Boston's Office Market Is Worsening As More Developers Pivot To Labs

Boston’s office market struggled mightily in 2020, recording historic levels of negative absorption and sublease availability.

The city's office landscape was performing as well as Boston’s thriving life sciences market in 2019, but last year’s coronavirus pandemic sent the markets in two dramatically different directions, researchers from Avison Young, CBRE, Colliers and Hunneman said in their Q4 reports.

While the lab market soared with major deals and record-low vacancies, the metro area recorded negative 4.2M SF absorption in 2020, a record for both a calendar year and a four-consecutive quarter period, according to Colliers.

Boston also counts its largest sublease market ever at 3.3M SF, topping the 2.8M SF of sublease space following the early 2000s tech bust and the 1.5M SF following the Great Financial Crisis, Colliers reported.

For the first time since the pandemic began, asking rents dropped in the fourth quarter, according to CBRE, which reported a 0.5% rent dip. Asking rents had increased over previous quarters as new space came to market, but rents are expected to fall further in 2021.

Some landlords are increasing offers of rent-free periods from 12 months to 18 months, relying on cash reserves from the pre-pandemic boom, Hunneman Director of Research Tucker White said. Rents in a central business typically take two to three years before a downturn starts knocking them down, he said.

A record $6.3B in venture capital funding has fueled the demand for life sciences assets, forcing a few rising developments to reassess their office goals. Three downtown skyscrapers — Winthrop Center, One Post Office Square and One Congress — are expected to deliver a combined 2.6M SF of office space in the coming years, space that can’t be converted to life sciences, White said.

“This 2.6M SF coming, unless they transition and do somewhat of a different build-out, it’s going to be hard to take any more lab space," White said.

Oxford Properties last month submitted a revised proposal to city officials shrinking its proposed office tower by almost half its original size at 125 Lincoln St. and instead build for life sciences. The move, near the crowded Leather District and Chinatown neighborhoods, is a bold example of the shifting market demands in Boston, Avison Young Director of U.S. Occupier Research Phil Mobley said.

“That’s interesting for a couple of reasons, it’s in the Central Business District right in the middle of Boston,” Mobley said. “You’ve got a conversion or a construction that’s going to be more expensive and more exacting in terms of the physical requirements.”

Samuels & Associates is also planning to build the remaining 250K SF at 101 Massachusetts Ave. as lab space, rather than more office, CBRE's report noted.

The daily occupancy of downtown office buildings after Labor Day sat between 8% and 12% before dropping to 5% and under in mid-December, CBRE reported. Coworking, a significant occupant of office space, also saw a retrenchment, said Aaron Jodka, Colliers' managing director for research and client services in Boston.

ServCorp closed its doors at International Place, while CIC put multiple floors at 50 Milk St. on the sublease market, according to Jodka. Just this week, a downtown incubator announced its upcoming closure in two months, The Boston Globe reported.

“It is showing the challenges of that industry, or segment right now,” Jodka said. “WeWork is the second-largest tenant in Boston. If they were to make changes to their occupancy, that would have a big effect on the marketplace.”

WeWork last year cut thousands of jobs after a failed initial public offering, and it is locked in litigation with landlords in Boston and Washington, D.C., over tenant improvement bills. Coworking leaders said last October that 2021 would be difficult, but professed confidence in long-term survival.

“It allows for flexibility that a standard lease does not provide for,” Jodka said of coworking spaces. “It allows flexible growth, access to spaces across multiple markets at once, with those memberships, and we see that industry continuing to grow long-term.”

An economic recovery in the second half of 2021 is anticipated among researchers and officials, including the president of the Boston Federal Reserve, who said as much in a speech this week. A return to the office could occur this summer, researchers said, as coronavirus vaccines begin more widespread rollouts.

While warehouse and logistics workers may be ahead of office workers in the vaccine line, the general public is slated to receive vaccinations in Massachusetts beginning in April.

“I anticipate the first half of the year to be another relatively challenging time frame,” Jodka said. “The second half of the year is when we’ll get a sense of returning before a 2022 stabilization.”