Market Snapshot: Steady Economy, Solid Gains in Employment Drive Positive Outlook for Boston’s Real Estate Market
Improving employment trends and a positive outlook of the local economy make Boston one of the most stable markets in the nation, according to recent research data published by Marcus & Millichap.
By Veronica Grecu, Associate Editor
Boston—Improving employment trends and a positive outlook of the local economy make Boston one of the most stable markets in the nation, according to recent research data published by Marcus & Millichap. More than 38,500 jobs were created in 2013 in the city, increasing payrolls 1.5 percent. By the end of 2014 employers will add 40,200 new jobs, of which 14,000 will be office-using positions—a 2 percent increase from last year.
With the array of businesses still expanding at a rapid pace and outgrowing their current spaces, the demand for new office space is also on the rise especially in the city’s urban core and along the waterfront. As a matter of fact, one of the most thriving areas in terms of new construction is Fan Pier on the South Boston Waterfront, where 1.1 million square feet were completed in the first half of 2014 to serve as Vertex Pharmaceutical’s global headquarters, and several office projects are under way. On the other hand, some companies started looking at Boston’s suburbs and their reasonably low rents and available development space. One of the most notable suburban development projects is New Balance’s $500 million venture in Brighton that includes the company’s new 250,000-square-foot headquarters building, as well as additional office, retail and restaurant space.
Developers completed approximately 4.2 million square feet of office space over the last 12 months as compared to merely 1.4 million square feet in the previous year. Around 5.2 million square feet currently under construction in the metro area is expected to come online throughout 2016. According to Marcus & Millichap, approximately 3.2 million square feet of office space is set for completion by the end of 2014—a 1 percent increase from 2013—with new inventory being heavily concentrated in the Boston/Suffolk County and Route 128 North submarkets.
Vacancy rates are expected to drop 110 basis points on net absorption of 6.3 million square feet and reach 14 percent by the end of the year, the lowest rate since 2008. Meanwhile, as vacancies are shrinking and new inventory is expected to come online this year, average office rents are projected to increase 5.1 percent, reaching $29.85 per square foot or a 5.1 percent gain.
Boston’s retail market will continue to strengthen as a direct result of the rapid growth in core industries such as technology, healthcare and leisure, backed by a revitalized housing sector and the slew of new construction projects currently underway on the city’s waterfront. According to Marcus & Millichap, roughly 2 million square feet of retail space came online over the past four quarters, as compared to 1.4 million square feet completed during the previous year. Nearly 1 million square feet of retail space was completed during the first half of 2014, and another 1.3 million square feet is expected to be delivered by the end of the year. The new projects will continue to be tenant-driven and most of them will focus on big-box discounters, drugstores and dollar stores. However, while Boston’s strong economy and young workforce will continue to attract retailers, new retail construction will be placed well below historical standards.Vacancy rates are expected to drop 30 basis points to 4.2 percent by the end of 2014. As a result, asking rents will rise 3.5 percent, reaching $17.55 per square foot by year’s end.
Meanwhile, Boston’s apartment market is also on the rise thanks to the steady economic growth and solid gains in employment—generated especially by the high-paying professional and business services and the growing number of tech startups and life-science companies. As a result, developers are more and more motivated to deliver new housing units, most of them concentrated in Boston’s core, which would accommodate mainly young professionals who prefer a live-work-play lifestyle. As the city is expected to welcome more than 90,000 new Bostonians by the year 2030, the strategic plan called “Housing a Changing City: Boston 2030” launched by the Walsh administration at the end of the third quarter of 2014 calls for 53,000 new housing units by the year 2030.
In an effort to keep up with the strong demand for housing units, developers completed more than 4,600 apartments over the past four quarters, a 20 percent increase from the previous year-long period. A new wave of apartments totaling 10,800 units is currently under construction, most of them located in the Intown Boston and Cambridge/Somerville submarkets, with delivery dates through 2015. Seven thousand rentals are expected to come online by the end of 2014, expanding inventory 1.6 percent. And more than 27,000 new rental units are in the planning pipeline mainly in Suffolk and Middlesex counties.
As the growing supply outpaced the demand for rental units, Marcus & Millichap’s market report shows that vacancy rates are projected to reach 4.3 percent by the end of 2014, which translates into a 60 basis-point increase. During the first quarter of 2014 effective rents increased 2.9 percent, reaching $1,691 per month. Landlords are expected to lift rents 2.0 percent to $1,704 per month by the end of the year, a slight increase from the 1.8 percent increase recorded in 2013.
Charts courtesy of Marcus & Millichap