Boston's Office Vacancy Rises To New Highs Despite Big Leases, Job Growth

Boston’s office market performed poorly in the third quarter, with vacancy reaching a new pandemic-era high as tenants continue to downsize. 

The city's economy has remained healthy, with strong job gains and billions of dollars of venture capital flowing to startups, but that isn't translating into growth for Boston’s office market. Despite a series of headline-grabbing leases, the market recorded negative net absorption in the hundreds of thousands of square feet, according to new quarterly reports from Colliers, Newmark and JLL. 

Office market experts told Bisnow that heightened remote work trends and macroeconomic pressures like inflation and interest rates have prevented many Boston office tenants from signing deals to expand their footprints. 

“Given the uncertainty that's still lingering from the pandemic, and now with these recessionary concerns, a lot of corporations are still taking a bit of a wait-and-see approach in their real estate decisions,” Newmark Boston Director of Research Elizabeth Berthelette said.

“That's sort of where you're seeing the disconnect," she added. "We have job growth, but it's not quite translating into a lot of new office demand because we're seeing sort of this change in how that relationship works.” 

Boston has regained all of the jobs it lost during the pandemic as of last quarter, according to Newmark's report, and its unemployment rate of 3.1% is 70 basis points below the national average. The city has continued to attract strong flows of venture capital, with Boston-based companies raising $6B as of September, putting this year on pace to be the second-best ever, according to Colliers' report.

The city's office market hasn't benefited from that economic growth. 

In the third quarter, Boston’s office market recorded over 1M SF of negative net absorption, and its vacancy rate reached a new cyclical peak of 14.3%, according to Newmark’s’ Q3 office market report.

Although there was an uptick in downtown foot traffic with workers returning to offices after Labor Day, leasing activity still is slow, and sublease availability is near pandemic-era highs, Newmark reported.

In the third quarter, Boston's office market had 10.7M SF of availability, up from 9.3M SF at the beginning of the year, according to Colliers’ office market report. Colliers pegged the city's vacancy rate at 16%, the highest level since the start of the pandemic, and it recorded negative net absorption of 361K SF, the third consecutive quarter of occupancy losses. 

Colliers Research Director Jeff Myers said that some of these losses have been driven by struggling companies shrinking their staffing and space needs, but overall, the city's economy has remained strong. 

“We certainly have seen headlines with companies that are laying off workers, giving back space or shrinking their square footage to the right size to what they believe is going to be their new office work ratio with their employees," he said. "Then, on the other side of that, we still have a lot of venture capital money that's moving into Boston, and that's moving in at a great rate. … We're actually at a record high for white-collar jobs in the market, and the economy has continued to produce jobs.

“You kind of have contradicting things that are happening at the same time," Myers added.   

Tenants are flocking to new and renovated buildings in the city and leaving behind space in older buildings. Of the 3.6M SF in the construction pipeline, two-thirds of it is already committed, according to Colliers' report.

"Not every type of office building experiences the pain in that same way,” Myers said. 

Last week, Eaton Vance finalized its previously reported 282K SF lease at One Post Office Square. In September, HarbourVest leased 250K SF at the One Lincoln tower. A week before that, McKinsey & Co. signed a 95K SF lease in MP Boston's Winthrop Center. 

“We are in the middle of a game of musical chairs that's emerging with some of the large towers that are underway,” Myers said.

However, with HarbourVest moving to One Lincoln, the company left behind its previous space at One Financial Center. As more big leases are signed in Class-A buildings, tenants are leaving large blocks of vacant space in older buildings. 

"There is a real bifurcation in what is the true trophy Class-A office market and commodity real estate today,” JLL New England Brokerage Lead Matt Daniels said.

JLL's third-quarter report found Boston recorded 706K SF of negative net absorption, but Daniels said September was a busy month for new leasing activity. 

“We had one of our strongest months ever in September," he said. "We had a fair amount of lease transactions signed, which is good, positive momentum."

While some tenants are signing leases, many are looking to give back space. The amount of sublease availability in Boston's Central Business District reached a record-high 3.7M SF last quarter, JLL's report found. It cited Wayfair, Reebok and Cengage as examples of tenants putting space on the market. 

Newmark's report found that 980K SF of new sublease space was added to the market last quarter, citing GrubHub, LogMeIn and Drift as additional examples of tenants contributing to that figure. 

In July, Facebook hit pause on building out a new 250K SF space it leased in Kendall Square, citing a redesign for hybrid work, according to the Boston Globe.

In August, biotech company Biogen put 250K SF of office on the market in Cambridge and Weston following a slew of layoffs, citing hybrid work as the main driver in its decision to sublease space. A month later, the company consolidated its workforce and cut its owned property in half through an almost $600M sale-leaseback deal with BXP.

"I tend to think some of the biggest heartaches will come in this business from those jobs that you can do from home and you wouldn't do in an office anymore," Daniels said.

Although the office market is still struggling, Daniels said Boston fares better than other similar cities because it doesn't rely on just one economic driver.

“There's the U.S. economy, and then there's the Boston economy, and we will fare fairly well,” Daniels said. “On all fronts, just based on the dynamics of our business, we have tremendous life sciences growth. Even today, we're getting good company formation out to the venture capital firms that are still very, very rich in dollars in their funds.”