Contact Us
News

Federal Reserve Survey Warns Boston's Tech-Led Office Growth Is High-Risk

Want to get a jump-start on upcoming deals? Meet the major Boston players at one of our upcoming events!

A new Federal Reserve survey cautions against so much of Boston’s office growth coming from technology companies. 

Boston skyline

It is rare to hear any negative sentiment about Boston’s office sector. The nine office projects that broke ground in Q2 bring the market office development pipeline to 8.8M SF, according to Perry data. Urban Boston office vacancy is hovering just under 7%.  

That strength in Boston’s commercial real estate market is mentioned in the U.S. Federal Reserve Board's August Beige Book economic survey. Despite the ongoing development boom, respondents to the survey were concerned over the proportion tech companies with a lack of profitability are taking in office space. 

But local real estate experts say the increase in tech companies this cycle is diversifying the city’s tenant base, making it more stable, not less.

“Overall, we think the influx of tech companies here in Boston is a great thing for our economy,” CBRE Senior Vice President Lauren Lipscomb said. “In the past, Boston was so heavily reliant on large financial companies to fill these large towers, and that day has certainly changed.”

Federal Reserve Survey Warns Boston's Tech-Led Office Growth Is High-Risk
Downtown Crossing

Technology firms have moved beyond the usual stomping grounds of Fort Point and Kendall Square and into some of Boston’s older submarkets. Wayfair has driven significant office activity in Back Bay this cycle, and companies like Acquia and Bullhorn have moved into downtown Boston office towers. 

Given how technology firms usually rely on investor dollars and venture capital funds in lieu of profits to fuel growth, there is concern over what happens to these companies when the VC revenue stream suddenly stops. But Lipscomb, while not mentioning any company specifically, said landlords are protecting themselves and welcome the tech growth.  

Financial services firms may have been the leading tenant source in Boston’s previous economic cycles, but there is a more even spread these days. Financial tenants account for about 33% of office demand while tech demand is just over 30%, according to Lipscomb. 

“Our real estate economy is so much more diverse,” she said. “It’s a welcome change from before to diversify what had once just been large leaders of the finance world.”

Landlords are still protecting themselves with security deposits, letters of credit and securitizing leases. Companies that pass the vetting process are the ones generally showing up in downtown skyscrapers.

“Landlords and developers are still being smart and strategic and doing due diligence,” Lipscomb said. “They’re not throwing significant T.I. dollars to companies with no story or track record and just a sudden burst of funding.”

Developers are also avoiding highly customized build-outs with tenant improvement allowances, enabling an easier re-tenanting process if the need arises. The tech industry’s open-office concepts are easy to refresh and put back on the market. 

“It’s not like a life science or biotech company where, if there’s a correction there, there’s huge exposure to T.I. and custom build-outs,” 128 CRE Senior Partner Jeremy Freid said. “If there is a tech correction, it’s easy space to turn around for other sectors to absorb.”

WeWork Entrance
An entrance to one of WeWork's locations

One caveat to the general optimism is WeWork. The office disrupter is expected to have Boston’s largest office footprint (roughly 1.5M SF) by year’s end, and there has been debate this cycle regarding coworking’s durability through a downturn

Even some of Boston’s biggest office tenants like Liberty Mutual and Amazon have enterprise deals for offices at local WeWorks. In a downturn, Northland Investment Corp. Director Santo Dettore expects those short-term leases to be in jeopardy.

“If that is the note the Beige Book is getting at, I would wholeheartedly agree,” he said. “When we see the belt tightening because share prices are dipping, the first thing they’re going to cut is their short-term leases. Those obligations mean nothing to them.”

Pinpointing when the correction will happen is still up for debate. Even with some national economic indicators pointing to a market correction in the next 18 months, those interviewed for this story are still confident in Boston’s diversified economic foundation of higher education, healthcare and, increasingly, life science and tech.

“Typically, when everyone sings that same positive song is when we get nervous,” Freid said. “That’s usually when we look over our shoulders, but I’ve been getting a pain in my neck looking over my shoulder for three years now waiting for the correction to happen.”