What's next for Boston's commercial real estate market?

Simply put, Boston is — and will continue to be — a top destination for both tenants and capital. With strong market fundamentals and key drivers like education, finance, healthcare, life sciences and technology, 2018 is likely to be another terrific year for the commercial real estate sector.

Market Metrics

Boston’s urban core comprises four major submarkets: Downtown, Back Bay, Seaport and Cambridge. Together, these submarkets total more than 96.1 million square feet of office and lab space. This sector of the market features a vacancy rate of approximately 8.8 percent, positive net absorption of more than 300,000 square feet in 2017 and rental rates that are on the rise.

Boston’s urban office market is largely driven by the region’s high concentration of educational institutions, financial and professional services, healthcare, life sciences and, perhaps the most important, technology.  These industries excel in the Boston area due to its high concentration of knowledge workers and its spirit of innovation and entrepreneurship.

Tenant In-Migration

The biggest trend impacting Boston recently has been the large-scale relocations of tenants into the urban core — both from within and outside of the market. This is a trend that shows little signs of slowing down.

• Alexion — Alexion Pharmaceuticals also found Boston’s store of intellectual capital hard to resist, highlighted by the company’s decision to relocate its corporate headquarters from Connecticut to 150,000 square feet in the recently completed 121 Seaport Boulevard.
• PTC — The other tenant taking space at 121 Seaport Boulevard is a Needham-based technology company, which will move its headquarters into the remaining 250,000 square feet.
• Bose — Similar to PTC, in an effort to skew the company’s workforce younger, Bose will relocate a large portion of its workforce from Framingham into nearly 100,000 square feet at Boston Landing, which is also the global headquarters of New Balance.

Other tenants making the move into the urban core include Reebok, Converse, America’s Test Kitchen and Autodesk.

Investment Activity

Investors of all shapes and sizes have taken note of the above trends, with 2017 being a very active year for Boston transaction activity, including acquisitions by CIM (1000 Washington Street and 321 Harrison Avenue), AIG (the HIVE), Jumbo Capital Management (50 Congress Street), Ashkenazy Acquisitions Corporation (South Station) and Bentall Kennedy (93 Summer Street). The only factor limiting transaction volume in 2017 was a lack of inventory, as demand far outstrips supply.

Outlook

Twenty-eighteen is sure to be another terrific year for the Boston office market. On the fundamental side, tenants will continue to relocate to the urban core to take advantage of public transportation, the young and talented workforce and the existing ecosystem of knowledge-based workers. On the investment side, core capital will continue to chase the few deals that will likely come to market. It is important to point out that this pent-up demand has compressed yields for core assets in gateway markets, and that further compression may occur for the right asset. One thing is certain, Boston will continue to be a target in 2018, whether it’s tenants seeking to attract talent or capital seeking stable cash flow in one of the country’s strongest office markets.