BOSTON OFFICE MARKET REPORT

SECOND QUARTER 2017

After limping through the conclusion of 2016 and coming out of the blocks sluggish last quarter, the Boston market gathered its momentum this quarter and produced strong statistical results. The Hub remained the 10th largest metro in the country with population growth exceeding San Francisco, New York and Los Angeles. Firmly rooted in education, technology and life sciences, the region’s diverse economic base has submitted strong job growth through increased recruitment and skilled labor retention from the area’s leading universities and institutions.

The net effect on the surrounding real estate market has created one of the world’s strongest and tightest urban markets. Recent success has helped the city recruit and expand blue chip talent including both Amazon and General Electric. The influx of large corporate users reflects the strong appeal and international recognition of Boston as one of the premier Global Gateway markets and “must have” locations.

As a result, both the vacancy and rental rents have responded favorably over the first half of 2017 with the second quarter recording 204,700 square feet net positive absorption and asking rate growth to $54.88 per square foot. Across Boston’s eight distinct submarkets the total vacancy rates measures 6.8% which is approaching its lowest level since the dot-com boom of the early 2000’s.

Unlike that period of rapid growth, the market has slowly evolved and strengthened coming out of the Great Recession and fundamentals have been carved from the ground up on solid footing. Looking forward, expect sound market conditions and a diversified economy to guide the greater Boston commercial real estate market to a strong performance over the next several years.

MAY MASSACHUSETTS UNEMPLOYMENT

# 4.2%JUNE

NATIONAL UNEMPLOYMENT

$4.0%ANNUAL

WAGE GROWTH

# 2.9%HIGHEST GDP

PER CAPITA NATIONALLY

4th

SUMMER MARKET OFF TO HOT START

MARKET TRENDS

$37.00

$40.00

$43.00

$46.00

$49.00

$52.00

$55.00

$58.00

$61.00

Average Asking Rate

20172016201520142013201220112010200920082007200620050.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Direct Vacancy (%)

$15.00

$19.00

$23.00

$27.00

$31.00

$35.00

$39.00

$43.00

$47.00

Average Asking Rate

20172016201520142013201220112010200920082007200620050.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Direct Vacancy (%)

CLASS A - ASKING RATE VS. DIRECT VACANCY

CLASS B - ASKING RATE VS. DIRECT VACANCY

BOSTON 10TH LARGEST NATIONAL METRO

Faster population growth than New York & San Francisco

VACANCY DECREASES TO 6.8%Strong demand across all eight downtown submarkets

ASKING RATES RISE AGAINDemand continued out-pacing supply, modern space rules

LIFE SCIENCE SECTION SURGESnow represents over 70% of R&D demand

TENANTS FAVOR CREATIVE OFFICE

Open layouts, contemporary finishes and collaborative environments

INVESTMENT SALES QUANDARYare seller’s expectations above willingness to pay?

ADAPTIVE REUSE EMERGENCEwhen soaring constructions costs meet creative demand

Average Asking Rate Direct Vacancy

Average Asking Rate Direct Vacancy

0% 2% 4% 6% 8% 10% 12%

South Station

Charlestown

North Station

Fenway

Seaport

Back Bay

Financial District

Midtown

DIRECT VACANCY RATE BY SUBMARKET

Beacon Hill

North End

South End

Back Bay$60.50/SF

North Station$48.39/SF

Financial District

$54.98/SFMidtown$43.61/SF

South Station$49.02/SF

Seaport$57.71/SF

VACANCY

6.8%

ABSORPTION

(205K) sf

SUBLEASE

1.7%

CONSTRUCTION

1.1 MM sf

AVAILABILITY

13.0%

ASKING RATE

$54.88/sf

QUICK GLANCE MARKET STATS

▼

▼

▼

▼▼

▼

CLASS A OFFICE

$7.6% DIRECT VACANCY

#1.7% SUBLEASE AVAILABILITY

#13.6% TOTAL AVAILABILITY

$ (174,000) SF 12-MONTH ABSORPTION

#$60.32/SF AVERAGE ASKING RATE

• Several significant leases were signed this quarter which clarified some uncertainty regarding a handful of the city’s largest requirements. Most notably, Amazon added to its WeWork location at 31 St. James by committing to roughly 150,000 square feet at 253 Summer Street in the Seaport. The lease which is rumored to average in the low-to-mid $50’s will fill one of the Seaport’s largest blocks of available space.

• While not new to the market, in fact one of the older & largest tenants, Mintz Levin recently signed a 15-year extension at One Financial Center. The legal giant will occupy seven floors (six contiguous) spanning 205,000 square feet. Despite its current 258,000 square foot size, both operational and design efficiencies will afford the law firm additional expansion space and fully renovated & expanded conference and common area facilities.

• In the heart of Downtown along the newly activated and amenity rich Washington Street, VMware, a subsidiary of Dell Technologies, signed a long term 38,000 square foot commitment at Lafayette City Center. The storage virtualization company is relocating from 355 Cambridge Street in Cambridge to the LCC. The relocation marks another win for Downtown as the emerging tech hub for companies seeking reprieve from massive supply and costs constraints in the surging Kendall Square and Cambridge market.

• The investment sales market churned along with a handful of closings and assets coming to market. One of the largest buildings in Boston, One Federal Street, was recapitalized by Tishman Speyer for roughly $630 PSF. Local fund, Rockpoint Group, continued its buying spree by acquiring 100 High Street for $678 PSF from CBRE Global as well as 160 Federal Street for $517 PSF from Beacon Capital.

ADDRESS SUBMARKET TENANT SF

One Financial Center Financial District Mintz Levin 205,000

253 Summer Street Seaport Amazon 150,000

888 Boylston Street Back Bay Accenture 53,000

20 Guest Street Fenway Global Atlantic Financial 42,300

500 Washington Street Financial District VMware 38,000

120 St. James Avenue Back Bay First Marblehead 32,200

125 Summer Street Financial District Analog Devices 21,000

125 High Street Financial District Broadridge 11,100

NOTABLE QUARTERLY LEASES

CLASS A OFFICE

$40.00

$45.00

$50.00

$55.00

$60.00

$65.00

$70.00

20172016201520142013201220112010200920080.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

2017201620152014201320122011201020092008

AVERAGE DIRECT VACANCY BY SUBMARKET

AVERAGE ASKING RATE BY SUBMARKET

Financial District Seaport Back Bay

One Federal Street$705,000,000 ($630/RSF)

Recap: Tishman Speyer

100 High Street$370,000,000 ($678/RSF)Buyer: Rockpoint Group

100 Northern Avenue$475,000,000 ($923/RSF)

Buyer: Deutsche Bank

160 Federal Street$190,000,000 ($517/RSF)Buyer: Rockpoint Group

RECENT INVESTMENT

SALES

160 Federal Street

One Federal Street

100 High Street

100 Northern Avenue

CLASS B OFFICE

$5.2% DIRECT VACANCY

#1.8% SUBLEASE AVAILABILITY

#11.9% TOTAL AVAILABILITY

#11,700 SF 12-MONTH ABSORPTION

#$45.06/SF AVERAGE ASKING RATE

• Over the past 24-36 months the Class B market has re-invented itself into the market leader for today’s creative & innovative tenants. The authentic character and boutique feel of the buildings coupled with modern technologies and contemporary finishes have elevated the market standard and influenced the Class A tower branding as well. The Class B vacancy rate has averaged between 5-8% and asking rates are now in the mid-high $40’s PSF for well positioned product with premium quality assets extending into the low $50 PSF range.

• After an ownership recapitalization last quarter, the new team at 10 Post Office Square between Synergy and LaSalle Investment Management renewed Boston Private Bank’s 24,100 square foot lease while also signing the Nature Conservancy to a 11,700 square foot agreement. It is rumored that a new restaurant concept will likely activate the retail portion of the building’s currently sleepy streetscape along Congress Street.

• The Seaport and Fort Point neighborhood continued strong demand with the afore mentioned Amazon expansion at 253 Summer Street as well as Mass Robotics new 15,000 square foot lease at 12 Channel Center. In addition M&W Group renewed their 8,500 square foot lease at 285 Summer Street.

• Investment sales activity picked up during the second quarter with multiple closings. Most notably, AIG recapitalized a 5-building portfolio with Synergy in the heart of Downtown along the Summer Street corridor. The Hive portfolio which features Class B’s first shared amenity space across multiple buildings achieved $503 PSF. Synergy also recapped 10 Post Office Square with LaSalle for $508 PSF, in addition to their acquisition of Center Plaza from Shorenstein for approximately $493 PSF.

ADDRESS SUBMARKET TENANT SF

253 Summer Street Seaport Amazon 150,000

Constitution Wharf Charlestown Shoes.com 31,300

10 Post Office Square Financial District Boston Private Bank 24,100

12 Channel Center Seaport Mass Robotics 15,000

10 Post Office Square Financial District The Nature Conservancy 11,700

285 Summer Street Seaport M&W Group 8,500

NOTABLE QUARTERLY LEASES

CLASS B OFFICE

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

20172016201520142013201220112010200920080.0%

4.0%

8.0%

12.0%

16.0%

20.0%

2017201620152014201320122011201020092008

AVERAGE DIRECT VACANCY BY SUBMARKET

AVERAGE ASKING RATE BY SUBMARKET

Financial District Seaport Back Bay

Center Plaza$305,000,000 ($493/RSF)

Buyer: Synergy & Green Oak

The Hive$175,000,000 ($503/RSF)

Recap: Synergy & AIG

10 Post Office Square$184,816,700 ($408/RSF)

Recap: Synergy & LaSalle Investment

50 Congress$79,000,000 ($440/RSF)

Buyer: Jumbo Capital & Guggenheim

RECENT INVESTMENT

SALES 10 Post Office Square

Center Plaza

Tower Point

50 Congress Street

Tower Point$86,850,000 ($553/RSF)

Buyer: Northwood Investors

The Hive

OFFICE REPORT STATS

Office Total Inventory (SF)

Direct Vacancy

Sublease Availability

Total Availability

Quarterly Absorption (SF)

12 Month Absorption (SF)

Average Asking Rate

TOTAL A&B 71,478,700 6.8% 1.7% 13.0% 204,700 (297,500) $54.88

Back Bay 14,949,300 7.4% 2.3% 14.8% 110,500 (320,800) $60.50

Charlestown 2,858,600 3.1% 0.9% 11.4% (25,800) 23,200 $39.80

Fenway 1,746,000 4.0% 0.0% 7.6% (10,300) 42,500 $51.01

Financial District 35,439,700 7.6% 1.7% 13.5% 98,900 130,500 $54.98

Midtown 1,999,300 10.2% 1.5% 12.4% 38,600 (1,450) $43.61

North Station 3,312,800 3.4% 2.2% 8.8% (11,300) (51,400) $48.39

Seaport 8,274,500 5.1% 1.8% 12.2% 9,300 (114,600) $57.71

South Station 2,898,600 3.0% 0.0% 6.5% (5,200) (5,500) $49.02

CLASS A 46,005,500 7.6% 1.7% 13.6% 192,900 (173,800) $60.32

Back Bay 11,038,500 9.0% 2.1% 16.4% 92,900 (346,050) $65.01

Charlestown 903,800 4.8% 0.6% 13.2% (12,850) (8,600) $41.32

Fenway 1,117,600 6.3% 0.0% 11.8% (15,600) 40,250 $56.50

Financial District 25,558,900 8.3% 1.8% 14.0% 78,850 141,700 $58.94

Midtown 1,176,200 13.3% 2.6% 16.3% 48,900 12,400 $47.50

North Station 1,407,650 1.5% 3.4% 11.4% 11,450 5,150 $56.63

Seaport 3,448,050 1.5% 0.3% 5.3% (10,750) (5,350) $69.33

South Station 1,354,850 3.5% 0.0% 3.5% - (13,300) $56.00

CLASS B 25,473,200 5.2% 1.8% 11.9% 11,700 (123,750) $45.06

Back Bay 3,910,850 2.7% 3.0% 10.2% 17,500 25,250 $47.79

Charlestown 1,954,900 2.3% 1.1% 10.5% (12,00) 31,800 $39.10

Fenway 628,350 8.9% 0.0% 8.9% 5,300 2,250 $41.24

Financial District 9,880,850 5.8% 1.4% 12.3% 20,100 (11,200) $44.75

Midtown 823,050 5.7% 0.0% 6.8% (10,300) (13,750) $38.06

North Station 1,905,100 4.7% 1.3% 6.9% (22,750) (56,550) $42.30

Seaport 4,826,450 7.7% 2.9% 17.1% 20,100 (109,300) $49.40

South Station 1,543,750 2.5% 0.0% 9.2% (5,200) 7,800 $42.90

Lincoln Property Company | 53 State Street, 8th Floor, Boston, MA | 617.951.4100 | LPCBoston.com

ETHAN ROBERTDirector of Research O: 617.951.4160 erobert@lpc.com

Lincoln Property Company’s Boston Office Report is produced by the Boston Office’s research team in collaboration with our Downtown Brokerage Group. If you have any questions regarding market conditions and the information found in this report, please contact Ethan Robert.