we're under no illusion that the next year and a half or so [isn't] going to be tough."
