MARKET REPORT

OFFICE
Boston Metro Area Q2/19
Vacancy Continues to Contract as Large
Developments Come to Central Boston Office 2019 Outlook

Cambridge leads Boston in arrivals, maintains minimal availability. High CONSTRUCTION:

demand for Boston office space continues to lower vacancy, especially in
The development pipeline for this year
the central business district. Companies that collaborate with and recruit
falls slightly below the cycle-high level
from Harvard, MIT and other nearby universities prefer to operate in
Cambridge, where available space is scarce. The local vacancy rate is down 3.3 MILLION SQ. FT.
will be completed
delivered in 2018, with multiple projects
underway in Cambridge and Seaport.
from a cycle high of 14.0 percent in 2011 to 4.4 percent in March, even as
new supply came online. The metro’s three largest deliveries for 2019 are
in the submarket, including the 430,000-square-foot Cambridge Crossing
innovation center. Another area undergoing substantial development
VACANCY:
is the Seaport neighborhood of South Boston, with 457,000 square feet
scheduled to open this year. New facilities at the Boston Marine Industrial Availability will decline to 10.7 percent
this year as demand is expected to exceed
Park and in Innovation Square join several recent multifamily arrivals to
help establish a live-work-play environment. 50 BASIS POINT
decrease in vacancy
supply additions, especially in and
around the urban core.
Office leasing outside the core is supporting falling vacancy and rising
rents. Operations in the intermediate suburbs outside Boston are improv-
ing despite deliveries surpassing 1 million square feet for the fourth year
in a row. Major projects include the 211,000-square-foot 20 CityPoint in
RENTS:
Waltham as well as nearly 600,000 square feet in combined medical office Rent growth improves in 2019 as the
average marketed rate will advance to
completions. Much of this space is leased ahead of opening, reflecting
strong demand that is also supporting above-market asking rent growth. 2.8% INCREASE $33.47 per square foot. Last year, asking
rates fell 4.3 percent.
Advances within the Route 128 Loop and the Revere/Somerville/Medford in asking rents

area will help produce renewed rent appreciation for the overall metro
this year following a contraction in monthly fees in 2018.

Investment Trends
• Strong investor demand for core Boston offices drives market-high
Local Office Yield Trends
prices in the Back Bay, Financial District and Cambridge. Whether a
h property spans 300,000 or 10,000 square feet, it could trade for a sale
10.0% price above $1,000 per square foot. High-credit tenants paying premium
rents support cap rates in the low-3 to mid-4 percent range with initial
8.5% returns reaching above 6 percent for value-add Class C assets.
Average Rate

7.0%
• A lack of space to rent and properties for sale in Cambridge drives both
office tenants and investors to the nearby suburbs of Waltham, Lexing-
5.5% ton, Burlington and Somerville. These areas feature lower entry costs
and first-year yields averaging in the mid-6 percent zone.
4.0% • Properties near the Route 495 Loop change hands less often than more
9* 01 03 05 07 09 11 13 15 17 19*
central submarkets, but assets in the populated areas of Framingham,
Natick and Marlborough garner attention. Low entry costs and cap
rates above 7 percent appeal to yield-oriented investors, while rental
Sales Trends
demand is aided by the I-90 freeway that feeds into downtown Boston.
Sales Price Growth
* Cap rates trailing 12 months through 1Q19
er Square Foot

Sources: CoStar $400

Group, Inc.; Real Capital Analytics 18%
Year-over-Y

$300 9%
 Employment Trends
1Q19 – 12-Month Trend
Local Office Yield Trends
Employment Growth Office-Using Emp. Growth EMPLOYMENT
6% 10.0%
0.7% increase in total employment Y-O-Y
Year-over-Year Change

3% • Boston
8.5% employers created 20,080 new jobs in the 12 months
ending in March. Hiring was led by the professional and business

Average Rate
0% services
7.0% as well as the education and health services sectors; they

added a combined 15,300 personnel to payrolls.

-3% 5.5%
• Continued employment growth contributed to a 50-basis-point
decline in the unemployment rate to 2.7 percent, which slowed
-6% 4.0%
09 10 11 12 13 14 15 16 17 18 19* the pace of hiring
01 03from
05 the
071.3 percent
09 11 reported
13 15 a year
17 ago.
19*

Office Supply and Demand Sales Trends

Completions Absorption CONSTRUCTION
Sales Price Growth
6

Average Price per Square Foot

$400
3.7 million 18%
square feet completed Y-O-Y

Year-over-Year Growth
Square Feet (millions)

3 • The total amount of office space delivered over the9%past four

$300
quarters is about double what was completed over the previous
0
annual
$200 period, with sizable projects arriving in Cambridge,
0%

Seaport and the Framingham/Natick area.

-3 $100 -9%
• Major openings since March 2018 include the 432,000-square-
-6 foot Alexandria
$0
Center at Kendall Square and Congress
-18%
Square in
09 10 11 12 13 14 15 16 17 18 19* the Financial
09 10 District,
11 12 which
13 14 spans 365,000
15 16 17 18square
19** feet.

Vacancy Rate Trends

Metro United States VACANCY
24%
40 basis point decrease in vacancy Y-O-Y
18% • A high level of pre-leasing minimized the impact of the elevated
Vacancy Rate

construction pipeline on vacancy. The metrowide rate declined

12%
to 11.2 percent in March, its lowest value in more than a decade.

6% • Cambridge holds the tightest vacancy rate in Boston at sub-5

percent. Substantial leasing activity also drove a 300-basis-point
0% drop in availability to 17.3 percent in the Route 3 North area.
09 10 11 12 13 14 15 16 17 18 19*

Asking Rent Trends

Metro United States RENTS
14%
1.3% increase in the average asking rent Y-O-Y
Year-over-Year Change

7% • Following two consecutive quarters when over 1 million square feet of

office space was added to the metro, fewer openings in the first quar-
0% ter of 2019 contributed to renewed rent growth. The average asking
rate rose to $34.92 per square foot in March.
-7%
• Low vacancy continues to drive growth in marketed rates in the Cam-
-14%
bridge area, which are already some of the highest in Boston. Rents
09 10 11 12 13 14 15 16 17 18 19* also appreciated by over 9 percent in the northern close-in suburbs.

* Forecast
Source: CoStar Group, Inc.
Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 1.1% Metro 22.3% Metro 358

U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

Office Square footage*

40.8% Urban

2019 Office-Using Job growth Population of Age 25+ U.S. Average 32.0%

Percent with Bachelor Degree+**

Metro 1.5% 59.2% Suburban
U.S. Average 1.7% Metro 44.9% U.S. Average 68.0%
U.S. Average 29.9% *1Q19
**2018

SUBMARKET TRENDS SALES TRENDS

Steady Transaction Volume Facilitates Price Growth
Lowest Vacancy Rates 1Q19*
Employment Trends as Yield Advantage Brings
Local OfficeinYield
New Buyers
Trends
Employment Growth Office-Using Emp. Growth • Trade velocity remained consistent over the past 12 months ending in
6% Y-O-Y Average March, as investors
10.0% pursued opportunities most often in central Boston
Vacancy Y-O-Y %
Submarket Basis Point Asking and the western suburbs inside the Route 128 band.
Rate Change
Year-over-Year Change

Change Rent
3% 8.5%
• Competition over listings helped drive the average sale price up 9.2
Average Rate

Cambridge 4.4% -50 $48.04 8.7% percent to $312 per square foot at the end of the first quarter. Higher
0% 7.0%
sales prices contributed to a 20-basis-point drop in the average cap
Southern New Hampshire 7.7% -30 $18.73 -2.9%
rate, which now lies in the high-5 percent zone.
-3% 5.5%
Boston/Suffolk County 9.0% -20 $50.83 -2.8% Outlook: Lower cap rates in other investment options are prompting some
-6% investors to pursue
4.0% opportunities with offices. Buyers are likely to target
09 10
Route 128 North 11.6%11 12 13
-40 14 15
$24.0816 17 18
7.3% 19* 01 03 05 where
higher-end suburban submarkets, 07 initial
09 11returns
13 are
15 greater.
17 19*

Route 128 West 12.7% -90 $33.11 5.3%

Office Supply and Demand Sales Trends
Route 128 South 13.8% -100
Completions $22.73
Absorption 3.4% Sales Price Growth
6
Average Price per Square Foot

Route 495 North East 15.0% 40 $21.26 1.5% $400 18%

Year-over-Year Growth
Square Feet (millions)

3
Route 495/Route 2 West 16.9% -30 $18.18 -1.4% $300 9%

0
Route 3 North 17.3% -300 $19.74 6.6% $200 0%

-3 $100 -9%
Route 495/Mass Pike West 18.9% 110 $27.15 3.6%

Overall Metro -6 11.2% -40 $34.92 1.3% $0 -18%

09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19**

* Includes submarkets with more than 100,000 square feet of inventory ** Trailing 12 months through 1Q19 over previous time period
Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
 1Q19* Office Acquisitions CAPITAL MARKETS
By Buyer Type
Cross-Border, By DAVID G. SHILLINGTON, President,
11.6%
Marcus & Millichap Capital Corporation
Other, 6.0%
Equity Fund • Ongoing trade concerns weigh on growth outlook; Fed plots next
& Institutions, 32.9% steps. Amid rising trade tensions between the U.S. and China and
slowing global growth, the outlook has turned more cautious. Mar-
ket volatility, along with a flight to safety trade, has flattened the
yield curve dramatically, with the 10-Year Treasury trading below
Private, 45.1%
Listed/REITs, 4.4% 2.2 percent. This has pushed the broader yield curve into inversion,
a closely watched precursor to a potential recession. Meanwhile,
many measures of the domestic economy remain buoyant, includ-
Office Mortgage Originations ing continued job and wage growth, historically low unemployment
By Lender and muted inflationary pressure. These conditions have prompted
a dichotomy, with Federal Reserve officials signaling more accom-
100%
modative policies. The impending end of quantitative tightening in
Percent of Dollar Volume

Atlanta Office:
September, coupled with potential cuts to the Fed funds rate Michael
in the Glass First Vice
75% Nat'l Bank/Int'l Bank michael.glass@marcusmillicha
Reg'l/Local Bank second Fasano
Michael half of the
Firstyear, highlight the Manager
Vice President/Regional shift in Fed policy. As a result,
1100 Abernathy Road N.E., Bldg. 500, Suite 600
50% CMBS long-term interest rates are likely to remain subdued, withCleveland Fed Office:
Atlanta, GA 30328 5005 Rockside Road, Suite 800
Financial/Insurance policy
(678) leaning
808-2700 toward accommodation.
| michael.fasano@marcusmillichap.com Independence, OH 44131
Pvt/Other (216) 264-2000
25%

• Conservative underwriting balances abundant marketplace Columbus Office:

230 West Street, Suite 100
0% liquidity. While debt availability for office assets remains widely Columbus, OH 43215
14 15 16 17 18 (614) 360-9800
available
Austin Office:from a wide range of sources including local, regional and
national banks and insurance companies, sentiment surrounding
* Trailing 12 months through 1Q19 Craig Swanson Vice President/Regional Manager
Include sales $2.5 million and greater theNorth
9600 healthMopac ofExpressway,
the economy has fallen somewhat in recent months.
Suite 300 Cincinnati Office:

Sources: CoStar Group, Inc.; Real Capital Analytics Austin,

LendersTX 78759
remain broadly cautious in underwriting, with loan-to-
(512) 338-7800 | craig.swanson@marcusmillichap.com Colby Haugness Regiona
value (LTV) ratios typically in the 55 to 70 percent range, depend- 600 Vine Street, 10th Floor
Cincinnati, OH 45202
ing on the borrower, asset and location. The conservative approach (513) 878-7700 | colby.haugnes
National Office and Industrial Group has filtered into a focus on proven property results, with much less
willingness to lend against pro forma rents. This has prompted
Alan L. Pontius
Senior Vice President, National Director | National Office and Industrial Group investors
Baltimore to turn toward short-term mezzanine debt and bridge
Office: Tim Speck First Vice Presi
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com loans to cover capital improvements, while seeking long-term tim.speck@marcusmillichap.co
Matthew Drane Regional Manager
solutions
100 E. Pratt St., once returns have been solidified. Construction origina-
Suite 2114 Dallas Office:
Prepared and edited by
tion remains
Baltimore, MD 21202muted, with lenders focusing on core locations with
5001 Spring Valley Road, Suite
Cody Young Tel: (202) 536-3700 | matthew.drane@marcusmillichap.com Dallas, TX 75244
proven demand. (972) 755-5200
Research Associate | Research Services

Fort Worth Office:

For information on national office trends, contact: 300 Throckmorton Street, Suit
John Chang Fort Worth, TX 76102
Senior Vice President, National Director | Research Services (817) 932-6100
Boston Office:
Tel: (602) 707-9700 | john.chang@marcusmillichap.com
John Horowitz First Vice President/Regional Manager
100 High Street, Suite 1025
Price: $250
Boston, MA 02110
(617) 896-7200 | tim.thompson@marcusmillichap.com
Denver Office:
© Marcus & Millichap 2019 | www.MarcusMillichap.com

Skyler Cooper Regional M

1225 17th Street, Suite 1800
Denver, CO 80202
Charleston Office: (303) 328-2000 | skyler.cooper

Benjamin Yelm Regional Manager

151 Meeting Street, Suite 450
Charleston, SC 29401
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and
(843) 952-2222 complete information; however, no representation, warranty or guarantee,
| benjamin.yelm@marcusmillichap.com
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data
includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide
Detroit Office:
specific investment advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau
Steven Chaben Senior Vi
Two Towne Square, Suite 450
Southfield, MI 48076
Charlotte Office: (248) 415-2600 | steven.chaben

Benjamin Yelm Regional Manager