Boston Sees Bump In Office Leasing Activity, But Tenant Reductions Keep Vacancy Rising

A series of deals with big-name office tenants helped give Boston a boost in leasing activity last quarter, but that was still overshadowed by tenant downsizing, as the market continues to face occupancy losses and rising vacancy. 

In the third quarter, leasing activity in Boston’s central business district increased to 1.1M SF, a jump from 500K SF in the last quarter, according to Savills. This ends a nine-month trend of declining leasing activity from the prior quarter. 

“The uptick in leasing activity that we saw in Q3 was a reversal for what we are seeing in the Boston CBD office market,” Savills Director of Northeast Regional Research Marisha Clinton said. 

This rising leasing activity has created some optimism as out-of-state tenants have come into the market with large leases. But third-quarter reports released over the last week still show significant challenges, as Boston's office market faces record vacancy and declining rents. 

Notable third-quarter deals included Deloitte’s 138K SF lease at MP Boston’s Winthrop Center, Toast’s 102K SF lease at 333 Summer St., and MFS Investment Management’s 313K SF lease renewal at 111 Huntington Ave.

“From a demand perspective, one thing that we have seen is that there is that overall increase in requirements from folks looking for space,” JLL senior analyst Bryan Montgomery said.

Jeff Myers, research director at Colliers, said the city has benefited from continued job growth and the attraction of new “value-add” players like Lego, which signed a 101K SF lease at Samuels & Associates’ Parcel 12 development, and ARPA-H, a new federal agency that chose Cambridge as one of three hubs. 

"The market continues to attract value-add companies, and I think that's a good sign," Myers said. "The fact that we are still adding and have a record number of white-collar jobs is great because eventually, it will help establish a floor on how much tenants can downsize in the market."

Still, the office market faces a long road to recovery as tenants continue to consolidate. The overall net demand was negative in the third quarter, with JLL reporting occupancy losses of nearly 1.5M SF, causing total vacancy to reach just under 20%. 

“Tenants are in consolidation mode rather than in growth mode, and more tenants are opportunistic, meaning most are out looking 14 to 16 months before their lease expiration,” said Matt Daniels, executive managing director at JLL.

The occupancy losses in a market with an oversupply of space have continued to fuel the favorable tenant conditions, with landlords lowering rents and supplying concession packages. Rents in the CBD decreased, particularly at Class-B and C properties, where rents were down 3% year-over-year, according to Savills.

Sublease availability reached 4.2M SF in the CBD alone, up 32.5% year-over-year, according to Savills. Some sizable sublease blocks came from 2seventy Bio in Cambridge and Dynatrace in Waltham, according to JLL.

However, sublease space is expected to decrease, as it will either be taken up by new tenants or will become direct space as lease terms expire.

Myers said Colliers is still seeing negative net demand in the market, but the occupancy losses are shrinking compared to prior quarters. 

“I feel like the fact that the rate of deterioration has been slowing is positive news,” Myers said. “Even though we are still in the red, it isn’t as dark of a red as it was before, and if that continues, that will be good.”

Looking ahead to the fourth quarter, JLL's Montgomery said he believes there will be continued occupancy loss and vacancy will rise further as tenants rethink their real estate portfolios.

“As firms look at the overall operating cost of bringing folks into space available in the sublease market instead of just leaving it vacant, it becomes a very real consideration for some of these firms as they are looking at occupying versus not,” Montgomery said.

With increased construction costs and high interest rates persisting, there could be a supply constraint in the coming years as tenants compete to occupy the newest office space. Of the new construction projects in motion now, the three biggest office buildings are South Station Tower, 10 World Trade Center and 40 Thorndike, which will be delivered in the next couple of years.

There will soon be less than 2.2M SF of office space under construction for the first time since 2013, according to JLL, which could have significant implications for a market that has gravitated to new Class-A space.

“In a market that has seen most of its large-block leasing and big deals done in new construction, it’s just going to be interesting to see,” Montgomery said. “As large-block tenants come up for renewal, there isn’t that level of high-end new construction that can base where they choose to go.”