Low Vacancy Rate in Boston
In some cities, office space is abundant and readily available. In fact, in some cases, landlords have a very hard time keeping buildings and properties occupied. This is not an issue in Boston, where office vacancy rates are among the lowest in the nation. Indeed, Boston's office vacancy rates are lower than those of all but six other major U.S. cities. This is great news for landlords, but it can cause a great deal of stress for companies that are looking for specific types of space. Why does Boston have such low office vacancy rates? Why is that a good thing for investors? How does one go about navigating the market? Boston City Properties is here to help. Read on to learn more.
REIS Releases Eye-Opening Information
Here at Boston City Properties, we work tirelessly to stay up to date regarding current real estate market conditions in Boston and throughout the state of Massachusetts. One part of that is monitoring reports that are released by respected organizations in the industry. REIS Inc. is well-regarded for its real estate data and reports. The company recently released its report for the third quarter of 2016, and it features some very interesting information regarding office space in Boston.
First, per REIS, Boston had an office vacancy rate of just 11.9 percent for the third quarter of 2016. That figure dropped by 0.9 percent since the same period in 2015, which means that there is even less available office space in Boston right now than there was just a year ago.
Currently, Boston is tied for fifth place with Portland, Oregon, for having one of the lowest office vacancy rates in the country. Seattle came in fourth at 10.8 percent, San Francisco came in third at 10 percent, Washington, DC, came in second at 9.3 percent, and New York City came in first at just 9.2 percent. For reference, the national office vacancy rate for the third quarter of 2016 was 16 percent. The national rate has been dropping over the last several quarters.
What Does the Low Vacancy Rate Mean?
The low office vacancy rate in Boston means a number of things. First, it suggests that the economy in the area is strong. When vacancy rates drop, it implies that new companies are moving in to new offices and that existing companies are expanding into larger or additional spaces. As a result, a low vacancy rate also suggests that the economy is doing very well and that business is generally booming. Needless to say, it also means that companies are eager to do business in Boston and that office space in the city is in high demand.
Low vacancy rates also sometimes mean that construction isn't keeping pace with demand. This is a double-edged sword, however, as there is no reliable way to predict when or if demand will plateau or even reverse. In the meantime, if a lot of new office space is coming down the pipeline but demand drops, the vacancy rate may spike down the road.
The REIS report also notes that the completed construction of new offices exceeded the amount of occupied space during the third quarter. 6.44 million square feet of office space was built and became available, but only 4.77 million square feet of it became occupied. Some analysts believe that this could be a sign that the boom is tapering off. If net absorption continues to outpace construction, this could very well be the case. However, this is only the second consecutive quarter during which new absorption outpaced new construction, so it hasn't become a definite trend just yet.
In the past year, office users took 38.29 million square feet of space. In 2015, they absorbed 45.27 million square feet, so there has been a drop of 17.3 percent from 2015 to 2016. Many experts point to a deceleration in job growth from the first quarter of the year to explain this, but other factors could be in play as well.
Factors Affecting Office Space Availability
One of the top factors affecting office space availability in a booming economy and real estate market like Boston's is an inability to construct enough new space to meet demand. This could partly be due to the fact that there are some pretty significant geographical limitations on where new construction can occur in the city's central business district. At a certain point, there just isn't enough land to construct new buildings. A more extreme example of this is found in San Francisco, which is hemmed in on three sides by water. Boston's problem isn't nearly as big, but it is definitely wreaking havoc on vacancy rates.
Another factor that affects the availability of office space in a big city like Boston is the job market. For several years since the recession, job growth in the region was very strong. Over the last year, however, job growth has slowed down quite a bit. The manufacturing and government sectors actually lost jobs, but the information, financial activity and other services sectors in the region gained a lot of new jobs. As is so often the case, then, there are ups and downs in Boston's job market, and they are affecting demand for office space throughout the city.
Why Do Office Vacancy Rates Matter?
You may have noticed that business websites and publications seem to be somewhat obsessed with office vacancy rates. They have good reason for this, as vacancy rates often reflect the overall health of the economy. They often show whether the economy is strengthening or weakening, or if it's contracting or expanding.
When office vacancy rates are low like Boston's, market conditions are typically good for business. Business owners can feel confident about investing in new space, whether it be for upgrading, establishing or expanding their current operations. In this way, low vacancy rates can create a cycle that drives up demand even more. This is why these rates sometimes drop significantly over extended periods of time.
When office vacancy rates are high, business is most likely struggling in the region. It means that less space is needed, which implies that companies may be downsizing to smaller spaces or not bothering to lease space at all. Many times, it also means that many companies are going out of business, which is especially troubling.
Low Office Vacancy Rates Means Opportunities for Investors
Real estate investors have been flocking to Boston for many years now, as the real estate market around the area has been on fire for some time. Investing in commercial real estate like office space can be risky precisely due to occupancy and vacancy issues. After all, if an investor buys a large office building and can't keep it occupied, it won't be able to collect as much rent. If things get bad enough, the investor might not break even. If they get really bad, the investor might even lose money.
Fortunately, investors in Boston don't really have to worry about these issues. While the REIS report suggests that demand for office space may be cooling, the fact is that in virtually any neighborhood in Boston, office buildings tend to be largely occupied. The situation is even better in bustling business districts like the Seaport, the Financial District and Downtown, which are filled with prestigious office buildings that major, well-established companies and corporations flock to. Class A office space tends to attract stable tenants, and these and other neighborhoods in the city are dominated by Class A space. Therefore, investors can be pretty certain that they won't struggle to keep their buildings sufficiently occupied.
When office vacancy rates are low and demand is high, investors can often safely increase rent and enjoy even better profits from their investments. Indeed, rental costs tend to rise in step with vacancy rates. When rates are high, of course, the opposite is generally true: Rents go down, and investors make less money.
Another thing to keep in mind regarding investing in office space in Boston is that the properties themselves tend to be quite valuable. While appreciation rates for commercial real estate tend to be lower than those for residential real estate, most commercial properties in Boston gain value fairly consistently over time. Therefore, investors are winning on two fronts: They have occupied buildings with plenty of tenants paying high rent, and they own buildings that are gaining tons of equity. In the event that they want out, they can rest easy in the knowledge that they can sell their buildings for tidy profits.
Will New Construction Affect Your Investment?
Like many investors, you may be concerned about the flurry of office construction that's been happening in some of Boston's busiest business districts. After all, if too much space opens up, vacancy rates will increase. This could lead to rents going down and investors making less money. This is why we always keep an eye on how much new space is being constructed at any given time and compare it to how much space is being filled.
As mentioned previously, newly constructed office space has outpaced net absorption for two quarters now. This might mean that there will be a glut of space once current projects are finished, but it is unlikely. Two quarters' worth of this is not enough to confirm that an actual pattern has emerged.
At any rate, news about new office space opening up in the city is constantly popping up. You can't walk two blocks without seeing construction cranes and other signs of new space being built. Much of this new space is Class A. Theoretically, there may be many companies biding their time until new Class A space opens up. Such companies may currently be leasing Class B or Class C space but simply haven't been able to get the Class A space that they need. As more Class A space becomes available, we will most likely see many companies moving from B and C. As far as how this will affect investors, that remains to be seen.
A prime example of this type of migration is happening in the Seaport District right now. Whereas downtown and the Financial District were long ground zero for Class A office space, the Seaport has skyrocketed in popularity as a location for companies to buy space. Not surprisingly, demand for Class A space in the Seaport has correspondingly skyrocketed, so we are seeing a hotbed of construction activity over there. Rents in the area keep rising as well, so investors are wise to jump in and take action as quickly as they can.
How Vacancy Rates Affect Business Owners
Of course, investors aren't the only ones who worry about vacancy rates. They affect business owners too, as low vacancy rates mean that companies often have to make compromises to get the space that they need. When vacancy rates are high, business owners typically have far more options and can be a lot more selective about where they lease space.
If you own a business and need to lease office space in Boston, you're facing an uphill battle. Like the residential real estate market, the commercial real estate and rental markets are very competitive. With vacancy rates as low as they are, businesses tend to struggle to find suitable space. They are also often taken aback by how much they will have to pay to get the space that they want. Indeed, sticker shock is a major issue at the moment.
Although things are a bit tough for business owners who are looking for space, don't despair. Regardless of which neighborhood you're looking at, you can find suitable space. You just need to be patient and, many times, a bit flexible. You may have a list of requirements, but many of them are probably more like wants rather than needs. When looking for office space, make a list of features that are essential to the operation of your business. Make another list of features that would be nice to have but that aren't absolutely critical. These lists will help you to find suitable space more easily.
How Boston City Properties Can Help
Whether you are an investor or a business owner, Boston City Properties can help you navigate the complicated, competitive and confusing real estate market and rental market. We understand how low office vacancy rates affect both markets as well as how they affect investors and business owners, and we use that knowledge to help clients find exactly what they need. Whether you're looking for an office building to invest in or for space to lease for your business, we are here to help.
If you are an investor, Boston City Properties can give you up-to-the-second information regarding investment opportunities in the neighborhood of your choice. Our vast database is updated continually, and it includes listings for office buildings and other types of commercial real estate for sale. With a few clicks of the mouse and strokes of the keyboard, you can see exactly what is available. Use search filters to refine your results even more. The best part of all is that this service is completely free.
If you are a business owner, you can also avail yourself of our convenient database and search tool to scout out available office space in the neighborhood of your choice. There is no charge for this service. To gain access, just complete a quick and easy form and submit it. You will be able to start searching for office space right away.
For both investors and business owners, Boston City Properties has real estate agents and brokers in all Boston neighborhoods. When the time is right, we can connect you with one of these professionals who can help you through the rest of the process. They can take you to look at properties and work with you on negotiations. With their help, the entire process is sure to go as smoothly as can be.
What Does the Future Hold for Office Vacancy Rates in Boston?
Although some data points suggest that office vacancies may start rising again soon, there is no way to predict this with any real degree of accuracy. So many factors come into play to affect vacancy rates that no one can confidently predict what will occur. However, by keeping up with real estate news for Boston, you can gain a pretty decent understanding of the situation. Check back with us often for up-to-the-second information regarding office vacancy rates and other commercial real estate news in Boston.
Are you ready to invest in office space or to lease office space in Boston? Boston City Properties is here to help. Sign up to gain immediate, free access to our searchable listings to get started. If you run into any trouble or have any questions at any time, do not hesitate to contact us. When you are ready to check out properties, give us a call to be connected with a local real estate professional who can assist you. For more information, call Boston City Properties today.