How Boston Developers, Brokers Are Handling The Office Market’s ‘Paradigm Shift’

The Boston office market has changed dramatically in the last three years, with developers and brokers being forced to shift the way they do business.

While new office towers like One Congress and Winthrop Center have come on the market and attracted tenants, landlords with older buildings are struggling to find new ways to lease up space and have had to get creative. And as construction costs continue to rise, some developers are having a hard time building more of the new product that office users want. 

Leasing strategies have also changed, as tenants are taking smaller spaces and are looking for best-in-class offices with newer amenities, driving competition among owners, some of Boston's most prominent landlords and brokers said Tuesday at Bisnow’s Boston Office: Navigating the Changing Landscape event at Rowes Wharf.

“There has never been a time in my 37 years doing this where you just have to be excellent. You can't not be excellent [in today's market]," said John Boyle, executive vice president at Cushman & Wakefield.

Boyle said that demand in the market is down 30% from last year and sublease space on the market is up. And he said that while deals are happening, there need to be no flaws in their execution.

“If you don't have an excellent product and you're not on point and your point of sale isn't where it needs to be, then it's going to be a long 24 to 36 months or longer,” Boyle said. “I think we all have to just be cognizant of that. That’s the reality.”

The types of tenants that are entering the market are also changing. JLL Managing Director Patrick Nugent said Boston has become a small-tenant market with leases ranging from 8K SF to 12K SF on average.

“We're not a huge-tenant market,” Nugent said. “We obviously do have our fair share of large tenants in the market, like a Lego or like a WilmerHale or some of the other tenants. When the large tenants come along, there's a lot of competition appointments between owners.”

Hines Managing Director Matthew Murray said in a market where tenants now have the upper hand, landlords must have everything they want in an office building to get leases signed.

“There's a tremendous amount of older stock in Boston that for the last 25 years to 30 years have been considered Class-A, and they've been great towers and great buildings,” Murray said. “As we're going through a paradigm shift in terms of what's happening across the world, an expectation from clients like a Lego or like a SimpliSafe on what's important is no longer what's nice to have but are a must-have.” 

Hines is constructing South Station Tower, which includes 685K SF of office space and 166 luxury condos spanning 51 stories. The developer secured an $870M construction loan and began work on the project just before the pandemic, yet no leases have been signed for the building, the Boston Globe reported in June. The project is scheduled to deliver in 2025. 

Some shiny office towers have drawn new tenants into the city, like The Lego Group, which signed a 100K SF lease for its Americas headquarters at Samuels & Associates' P12 development in the Back Bay, and some have tenants already in the city, like Whoop, which moved into its 121K SF office building at Related Beal's One Kenmore Square in July, the Boston Globe reported.

"We have a very high occupancy rate within our office right now. We immediately occupied four floors with the intent to sublease three floors," said Melisa Millman, senior director of office experience and operations at Whoop. "From our growth perspective, we are already looking at removing them potentially from the sublease market because we're expanding faster than we thought."

While the office buildings that have opened are for the most part doing well, there is uncertainty as to how the market will continue to perform. Some landlords think that with the price of materials continuing to rise and office rents decreasing, it just isn't a market for larger office buildings to be delivered and profitable now.

“I think Boston is going to be in a supply constraint for a while because of that,” said Austen Holderness, chief development officer at Carr Properties. “The TI and the concessions have increased dramatically, interest rates have doubled, and when you add all that in, you're going to be building $1,100 or $1,200 per SF to get an adequate yield on cost.”

Carr, a D.C.-based developer, entered the Boston market in partnership with The HYM Investment Group with One Congress, the 600-foot-tall, 1M SF office tower that opened earlier this month. The partnership began working on the project in the summer of 2019 after it secured its first tenant, State Street Corp., with a 510K SF lease at the beginning of 2019.

Thomas O’Brien, CEO of HYM, also said that the cost of building could lead to a supply constraint in the market. There have been a number of major offices to add space to the market like One Congress, Winthrop Center and One Post Office Square, but O'Brien said he isn't sure how many more gleaming towers are set to be built with prices rising.

“Last week, we were with a group from New York, a group of investors who are in a transaction we're working on right now,” O’Brien said. “The person looked at me and said, ‘What do you think it would cost to build a building like this today?’ And I said probably $1,200 a foot, and the guy looked at me like I was crazy.”