NORTHEAST SNAPSHOT, FEBRUARY 2008

Boston Office Market

The fundamentals of the Boston office market have remained strong heading into 2008. Although there has been some hesitation on the part of tenants and buyers due to the credit crunch, overall, the market is still doing well. Vacancy rates for Class A office space are sitting at approximately 6 percent with an average asking price of roughly $60 per square foot, and prime space in downtown trophy office towers is commanding rental rates of approximately $90 per square foot.

In the past year, strong fundamentals such as low vacancy rates and asking rental rates that are high and growing, lured many large investment bankers to the Boston market, resulting in the acquisition of several of the city’s high-end office properties. Blackstone’s purchase of the Equity Office portfolio was by far one of the blockbuster deals of 2007. According to Real Capital Analytics, in 2007, 169 office properties were sold in the Boston market totaling just under $11 billion in sales. The average asking price for these buildings was $291 per square foot at a 6.1 percent cap rate. However, larger downtown towers that closed went for $300 to $600 per square foot.

Currently, although most of the large trophy buildings have been traded, there is certainly still demand for office investment product. Foreign investors continue to keep their eyes on the Boston market, infusing the city with new capital. The weakness of the dollar has made American assets a good buy right now and investors from Europe and the Middle East have found Boston to be a particularly good investment because of its high barriers to entry and maturity. In addition, the 24/7 atmosphere of the city has attracted many investors to the marketplace. Boston’s strong residential population adds a continued revenue stream for the city and support for the office market as well.

In 2007, several new high-rise office buildings were announced, approximately 7 million square feet, but there are such difficult barriers to entry in Boston that new projects often take years and years to get out of the ground and come online. In addition, lenders have become considerably more conservative, so many projects that were announced might not come to the marketplace for several years. Therefore, this already tight market is expected to get tighter and tighter as supply lessens. However, despite a slow down in supply, tenants such as private equity firms, life science firms, financial institutions and large law firms all continue to grow and take space in the market.

Outside of Boston, the 128 market and the northwest sector continue to draw attention from tenants and investors. This area is more “hands on” than downtown Boston, in other words, a strong local development company in combination with a large financial institution. Cambridge is also a market that is experiencing more activity, especially from the life sciences sector.

Overall, with little or no new supply coming to the marketplace, even if there is moderate growth, the Boston office market should remain tight with vacancy rates going down and rental rates going up.

— Robert Miller is the managing director for Sperry Van Ness in Boston.

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