'Still More Pain In Front Of Us' As Boston Office Vacancy Hits New Highs

It isn't looking good for Boston’s office market after the first three months of the year. With vacancy rates reaching historic highs and the market suffering from millions of square feet of occupancy losses, experts say that the damage is far from over.

Although the market has attracted new companies like Lego that favor its skilled workforce, Boston’s vacancy rate reached 18.8% in the first quarter, hitting a level similar to that experienced during the Great Financial Crisis, according to Colliers’ first-quarter office market report.

The Boston metro area recorded 3.4M SF of negative net absorption in the first quarter, according to Colliers, with 1.5M SF of that occupancy loss occurring in Boston proper.

“I don’t think we’ve hit bottom,” Colliers Research Director Jeff Myers told Bisnow. “I think there is still more pain in front of us.”

Companies will continue to put more space back on the market as they plan their strategies more carefully, experts said, and they predict negative net absorption and vacancy rates will only continue to increase as the market corrects.

“Being forced to make decisions in really foggy times, no one likes to make long-term decisions when they can’t see that far in front of them," JLL New England Brokerage Lead Matt Daniels said. 

JLL's Q1 report estimated negative net absorption of 1.6M SF in Boston, and it found the vacancy rate surpassed 19% for the first time since 2004. 

The amount of sublease space tenants have put on the market has reached the highest level in 20 years, according to Colliers. If these levels continue to rise, Myers said it could have a detrimental impact on landlords who would become responsible for the vacancy if they aren't able to fill the space.

“Right now, the tenants are paying for that space, and they're trying to recoup from their costs by putting it on the sublease market," Myers said. "If they decide they don't need the space when it's time to renew, it will go into the landlord's hands and it will become the landlord's problem and they won't be paid anymore."

Newmark's Q1 report found occupancy losses in Boston of 1.5M SF, the highest level of any quarter since the start of the pandemic. The firm also found sublease availabilities reached a two-decade high. 

One of the largest sublease additions was Verizon listing 190K SF at Boston Properties and Delaware North’s 440K SF the Hub on the Causeway development, the Boston Business Journal reported.

The vacancy rate in the city reached a 17-year high, according to Newmark, as a mix of hybrid work and macroeconomic factors are leading companies to be more mindful of the space they have and are looking to take on.

“Vacancies are increasing, and we expect there to be more rent losses in the near term,” Newmark Director of Research Elizabeth Berthelette said. “Those are risks to office fundamentals that we continue to see. Valuations are hard right now across the board because few transactions are happening.”

Berthelette also said unexpected factors like the banking crisis with Silicon Valley Bank have also brought pain to companies across the market.

“The turmoil in the banking sector was more of an exogenous market impactor that came into play in Boston,” Berthelette said. “VC funding and funding for early startups and biotech companies were certainly impactful. Turmoil in the banking sector at a macro level could potentially be a drag on the economy.”

JLL's Daniels said dynamics are also changing for brokers who are helping tenants and landlords in the market. Rather than closing deals at a faster pace, Daniels said brokers are helping tenants and landlords gain some confidence as uncertainty persists.

“Is it as transaction-filled, are leases moving as fast as they did 18 to 20 months ago? No. Is it easier for companies to make decisions with confidence? No,” Daniels said. “This is when brokers really earn their keep and great brokerage firms separate themselves from lesser firms.”

Although a bleak outlook on the market persists, experts see some bright spots. 

Numerous sizable leases have been signed by companies relocating into Boston’s Central Business District this quarter, including Goulston & Storrs' 100K SF lease in One Post Office Square and Massachusetts Pension Reserves Investment Management's 32K SF lease at 53 State St.

New players also have plans to move to Boston, like Lego, which announced plans to move its Americas headquarters to Boston from Connecticut in January, and Danaher’s new company, Veralto, looking for space in Waltham.

“Lego is a great example of a new company that has come to town,” Myers said. “Boston’s high-quality talent pool of workers has proven that it can continue, even in this cycle, to draw in new blood into the office market.”

Myers said that although more pain is to follow, it is from a demand perspective, and it isn't because there is anything wrong with certain companies or industries.

"It's not like the dot-com bust, where dot-coms were problematic, or the Great Recession, where housing and financing were problematic," Myers said. "Once we do get to a point where we can stabilize interest rates and get a little bit of stability on that side of the market, some companies that had pressed pause will regain confidence."