Office Research

Market Report Second Quarter 2018

Boston Metro

Corporations, Developers and Investors

Eye Boston Office Market Office 2018 Outlook

Corporate expansions benefit office vacancy, boosting 3.3 million sq. ft. Construction:
asking rent. The numerous colleges and universities in the Completions pick up from
will be completed
Boston metro supply the area with a workforce that is diverse for the 2.9 million square feet
several industries and highly skilled. As national unemployment completed in 2017. Deliveries
hits one of the lowest rates in decades, several employers are remain on par with the prior
searching for markets where skilled labor can be recruited from three-year average.
local higher educational institutions. Several companies including
Amazon and MassMutual have announced expansions in the 30 basis point Vacancy:
area, creating thousands of new office-using jobs in the Seaport Net absorption of 4 million
decrease in vacancy
District. Additionally, venture capitalists continue to invest in many square feet will benefit vacancy
of the metro’s start-ups, which typically fill smaller office spaces. improvement. The rate will drop
This steady demand has slashed vacancy nearly 450 basis points to 11.2 percent in 2018.
during the past eight years, supporting rental gains.

More completions on the way to central Boston, Cambridge. 5.0% increase Rents:
Deliveries pick up again this year, bringing a four-year total of 13.5 Building on last year’s 2.8 percent
in asking rents
million square feet of space. The bulk of office space underway increase, the average asking rent
is located in Boston’s CBD and the Cambridge area. Most of the will climb to $36.35 per square
completions pre-leased, minimizing an impact on vacancy. The foot this year.
rate will reach its lowest level in at least 12 years and rest 250 basis
points below national vacancy. The downtown and Cambridge
areas boast the lowest vacancy rates metrowide.

Investment Trends
Local Office Yield Trends • Robust office-using hiring, low vacancy and above-average
Office Cap Rate 10-Year Treasury Rate rent growth keep investors interested in Boston’s office market.
Both local and out-of-state buyers remain active, with many
12% institutional buyers focusing on assets in the Financial District
and Seaport. Here, first-year returns in the low- to mid-4 percent
9% band can be found.
Rate

6% • Buyers looking for lower entry costs and higher first-year

returns are targeting assets in western suburbs. Properties
3% along Interstate 95, near Newton/Waltham and south through
Norwood, are highly targeted. Cap rates in these areas average
0%
00 02 04 06 08 10 12 14 16 18* between the low-6 and high-8 percent band, depending on
property class and location.
• The majority of transactions during the prior 12 months comprise
assets of less than 100,000 square feet. Several buyers were
owner-users with intent to lease out any unused space.

* Cap rates trailing 12 months through 1Q18; 10-Year Treasury up to March 29

Sources: CoStar Group, Inc.; Real Capital Analytics
The Boston metro consists of the following counties: Essex, Middlesex, Norfolk, Plymouth and Suffolk
Boston
1Q18 - 12-MONTH TREND
Employment Trends EMPLOYMENT:

8%
Non-Farm Office-Using
1.0% increase in total employment Y-O-Y
g

• Nearly 26,000 positions were created during the past 12

4%
months ending in March. Hiring was led by the professional
and business services sector with 13,000 jobs.
0%
• The pace of hiring cut the metrowide unemployment
-4% rate 40 basis points during the past four quarters to 3.1
percent. The tight rate is making it difficult for employers
-8%
to find quality workers.
08 09 10 11 12 13 14 15 16 17 18*

Office Completions CONSTRUCTION:

Completions Absorption
6,000
2 million square feet completed Y-O-Y
)

• Completions decline from the 3.1 million square feet

3,000 delivered the prior 12-month period. The majority of
space was located in Cambridge and the Route 128
0
(

West submarket.
-3,000 • Nearly 5 million square feet are underway, with
completion dates through 2019. The largest project is
q

-6,000 Akamai, at more than 486,000 square feet.

08 09 10 11 12 13 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

Metro United States
70 basis point decrease in vacancy Y-O-Y
20%
• Net absorption of 4.1 million square feet outpaced supply
17% additions, slashing metrowide vacancy to 11.4 percent.
The prior year, a 110-basis-point decrease was registered.
y

14%
• Elevated demand in Cambridge slashed vacancy 170
11%
basis points during the past four quarters to 3.7 percent.
Vacancy in Cambridge is the lowest metrowide.
8%
08 09 10 11 12 13 14 15 16 17 18*

Asking Rent Trends RENTS:

Metro United States 6.1% increase in the average asking rent Y-O-Y
12%
• Tightening vacancy aided in an increase in the average
g

6% asking rent to $35.11 per square foot, a new high. The

prior year, rent ticked up 1.9 percent.
0%
• Rent in Class B/C space surged 9.6 percent during the
-6% year ending in March, to $25.68 per square foot. Asking
rent in Class A office space moved up 3.7 percent during
-12% this time, to $46.18 per square foot.
08 09 10 11 12 13 14 15 16 17 18*

* Forecast
 Office Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2018 FORECAST JOB GROWTH *POPULATION AGE 20-34 **SQ. FT. PER OFFICE WORKER

Metro 1.3% Metro 22% Metro 375

U.S. Average 1.2% U.S. Average 21% U.S. Average 213

**OFFICE SQUARE FOOTAGE

42% Urban
2018 OFFICE-USING JOB GROWTH POPULATION OF AGE 25+ U.S. Average 32%
*PERCENT WITH BACHELOR DEGREE+
Metro 1.6% 58% Suburban
U.S. Average 2.2% Metro 44% U.S. Average 68%

U.S. Average 29% * 2017

**1Q18

Lowest Vacancy Rates 1Q18 Prices Climb Higher as Fewer Listings

Available Bolster Bidding Environment
Y-O-Y
Vacancy Asking Y-O-Y %
Submarket
Rate
Basis Point
Rent Change • Limited listings slowed transaction velocity during the
Change
past 12 months, though competition lifted the average
price up 2.4 percent to $272 per square foot.
• Average first-year returns for office assets have held
SUBMARKET TRENDS

Cambridge 3.7% -170 $45.93 1.7%

steady in the high-5 percent band during the past
three years. Several Class C assets traded with returns
Boston-Suffolk County 8.9% -160 $52.52 11.2%
SALES TRENDS

in the low-8 percent band.

Close-In Suburbs North 9.0% -80 $22.92 5.4% Outlook: The large hospital and medical school presence
in Boston will keep buyers interested in medical office
Southern New Hampshire 9.1% -60 $17.78 6.9%
buildings. Cap rates for these assets vary by property
Route 128 North 12.2% -110 $22.33 2.4%
type and location.

Route 128 West 14.0% -40 $31.05 -2.9% Price Per Square Foot Trends
Route 495 North East 14.4% -220 $20.70 -0.8%
Year-over-Year Appreciation

16%
Route 128 South 15.3% 200 $21.66 4.8%
8%
Route 495-Mass Pike West 16.4% 70 $26.49 -1.0%
0%
Route 495-Route 2 West 17.3% 140 $18.76 -0.7%
-8%
Route 2 North 20.2% 10 $20.13 5.9%
-16%
Overall Metro 11.4% -70 $35.11 6.1% 08 09 10 11 12 13 14 15 16 17 18*

* Trailing 12 months through 1Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Office Research | Market Report

1Q18 Office Acquisitions By WILLIAM E. HUGHES, Senior Vice President,

By Buyer Type
Marcus & Millichap Capital Corporation
Other, 1%
Cross-Border, 8% • Fed raises benchmark interest rate, plots path for additional
increases. The Federal Reserve increased the federal funds rate
by 25 basis points, lifting the overnight lending rate to 1.75 percent.
The Fed noted that inflation has broadly reached its objective, while
Private, 62%
the domestic economy is performing tremendously well as tax cuts
Equity Fund power household spending and corporate investment. As a result,
& Institutions, 24%
the Fed has guided toward two additional rate hikes this year, likely
in September and December, while setting the stage for as many

CAPITAL MARKETS
Listed/REITs, 5% as four increases in 2019.
• Lending costs rise alongside Fed rate increase. As the Fed
Office Mortgage Originations continues to lift interest rates, lenders are increasingly tightening
By Lender margins in order to compete for loan demand. Despite these
efforts, borrowing costs remain on an upward trajectory, which may
100%
prompt investors to seek higher cap rates or pursue greater returns
Percent of Dollar Volume

in secondary markets. However, robust economic growth and

75% Nat'l Bank/Int'l Bank
CMBS rising net operating incomes are keeping selling prices elevated,
Financial/Insurance which may widen an expectation gap as property performance and
50%
Reg'l/Local Bank demand trends remain positive.
Pvt/Other
25% • Lending continues to be highly competitive. While the Fed
has committed to tightening policy, global markets and foreign
0% central banks are keeping pressure down on long-term interest
12 13 14 15 16 17 rates, restraining the 10-year Treasury to the 3 percent range.
Banks, commercial mortgage-backed securities (CMBS) and life
insurance companies are providing debt for office assets, with
Include sales $2.5 million and greater leverage at banks typically capped at 65 percent. Meanwhile, life
Sources: CoStar Group, Inc.; Real Capital Analytics insurance companies will typically provide capital with leverage
between 60 and 65 percent, with CMBS offering up to 70 percent.
Lender spreads have narrowed in recent months, while 10-year
loan structures will typically range between 4.25 and 5.25 percent,
depending on tenancy, location, sponsorship and loan-to-value
ratio. Minimum debt service coverage required is 1.3 times expected
asset revenues, supporting debt yields of 8.5 percent. The national
economy should grow strong and office demand should support a
10-basis-point decline in vacancy to 13.7 percent nationally.
National Office and Industrial Properties Group

Alan L. Pontius Boston Office:

Senior Vice President, National Director | Specialty Divisions
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com Tim Thompson Regional Manager
100 High Street, Suite 1025
Boston, MA 02110
Prepared and edited by
(617) 896-7200 | tim.thompson@marcusmillichap.com
Catherine Zelkowski
Research Analyst | Research Services

For information on national office trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, 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 intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide 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