Strong Demand Fueling Rent Hikes, New Construction Projects

BOSTON—The party continues for the owners of commercial real estate in Greater Boston with high rents and vacancies hovering near pre-recession lows.

Commercial brokerage firm JLL in its third quarter report on the office market in Greater Boston says that strong tenant demand is spurring new construction projects. Direct average asking rents reached $33.17-per-square-foot region wide, an increase of 2.1% over the second quarter and 7.2% as compared to the same period last year.

The total vacancy rate region-wide rose just 30 basis points to 14.3% which still hovers close to 2007 lows. The market overall reported 312,620 square feet of total net absorption for the quarter.

In the third quarter five office buildings totaling almost 1 million square feet of new office space came on the market, including Trip Advisor's and Vista Print's new headquarters. JLL in its report notes that of the 2.4 million square feet of office space to be delivered in 2015, 60% is pre-leased, which clearly indicates the strong demand for new Class A space in Boston. In response, several new speculative developments broke ground in the third quarter, including Skanska Development's 121 Seaport Blvd., a 17-story, 400,000-square-foot Class A building in the Seaport District.

Throughout Greater Boston tenants are finding fewer options to choose from. “Available large blocks in Class A buildings have become scare, driven by large leases—five leases were signed for over 100,000 square feet this quarter alone,” the JLL report states. “In the Boston CBD, for example, only 11 Class A blocks over 50,000 square feet are available in existing buildings. With more than 17 tenants in the market for space 50,000 square feet or larger, the supply-demand imbalance is increasing competition and pushing rents upward.”

Boston's strong economy, particularly in terms of job growth could provide some headwinds in the future. The Boston economy added approximately 200,000 new jobs in the last five years, knocking the unemployment rate down to 4.3%.

JLL notes in its report that the region's high tech sector has added jobs at a rate faster than the national average for four consecutive years. Recently, Twitter, IBM and Akamai Technologies say they plan to add 2,000 new jobs in the next year.

All the major markets posted impressive direct average rent growth in the past 12 months, led by East Cambridge at 15.8%, followed by the 128/Mass Pike region at 14.7% and West Cambridge at 12.3%. Other markets that posted rental price gains included the Northwest at 5.6%, Mid-Cambridge and the Back Bay both at 5.8%, the North district at 5.9% and the Financial District at 6.9%.