Q1-2018-OfficeReport

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METRO BOSTON Q1 2018 | OFFICE REPORT

TOTAL VACANCY RATE

Q1 NET ABSORPTION (SF)

ASKING RENT ($/SF)

UNDER CONSTRUCTION (SF)

11.5%

74,264

$33.18

3,340,498

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

OFFICE STATISTICS DOWNTOWN

2018

DOWNTOWN

TOTAL INVENTORY (SF)

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q1 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

Class A

48,887,186

3,435,560

7.0%

281,462

Class B

20,978,391

1,803,527

8.6%

(57,712)

Q1 2013

CLASS A & B TOTAL

69,865,577

5,239,087

7.5%

223,750

Vacancy

12%

Q1 2013

Vacancy TOTAL VACANCY 10%

TRENDS • Large commitments dominate the urban leasing environment as the competition for talent heats up. From innovative companies like Wayfair and Oath to traditional finance firms like MassMutual, tenants are taking down large blocks of space throughout the Downtown markets. The near-term outlook for demand is also positive. Preleasing among new construction is particularly strong and several tenants, including Chewy, LevelUP, and Burns & Levinson, are out with requirements of 50,000 square feet or more. • The Back Bay is finally reaping the rewards of this cycle’s urban office market expansion. Not long ago this submarket was facing high vacancies as tenants left for greener pastures in the Financial District and the Seaport. Strong leasing in this traditional high-rise market has led to a swift decline in vacancies (more than 200 basis points) over the last 12 months. And more growth is on the way. Wayfair is going gangbusters, DraftKings is moving to the neighborhood, WeWork is opening another location, and John Hancock is shifting its headquarters from the Seaport to space they occupy at 200 Berkeley and 197 Clarendon. • Boston’s Seaport is about to get a little more crowded. Amazon announced plans to lease 430,000 square feet, a separate requirement from the much-anticipated HQ2, in a to-be-built office tower at Seaport Square. This move will bring roughly 2,000 additional employees to the area. The e-commerce giant, who recently took occupancy of 150,000 square feet at 253 Summer Street, also has the option to expand into another 610,000 square feet on an adjacent parcel. MassMutual is throwing its hat into the ring as well; bringing 1,000 workers and 300,000 square feet of office space to Fan Pier by 2021. • On the heels of Rapid7’s recent deal, Oath will likely anchor the next office phase at Boston Properties’ Hub on Causeway in North Station. The media subsidiary of Verizon is said to be negotiating a 300,000-square-foot lease at the new development. • Rents continue to climb across most submarkets, but slower growth, which is indicative of a cycle’s maturation, has set in. Average asking rents are flirting with $58.50/SF in the first quarter — a 1.2% increase from year-ago levels. Lease rates were essentially flat compared to the fourth quarter, however. Flight-to- quality among office tenants this cycle is also impacting lease rates. With fewer Class A rent observations in comparison to the overall market, asking rents could decrease despite solid fundamentals.

12% 8%

10% 6%

5-Year Historical Average = 9.2%

2013

2014

2015

2016

2017

2018

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)

#H'(%#$'

SF (000s)

J567 T+'.,2 T)4.), T*1.))

2013

2014

2015

2016

2017

2018

Class A

Class B

2013

2014

2015

2016

2017

2018

NOTABLE TRANSACTIONS Notable Transactions

Class A

Class B

WeWork

Cengage Learning

Nixon Peabody

DraftKings

WeWork

75K SF

90K SF

105K SF

120K SF

135K SF

Back Bay

Seaport

Financial District

OFFICE STATISTICS CAMBRIDGE

CAMBRIDGE

TOTAL INVENTORY (SF)

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q1 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

Class A

7,036,443

320,548

4.6%

(13,088)

Class B

3,168,145

12,884

0.4%

24,518

CLASS A & B TOTAL

10,204,588

333,432

3.3%

11,430

Vacanct SF VACANCT SF Vacanct SF

TRENDS • Cambridge remains one of Boston’s tightest and most expensive office markets. Vacancies ended the first quarter near historic lows as the market absorbed roughly 11,000 square feet. MIT took occupancy of nearly 48,000 square feet at 105 Broadway, and Air Inc. moved into 19,207 square feet at 675 Massachusetts Ave. In West Cambridge, however, office vacancies climbed to 8.7% as negative absorption surpassed 50,000 square feet for the quarter. QuickBase accounted for the majority of this activity; vacating more than 30,000 square feet at 150 Cambridgepark Drive. 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. • Cambridge Crossing landed its first large office user this quarter. In another suburban-to-urban relocation, Philips NV is planning to move its North American headquarters from Andover to East Cambridge; bringing along roughly 2,000 employees. In 2020, the firm will occupy more than 300,000 square feet at the first phase of the Cambridge Crossing development. The catalyst for this deal was proximity to the booming life science market in Kendall Square, where the firm already employs 200 researchers. • While companies continue to move in from the suburbs, several home-grown Cambridge tenants are expanding. Cambridge Innovation Center is adding another location at 255 Main Street to accommodate the growing demand for co-working and shared office space. The startup hub is taking 92,500 square feet formerly occupied by Microsoft — bringing its Kendall Square footprint to 300,000 square feet. MIT, Draper Labs, Broad Institute, and CarGurus are growing here as well. • Nearly 80% of the 917,000 square feet of office space currently under construction in East Cambridge is spoken for. Work continues on Akamai’s new headquarters at 145 Broadway, and Philips NV and CarGurus both executed leases at new developments this quarter. While a handful of projects are slated to break ground this year, including the 425,000-square-foot 314 Main Street and the 430,000-square-foot courthouse redevelopment, demand for product in Cambridge seems insatiable. Several of the proposed developments are also being marketed to both office and lab users; creating even more competition for this market’s limited office inventory. • Limited availabilities and few rent observations have created some volatility in Cambridge’s recent rent data, which is not indicative of market health. Asking rents in East Cambridge and Mid Cambridge are among the highest in the metro area, and lease rates for the new construction, which are not included in current calculations, are well north of $90/SF gross.

1,200

1,000

800

600

SF (000s)

SF (000s) 400

400

200

2013

2014

2015

2016

2017

2018

2013

2014

2015

2016

2017

2018

Direct

Sublease

Direct

Sublease

NET ABSORPTION AND ASKING RENT

300

$80

300

$80

$70

200

$70

200

$60

100

$50

100

$50

$40

SF (000s)

$30

SF (000s) -100

$30

-100

$20

-200

$10

-200

$10

-300

2014

2015

2016

2017

2014

2015

2016

2017

Net Absorption

Asking Rent

Net Absorption

Asking Rent

NOTABLE TRANSACTIONS Notable Transactions

Philips NA

CIC

CarGurus

Matrix Partners

EIU

25K SF

50K SF

75K SF

100K SF

350K SF

East Cambridge

2018

CONSTRUCTION COSTS ( P E R S Q U A R E F O O T )

TOTAL CONSTRUCTION U N D E R W A Y

50K-75K SF: $120-$130 75K-150K SF: $115-$120 150K-225K SF: $100-$105 50K-75K SF: $75-$80 75K-150K SF: $70-$75 150K-225K SF: $65-$70

42% 31% 27%

BOSTON

SUBURBS CAMBRIDGE

1,200,000

Source: Dacon Construction

1,000,000

800,000

600,000

400,000

200,000

TALLEST PLANNED OFFICE TOWERS IN BOSTON

3,500 Preleased Available CURRENT CONSTRUCTION

3,000

2,500

2,000

1,500

1,000

500

1998 1999 2001 2002 2004 2005 2007 2008 2010 2011 2013 2014 2016 2017

BULFINCH CROSSING 45 FLOORS / 528 FT

SOUTH STATION TOWER 49 FLOORS / 677 FT

HARBOR GARAGE

52 FLOORS / 600 FT

WINTHROP SQUARE

53 FLOORS / 691 FT

HISTORICAL DELIVERIES

B O S T O N

H I G H L I G H T S

KEY: UNDER CONSTRUCTION & PROPOSED DEVELOPMENT

440,000+ SF

1. RISING LABOR AND MATERIAL COSTS CONTINUE TO DRIVE UP THE PRICE TO BUILD OFFICE SPACE IN GREATER BOSTON. 2. A MAJORITY OF OFFICE INVENTORY CURRENTLY UNDERWAY IN THIS MARKET HAS BEEN PRELEASED. 3. MORE SUBURBAN BUILD-TO-SUITS ARE ON THE WAY, AND A HANDFUL OF MAJOR DOWNTOWN PROJECTS, INCLUDING WINTHROP SQUARE AND THE GLOBE SITE REDEVELOPMENT, WILL LIKELY KICK OFF THIS YEAR.

120,000 - 190,000 SF

190,000 - 310,000 SF

310,000 – 440,000 SF LESS THAN 120,000 SF

OFFICE STATISTICS SUBURBAN

2018

SUBURBAN

TOTAL INVENTORY (SF)

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q1 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

Class A

59,081,606

7,958,514

13.5%

(246,271)

Vacancy

Class B

54,823,798

8,856,567

16.2%

85,355

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

1,500

17%

CLASS A & B TOTAL

113,905,404

16,815,081

14.8%

(160,916)

1,000

16%

VACANCY & NET ABSORPTION 500

15%

TRENDS • Suburban office vacancies spiked in the first quarter of 2018 as Reebok’s former headquarters hit the leasing market. Barring this event, market conditions have otherwise been positive with expansions coming from owner-users and in-place tenants. While office-users continue to migrate towards urban locales, demand for build-to-suits has helped drive activity in Boston’s suburban markets. 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 sale of Reebok’s former headquarters in Canton following its recent relocation to Boston’s Seaport neighborhood generated several hundred thousand square feet of negative absorption in the Route 128 South office market this quarter. Spear Street Capital purchased the 600,000+-square-foot campus for $88 million or $129 per square foot. While this site presents an interesting redevelopment opportunity, the new owner is planning to lease out the space. • Move-ins from Raytheon, Digital Federal Credit Union, Digital Guardian, and ServiceNow contributed to strong net absorption in markets like Route 128 West and Route 495 North. In addition to the Reebok space, Comverse Technology also vacated roughly 78,000 square feet at 200 Quannapowitt Parkway in Wakefield this quarter. • Office users are flocking to build-to-suit construction in Boston’s suburbs. Following Simpson Gumpertz & Heger’s 110,000-square-foot lease at the soon-to-be-built 20 CityPlace in Waltham, Alkermes recently confirmed its plans for growth. The drugmaker inked a deal for more than 200,000 square feet of new office space in Waltham; expanding its footprint to nearly 400,000 square feet here by 2020. Agero, Inc. also signed a lease for 115,000 square feet for a new headquarters at River’s Edge in Medford. The roadside assistance company will relocate from nearby One Cabot Road. Q1 2017 Q2 2017 Q3 2017 Q4 2017 • 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 are nearing $25.50/ SF in the first quarter — a 6% increase from year-ago levels. Lease rates were essentially flat compared to the fourth quarter, however.

1,500 0

17%

14%

1,000

16%

-50

13%

-1,000

12%

500

15%

2013

2014

2015

2016

2017

2018

Absorption

Vacancy

14%

-500

13%

-1,000

12%

2013

2014

2015

2016

2017

2018

Net Absorption

Vacancy

SUBURBAN RENTS Suburban Rents

10% 15% 20% 25% 30% 35%

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

Asking Rent ($/SF) 0% 5%

$0 $5

tion

,271) $28.86 ,355 $22.42 ,916) $25.43

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-Q1 2018)

Current Rent

Route 495 Northeast

NOTABLE TRANSACTIONS Notable Transactions

Alkermes

Agero, Inc.

Everbridge

Collegium Pharmaceuticals

MKS Instruments

25K SF

75K SF

125K SF

175K SF

225K SF

Route 128 West Inner Suburbs Route 128 Northwest Route 128 South Router 495 Northeast

rket conditions have otherwise

CAPITAL MARKETS STATISTICS Property Property City/Submarket Westwood

Property Property City/Submarket City/Submarket Buyer

40 Court Street 40 Court Street Boston Exan Capital LLC $54,000,000 Boston Exan Capital LLC $54,000,000 109,705

101 Station Driv 101 Station Drive AEW Capital Mana AEW Capital Ma $53,100,000 $53,100,000 208,134

Buyer Price Total SF Price/SF Cap Rate Total SF Price/SF Cap Rate Buyer Price

City/Submarket Westwood

Buyer Price Price Total SF Price/SF Cap Rate Total SF Price/SF Cap Rate

MEDIAN $/SF $177 109,705 $492 4.0% $492 4.0%

208,134 $255 6.50% $255 6.50%

SALES VOLUME ($)

NUMBER OF TRANSACTIONS

TOTAL SF

MEDIAN CAP RATE

$704,191,923

4,135,512

Sale Volume

Sale Volume SALES VOLUME $4,000

TRENDS • Following a rather lackluster second-half of 2017, transaction volume failed to make headway in Boston’s office market during the first quarter. With that said, Boston remains a highly-desirable destination for capital among all investor types and the limited inventory of available properties for sale continues to drive up pricing. Similar to national office trends, suburban investment is on an upswing, with the median price-per-square-foot increasing by more than 30% over the past year. This compares to just 1.6% growth in the urban markets. • Investors seeking higher yields and greater opportunities are driving the expanded suburban investment activity in recent quarters. Three out of the top four largest office transactions took place in the ‘burbs, with CrossHarbor Capital Partners; $277 million purchase of Cross Point in Lowell representing the top deal. Spear Street Capital’s $88 million acquisition of the former Reebok campus in Canton was another major sale that closed during the first quarter. National development sold 101 Station Drive in Westwood to AEW Capital for $53.1 million or $255 per square foot and Minardi Limited Partnership picked up two assets on Donald Lynch Boulevard in Marlborough for $13 million or $104 per square foot. • When Downtown assets do change hands, buyers pay a premium. Exan Capital recently purchased 40 Court Street, a 109,705-square-foot Class B asset in the Financial District for $54 million or $492 per square foot at a 4% cap rate. Stars Investment paid just $31 million for the building in 2014. The sale of 28 State Street is reportedly nearing completion, with an estimated price tag of $430 million or $745 per square foot. This would represent a 25% price increase from the asset’s 2014 sale.

$3,500

$4,000

$3,000

$3,500

$2,500

$3,000

$2,000

$2,500

$1,500

$ (000s)

$2,000

$1,000

$1,500

$ (000s)

$500

$1,000

$500

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Suburban Urban

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Suburban Urban

MEDIAN PRICE/SF Median Price/SF

Median Price/SF $700

$600

$700

$500

$600

$400

$500

$300

$400

$200

$300

$100

$200

$100

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Suburban

Urban

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

TOP Q1 / INVESTMENT SALES

Suburban

Urban

INDUSTRIAL SALES

Q1 2017

Q2 2017

Q3 2017

Q4 2017

TOTAL

SALES VOLUME ($) Former Reebok HQ Canton Cross Point Lowell

$374,173,554 101 Station Drive Westwood

$453,379,723 Former Reebok HQ Canton

40 Court Street Boston

$385,172,081

$433,947,886

$1,646,673,244

# OF TRANSACTIONS

296

Spear Street Capital CrossHarbor Capital Partners $227,2 , $88,000,000

TOTAL SF

4,779,432

6,394,205

4,045,511

4,243,774

19,462,922

Buyer

Exan Capital LLC

Buyer

AEW Capital Management

Buyer

Spear Street Capital

MEDIAN $/SF

$75

$59

$103

$86

$90

Price

$54,000,000

Price

$53,100,000

Price

$88,000,000

Total SF

680,000 1,282,212

Total SF

109,705

Total SF

208,134

Total SF

680,000

Price/SF

$129 77

Price/SF

$492

Price/SF

$255

Price/SF

$129

Cap Rate

4.0%

Cap Rate

6.50%

Cap Rate

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

Q1 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

Back Bay

13,947,135

1,088,263

194,502

9.2%

194,043

Charlestown

2,554,975

73,532

1,893

3.0%

(62)

Fenway/Kenmore

1,697,521

142,570

8.4%

(89,086)

Financial District

35,688,924

381,283

2,654,321

200,644

8.0%

(45,327)

Midtown

2,090,044

58,835

15,702

3.6%

(15,097)

North Station

2,667,523

175,000

75,888

8,579

3.2%

9,343

Seaport

10,044,887

1,001,341

508,559

185,435

6.9%

171,554

South Station

1,174,568

25,968

4,396

2.6%

(1,618)

BOSTON TOTAL

69,865,577

1,557,624

4,627,936

611,151

7.5%

223,750

East Cambridge

5,636,548

916,814

36,641

82,576

2.1%

54,618

Mid Cambridge

2,517,470

29,426

5,937

1.4%

8,069

West Cambridge

2,050,570

89,288

89,564

8.7%

(51,257)

CAMBRIDGE TOTAL

10,204,588

916,814

155,355

178,077

3.3%

11,430

Framingham-Natick

4,778,281

682,426

62,920

15.6%

15,902

Inner Suburbs

6,462,589

168,271

473,988

23,535

7.7%

5,239

Route 128 North

13,776,222

320,672

1,352,666

58,442

10.2%

(65,934)

Route 128 Northwest

13,913,990

1,617,437

181,704

12.9%

25,981

Route 128 South

16,065,407

2,027,143

212,363

13.9%

(568,789)

Route 128 West

23,391,168

377,117

2,473,962

220,482

11.5%

168,890

ROUTE 128 TOTAL

67,146,787

697,789

7,471,208

672,991

12.1%

(439,852)

Route 495 North

13,440,168

3,376,636

104,207

25.9%

156,941

Route 495 Northeast

7,588,559

1,337,260

29,799

18.0%

141,088

Route 495 South

3,334,696

611,837

7,935

18.6%

(8,413)

Route 495 West

11,154,324

1,917,621

42,718

17.6%

(31,821)

ROUTE 495 TOTAL

35,517,747

7,243,354

184,659

20.9%

257,795

SUBURBAN TOTAL

113,905,404

866,060

15,870,976

944,105

14.8%

(160,916)

MARKET TOTAL

193,975,569

3,340,498

20,654,267

1,733,333

11.5%

74,264

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

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