Tenant Shifts Widen Rent Gap Between Boston’s New And Old Office Buildings
Boston's office market has become a tale of two cities, as shiny new towers dominate the leasing market and older properties struggle to keep up.
The gap in rents between the city's newer Class-A office buildings and its older Class-B buildings has expanded to its widest point in years, according to new reports from CBRE and Colliers.
Colliers' Q1 office market report found that Class-A rents in Boston have returned to their pre-pandemic highs of roughly $70 per SF while Class-B rents averaged $51.30 per SF, 11% below their early 2020 level. This has increased the premium of Class-A office space over Class-B space to 36%, the highest in five years, according to Colliers.
This widening gap comes as office tenants have shifted from older buildings to newer ones, tightening the market dynamics in the Class-A segment. The availability rate in Boston's Class-A segment last quarter was 11.8%, while the city's Class-B availability rate was 20.9%, according to Colliers.
"When we look at what office tenants want, especially coming out of the pandemic when they're figuring out, 'How do we get employees back in the office?' high-quality properties are winning," Colliers Research Director Jeff Myers said. "What I've discovered, it's not a flight to quality; it's an expectation of quality. There's a new baseline. Everybody wants to be in higher-quality properties."
Class-A office space generally exists in newer buildings with a full suite of amenities and better sustainability metrics, while Class-B office space is typically in older buildings that haven't been brought up to today's standards. Each firm has different methods of categorizing buildings and tracking rents, creating variances in their data, but they both identify the trend of a widening gap between the office classes.
CBRE's Q1 report on the downtown Boston market found that Class-A rents were up $3.70 per SF from pre-pandemic levels to $76.79 per SF. According to CBRE, the difference between rents in Class-A and Class-B buildings is just over $20 per SF, the largest it has been since the Great Financial Crisis.
Newly developed office buildings have landed several major leases in recent months, illustrating the appeal of these properties in today's market.
CBRE's report found 1.2M SF of office leases have been signed in new projects in Boston in the last five months. According to Colliers, two-thirds of the roughly 4M SF of offices under construction in Boston have been pre-leased as of last quarter.
"This desire for fresh, new, sustainable, efficient space is expected to continue in the near term and the effect on vacancy and rents in the Class B market is projected to be significant as tenants relocate and leases roll," CBRE researchers wrote in the brokerage's Q1 report.
Winthrop Center, a new 691-foot-tall office tower under construction in the Financial District from MP Boston, in February signed a 115K SF lease with investment firm Cambridge Associates, which is relocating from 125 High St., a building constructed in 1990.
One Congress, a 600-foot-tall office tower being built by a Carr Properties-led team, is in talks with InterSystems Corp. to lease more than 400K SF, Banker & Tradesman reported last month. It would move from One Memorial Drive, a Cambridge office building constructed in 1986.
100 Causeway St, a 31-story office tower being built by Boston Properties next to TD Garden, drew Alphabet subsidiary Verily to sign a 109K SF sublease last quarter. The sublease, first reported by Bisnow last week, would have the firm take the 23rd through 26th floors from anchor tenant Verizon.
Owners of some older buildings have managed to land big tenants by launching substantial renovations to bring the properties up to today's standards.
One Post Office Square, a 40-year-old downtown office building undergoing a $300M renovation, in November landed a 150K-plus SF office lease with Eaton Vance.
In Needham, the three-building office complex at 140 Kendrick St. landed a 106K SF lease with Wellington Management in December after landlord Boston Properties agreed to reposition the property to become carbon-neutral. In January, shoemaker Clarks was reported to be in advanced talks to lease 50K SF at the property.
While owners of struggling Class-B properties may find success in repositioning their properties to lure office tenants, they have another option that many are pursuing: converting to lab space.
More than 3M SF of office space in Boston has been planned for lab conversions, according to Colliers' report, and millions of square feet are also planned for conversion in Cambridge and the suburbs.
"It's not just old, underutilized Class-B and C buildings getting converted," Myers said. "Anything with vacancy and the potential to house higher-value lab is getting a look."
These conversions are reducing the inventory of available office space and could bring down the vacancy rate, helping landlords increase rents in the coming years, Myers said.
"Conversions are going to help to make office space be more efficiently used," he said. "Vacant space is going to disappear — whether to consolidations of tenants into those buildings or space taken off market for life sciences — and the office market is going to get more efficient with its usage of space. And as that happens, landlords will gain more pricing power."
