Q2-2018-OfficeReport

METRO BOSTON Q2 2018 | OFFICE REPORT

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

ASKING RENT ($/SF)

UNDER CONSTRUCTION (SF)

11.7%

(67,812)

$33.14

3,367,201

1

303 Congress Street | Boston, MA 02210 | 617.457.3400 | www.NAIHunneman.com

Q2

OFFICE STATISTICS DOWNTOWN

2018

DOWNTOWN

TOTAL INVENTORY (SF)

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

ASKING RENT ($/SF)

Class A

49,426,670

3,253,643

6.6%

728,194

1,009,656

$63.49

Class B

20,979,810

1,757,825

8.4%

21,702

(36,010)

$50.61

Q1 2013

CLASS A & B TOTAL

70,406,480

5,011,468

7.1%

749,896

973,646

$59.25

Total Vacancy

12%

Q1 2013

Total Vacancy TOTAL VACANCY 10%

TRENDS • The second quarter proved to be one of the strongest in Downtown Boston’s recent history. With more than 700,000 square feet in positive absorption, vacancies in the urban core declined by 40 basis points over the quarter and 100 basis points over the year. Delivery of two fully-occupied office developments — 121 Seaport and 22 Boston Wharf Road — drove much of the activity. Following move-ins from Reebok and Amazon earlier this year, net absorption in the Seaport has surpassed 700,000 square feet year-to-date. Demand from out-of-market office users will continue to drive urban fundamentals in the foreseeable future. • Several sizeable users are in the market for new office digs, but availabilities over 100,000 square feet remain limited. State Street Bank (500,000+ SF), Bank of America (500,000+ SF), Salesforce (500,000 SF), Oath (300,000 SF), and Interpublic (280,000 SF) are some of the largest tenants touring the Downtown market. With only nine availabilities 100,000 square feet or more and one over 200,000 square feet, these users will likely turn to new construction to fulfill their requirements. Oath has reportedly signed a commitment at the 650,000-square- foot office tower at Boston Properties’ Hub on Causeway, which hasn’t even begun construction yet, and Epsilon is rumored to be nearing a commitment for 180,000 square feet in the same building. • Boston’s coworking landscape continues to expand. This quarter, WeWork agreed to take down another 90,000 square feet at Related Beal’s Congress Square development, which is slated to come on line later this year. Workbar also recently announced plans for growth in the city. The coworking operator is looking to double its Boston footprint to more than 100,000 square feet by 2019. While the need for flexible, collaborative work environments will likely continue to propel this trend, there is well over one million square feet of coworking space in Downtown Boston. One has to wonder how deep the demand well runs for this type of space. • Wayfair finalized its 395,000-square-foot lease at 222 Berkeley/500 Boylston Street in the Back Bay. The e-commerce giant currently occupies roughly 655,000 square feet across multiple buildings at Copley Place. Despite growing its footprint to more than one million square feet in 2019, Wayfair is expected to continue to expand, and is reported to be in the market for another 250,000-275,000 square feet in the Back Bay. • Rents continue to climb across most submarkets, but slower growth, which is indicative of a cycle’s maturation, has set in. Average asking rents surpassed $59/ SF in the second quarter — a 2.5% increase from year-ago levels. Lease rates were up 1.4% compared to the first quarter as well. Despite the recent flight-to- quality among Downtown office tenants, Class B lease rates are rising at a faster clip, and now have breached $50/SF Downtown.

12% 8%

10% 6%

8%

4%

6%

2%

5-Year Historical Average = 9.1%

4%

0%

2013

2014

2015

2016

2017

2018

2%

0%

2013

2014

2015

2016

2017

2018

NET ABSORPTION Net Absorption

1,000 1,200

Net Absorption

-600 -400 -200 0 1,000 1,200 -600 -400 -200 0 200 40 60 800 200 400 600 800

SF (000s)

g Rent /SF) $63.49 $50.61 $59.25

SF (000s)

2013

2014

2015

2016

2017

2018

Class A

Class B

2013

2014

2015

2016

2017

2018

NOTABLE TRANSACTIONS Notable Transactions

Class A

Class B

Amazon

Wayfair

WeWork

Spotify

BitSight

50K SF

150K SF

250K SF

350K SF

450K SF

Seaport

Back Bay

Financial District

2

OFFICE STATISTICS CAMBRIDGE

CAMBRIDGE

TOTAL INVENTORY (SF)

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

ASKING RENT ($/SF)

Class A

7,036,443

290,336

4.1%

30,212

17,124

$63.77

Class B

3,049,530

34,793

1.1%

(148,058)

(123,540)

$55.28

CLASS A & B TOTAL

10,085,973

325,129

3.2%

(117,846)

(106,416)

$62.90

Vacanct SF

Q1 2 Q2 2 Q3 2 Q4 2 Q1 2 Q2 2 Q3 2 Q4 2 Q1 2 Q2 2 Q3 2 Q4 2 Q1 2 Q2 2 Q3 2 Q4 2 Q1 2 Q2 2 Q3 2 Q4 2 Q1 2 Q2 2

TRENDS • Cambridge remains one of Boston’s tightest and most expensive office markets. Vacancies ended the second quarter near historic lows despite posting more than 100,000 square feet of negative absorption. Abt Associates’ relocation to 10 Fawcett Street and the planned redevelopment of the firm’s former headquarters at 55 Wheeler Street into a residential development accounted for a majority of this activity. Persistent demand for commercial space in Cambridge will keep fundamentals at or near current lows in the foreseeable future; leaving landlords with a clear upper hand. • Tech firms continue to drive demand for office space in Cambridge. In one of the largest transactions of the quarter, HubSpot extended its current lease at 1 Canal Park in East Cambridge and expanded its footprint by another 10,100 square feet. Data management startup, Devo, is relocating from Burlington to 4,500 square feet at 150 Cambridge Park Drive in West Cambridge. Wistia, OnShape and Happie also leased space in Cambridge during the second quarter. • Office construction is on Cambridge’s horizon and pricing for this space has reached new heights. Lease rates for some existing Class A space in East Cambridge are already in the low-to-mid $90s/SF, with the Cambridge average reaching almost $64/SF in the second quarter. Office users looking at new construction in this Kendall Square will likely pay over $100/SF Gross, which would represent a new high for the Cambridge market. • Despite such lofty pricing, demand remains robust for office space in Cambridge and new development is likely warranted. Boston Properties received approval for an additional 250,000-371,000-square-foot office tower on Main Street in Kendall Square. A few tenants (some are speculating Google is a prospective candidate) are reportedly in negotiations for the space. Out-of-market users are also circling MIT’s development on Main Street, also in Kendall Square. With the majority of DivcoWest’s first commercial building at Cambridge Crossing preleased to Philips North America, after committing to an additional 100,000 square feet in the building, the developer plans to bring another 500,000 square feet of speculative office and lab space to the site. • The long-awaited MBTA Green Line extension broke ground in June and areas along the new light rail route, including Cambridge Crossing and along First Street, are already reaping the rewards. New office, lab, multifamily and retail developments are popping up in parts of East Cambridge previously considered the end of the transit line. The expansion project will ultimately connect Cambridge to growth corridors in Somerville and other Inner Suburbs as well as Downtown Boston and Back Bay. These connections will provide tenants with another viable relief valve for the uber-tight Kendall Square market.

VACANCT SF

1,200

1,000

800

600

SF (000s)

400

200

0

2013

2014

2015

2016

2017

2018

Direct

Sublease

NET ABSORPTION AND ASKING RENT

300

$80

$70

200

$60

100

$50

0

$40

SF (000s)

$30

-100

Asking Rent ($/SF)

Net Absorption and Asking Rent

$20

-200

$10

$83.98 $55.28 $62.90

-300

$0

2015

2016

2017

2018

Net Absorption

Asking Rent

NOTABLE TRANSACTIONS Notable Transactions

HubSpot

Shiseido Cosmetics

Akebia Therapeutics

Onshape

Wistia

0K SF

20K SF

40K SF

60K SF

80K SF

East Cambridge

West Cambridge

3

Q2

OFFICE STATISTICS SUBURBAN

2018

SUBURBAN

TOTAL INVENTORY (SF)

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

ASKING RENT ($/SF)

Class A

59,315,665

8,431,291

14.2%

(522,586)

(774,497)

$29.36

Class B

53,941,335

8,988,258

16.7%

(177,276)

(274,742)

$22.45

Vacancy

1,500 CLASS A & B TOTAL

113,257,000

17,419,549

15.4%

(699,862)

(1,049,239)

$25.76

17%

2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017

1,000

16%

VACANCY & NET ABSORPTION Vacancy

TRENDS • Boston’s urban-to-suburban migration had a material impact on suburban fundamentals during the first half of 2018, with vacancies spiking again in the second quarter. Following Reebok’s recent relocation from its former campus in Canton to the Seaport, the completion of Alexion and PTC’s new office, also in the Seaport, resulted in another several hundred thousand square feet of negative absorption. Dell EMC, Kenexa and Shire vacated large blocks of space in the second quarter as well. Similar to Downtown, rents continue to rise, but growth is waning. Looking ahead, the suburbs will remain on solid footing despite continued migration to the urban center. Pockets along Route 495 may continue to contend with higher-than-average vacancies and struggle with lease-up, but adaptive reuse projects could help mitigate these risks. The lack of large blocks of available space in Cambridge and Downtown could also mitigate recent urbanization trends. • It’s not all bad news for Boston’s suburban office markets. Even with the loss of several major tenants, the Route 128 West submarket remains popular for Class A tenants. Recent leases by Simpson Gumpertz & Heger, Alkermes, Tesaro, and ZoomInfo point to the strength of Core Route 128. Outside of Route 128, Mathworks recently completed an 180,000-square-foot expansion at its Natick Campus, KROHNE completed its new 175,000-square-foot headquarters in Beverley and Allegro Microsystems relocated from Worcester to Marlborough. • Speculative construction in Boston’s suburban office market is leasing up, albeit at a slightly slower pace than the Downtown markets. In Waltham, the Post at 200 Smith Street landed its first major tenant. Deciphera Pharmaceuticals inked a deal for 44,256 square feet of office space in the newly constructed building. Now, 37% of the speculative suburban office construction built since 2016 is occupied. 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 • Another large mixed-use development is on the docket for Somerville. Cresset Group recently received approval for Xmbly; a 1.5 million square foot development adjacent to the ever-popular Assembly Row. The site, located along the MBTA’s Orange Line, will include three new commercial buildings. This new economy space will encompass office, lab and R&D uses. • Asking rents have been expanding rapidly in select suburban submarkets, but overall growth will likely wane as this current cycle matures. Demand for space within Route 128 and the Inner Suburbs has led to above-average gains over the past three years, with cumulative rent growth reaching 20-30% in some submarkets. Speculative construction in key markets, like Route 128 West, has also been driving higher rents. Average suburban asking rents ended the second quarter at $25.76/SF — a 6.3% increase from year-ago levels and 2% above last quarter’s rates.

500

15%

1,500

17%

0

14%

SF (000's)

1,000 -500

16%

13%

500 -1,000

15%

12%

2013

2014

2015

2016

2017

2018

0

14%

Net Absorption

Vacancy

SF (000's)

-500

13%

-1,000

12%

2013

2014

2015

2016

2017

2018

Net Absorption

Vacancy

SUBURBAN RENTS Suburban Rents

10% 15% 20% 25% 30% 35% 0 5% 10 15% 20% 25% 30% 35%

$10 $15 $20 $25 $30 $35 $40

Suburban Rents

$10 $15 $20 $25 $30 $35 $40 $0 $5

InnerSuburbs

Route 128 West

Route 495 West

Route 128 North

Route 495 North

Route 128 South

Route 495 South

Framingham-Natick

Route 128 Northwest Rent Growth (2014-2018)

Current Rent

Route 495 Northeast

0% 5%

$0 $5

NOTABLE TRANSACTIONS Notable Transactions

L3 Comm.

InnerSuburbs

Route 128 West

Route 495 West

Route 128 North

Route 495 North

Route 128 South

Route 495 South

Framingham-Natick

Route 128 Northwest Rent Growth (2014-2018)

Current Rent

Route 495 Northeast

ClearMotion

ZoomInfo

Sovos

Deciphera Pharmaceuticals

25K SF

50K SF

75K SF

100K SF

150K SF

Route 495 North Route 128 West Route 128 North

6

Property

177 Huntington Avenue

Property

City/Submarket

Boston

City/Submarket

Buyer Price

AFL-CIO Building Investment Trust

Buyer

CAPITAL MARKETS STATISTICS Price 206,837 Total SF

$137,500,000

67 S Bedford Street Bedford The CarlyleGroup Total SF Price/SF Cap Rate

$665

Price/SF Cap Rate

4.7%

$55,500,000 176,886 $314 5.6%

SALES VOLUME ($)

NUMBER OF TRANSACTIONS

TOTAL SF

MEDIAN $/SF $188

MEDIAN CAP RATE

Sale Volume

$1,229,408,481

78

3,648,439

6.1%

SALES VOLUME

TRENDS • Sales volume reached a four-quarter high in the Boston office market. Propped up by a handful of large Downtown transactions more than $1B in assets changed hands during the second quarter. Slower late-cycle growth, a widening bid-ask spread and rising interest rates are expected to stifle investment sales this year. With that said, Boston remains a highly desirable destination for capital among all investor types. Prices remain elevated and cap rates are compressing modestly. sold the 95%-occupied asset for $417.6 million or $731/SF. Related Beal acquired 451 D Street in Boston’s Seaport Submarket for $276 million or $578/SF, with plans to convert some of the office space to lab. In the Back Bay, Beacon Capital Partners divested the 206,837-square-foot 177 Huntington Avenue for $665/SF. All three properties garnered substantially higher price tags compared to their previous sale price as well as low, single-digit cap rates. Other owners look to be testing the waters as well. Skanska recently listed its newly constructed office at 121 Seaport for sale, and the price could reach $450 million or more than $1,000/SF. • Investors seeking higher yields and greater opportunities are driving suburban investment activity. As a result, recent price growth has accelerated in Boston’s suburban office market. Although sales volume dipped in the ‘burbs during the second quarter, several deals took place. The Carlyle Group acquired 67 S Bedford Street in Burlington for $55 million or $314/SF, and Lincoln Property Company and ASB Management purchased 91 Hartwell Avenue for $22.2 million or $186/SF. The cap rates on these deals were 5.6% and 6.1%, respectively. • Buyers continue to pay a premium for Downtown assets. In June, Heitman LLC closed on the 572,153-square-foot 28 State Street. Mitsubishi Estate and Rockefeller Group

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$ (000s)

$1,000

$500

$0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Suburban Urban

MEDIAN PRICE/SF Median Price/SF

$316.11 $489.20 $245.43 $236.89 $375.34 $243.77 $205.23 $174.11 $178.89 $267.89 $179.34 $209.56 $202.35 $203.24 $183.79 $385.65 $294.56 $243.21 $225.17

$153.51 $154.74 $143.32 $139.75 $115.16

2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012

$95.14 $0 $100 $200 $300 $400 $500 $600 $700 $800 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 $122.04 $106.90

$84.40 $97.20 $66.39 $89.85 $77.07 $69.99 $108.08 $123.90 $106.09 $100.00 $111.11

Suburban

Urban

TOP Q2 / INVESTMENT SALES

INDUSTRIAL SALES

Q1 2017

Q2 2017

Q3 2017

Q4 2017

TOTAL

SALES VOLUME ($) Former Reebok HQ Canton 28 State Street Bos

$374,173,554 67 S Bedford Street Burlington

$453,379,723 451 D Street Boston

$433,947,886 77 Huntington Avenue Boston

$385,172,081

$1,646,673,244

# OF TRANSACTIONS

76

78

82

60

296

4,045,511 AFL-CIO Building Investment Trust

CrossHarbor Capital Partners

TOTAL SF

4,779,432

6,394,205

4,243,774

19,462,922

Buyer Buyer

Spear Street Capital Heitman LLC

Buyer

Buyer

The Carlyle Group

Buyer

MEDIAN $/SF

$75 $276,000,000

$59

$103

$86

$90

$88,000,000 418, 0, 0

Price

$137,500,000

Price

Price

$55,500,000

Price

Total SF

206,837

Total SF

680,000 572 153

Total SF

176,886

Total SF

477,132

Price/SF

$665

Price/SF

$129 731

Price/SF

$314

Price/SF

$578

Cap Rate

4.7%

Cap Rate

-

Cap Rate

5.6%

Cap Rate

4.2%

7

Q2

M E T R O

B O S T O N

OFFICE RE CAP

2018

TOTAL INVENTORY (SF)

UNDER CONSTRUCTION (SF)

DIRECT VACANT (SF)

SUBLEASE VACANT (SF)

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

ASKING RENT ($/SF)

Back Bay

13,959,411

-

1,022,350

128,316

8.2%

132,099

326,142

$67.97

Charlestown

2,554,975

-

50,362

-

2.0%

25,063

25,001

$43.27

Fenway/Kenmore

1,673,521

-

159,915

-

9.6%

(41,345)

(130,431)

$64.75

Financial District

35,694,131

381,283

2,501,021

238,012

7.7%

115,932

70,605

$57.10

Midtown

2,090,044

-

79,120

6,651

4.1%

(11,234)

(26,331)

$48.22

North Station

2,668,666

175,000

90,593

3,785

3.5%

(9,911)

(568)

$46.58

Seaport

10,591,164

455,064

509,629

179,153

6.5%

551,489

723,043

$56.87

South Station

1,174,568

-

38,555

4,006

3.6%

(12,197)

(13,815)

$50.06

BOSTON TOTAL

70,406,480

1,011,347

4,451,545

559,923

7.1%

749,896

973,646

$59.25

East Cambridge

5,636,548

1,261,814

54,555

52,594

1.9%

12,068

66,686

$82.31

Mid Cambridge

2,517,470

-

33,550

10,449

1.7%

(8,636)

(567)

$65.84

West Cambridge

1,931,955

-

68,299

105,682

9.0%

(121,278)

(172,535)

$45.95

CAMBRIDGE TOTAL

10,085,973

1,261,814

156,404

168,725

3.2%

(117,846)

(106,416)

$62.90

Framingham-Natick

4,623,281

-

729,056

62,920

17.1%

(202,290)

(185,728)

$24.18

Inner Suburbs

6,410,617

168,271

444,199

30,879

7.4%

22,445

27,684

$34.44

Route 128 North

13,869,018

145,000

1,493,784

70,289

11.3%

155,528

(43,227)

$22.78

Route 128 Northwest

13,882,970

-

1,806,903

219,377

14.6%

(203,639)

(177,658)

$30.91

Route 128 South

16,159,293

61,702

2,142,216

220,260

14.6%

(66,670)

(691,759)

$25.46

Route 128 West

23,051,237

719,067

2,764,779

247,261

13.1%

(447,596)

(278,706)

$37.20

ROUTE 128 TOTAL

66,962,518

925,769

8,207,682

757,187

13.4%

(562,377)

(1,191,350)

$30.13

Route 495 North

13,194,841

-

3,075,566

109,716

24.1%

97,534

254,475

$20.24

Route 495 Northeast

7,538,395

-

1,390,877

26,996

18.8%

(50,814)

90,274

$20.24

Route 495 South

3,337,559

-

684,852

4,788

20.7%

(69,868)

(78,281)

$19.57

Route 495 West

11,189,789

-

1,847,647

47,184

16.9%

65,508

33,687

$20.53

ROUTE 495 TOTAL

35,260,584

-

6,998,942

188,684

20.4%

42,360

300,155

$20.25

SUBURBAN TOTAL

113,257,000

1,094,040

16,379,879

1,039,670

15.4%

(699,862)

(1,049,239)

$25.76

MARKET TOTAL

193,749,453

3,367,201

20,987,828

1,768,318

11.7%

(67,812)

(182,009)

$33.14

METHODOLOGY SOURCE: Co-Star, NAI Hunneman Commercial Company. PREPARED: June 2018.

DISCLAIMER: The above data is from sources deemed to be generally reliable, but no warranty is made as to the accuracy of the data nor its usefulness for any particular purpose. Average Rental Rates are asking rents on direct space. Vacant space includes both direct and sublease space.

LIZ BERTHELETTE | Director of Research 617.457.3306 | lberthelette@naihunneman.com