Boston office market weakens as economy falters

Demand for office space in Boston is still a fraction of what it was before the pandemic, according to new analysis from real estate software firm VTS.

VTS tracks and analyzes the office visit requirements of potential tenants in major cities across the United States and found that demand in Boston in July fell 26% from the previous month and remained 34% below rates before that the COVID-19 pandemic triggers wider adoption of remote working. . Nationally, the VTS Office Demand Index fell 17.5% in July to its lowest level since February 2021.

“We are used to seeing demand for office space cool off during the summer months, but not at this rate,” VTS CEO Nick Romito said in a statement. “Unique to 2022, the economic outlook is continuously changing and likely contributing to a reduction in demand for new office space as uncertainty causes some potential tenants to delay or reconsider their current office space needs.”

The Federal Reserve raising its benchmark interest rate to the highest level since 2018 – in an effort to fight inflation – is having a particular impact on markets with a higher concentration of office tenants in financial sectors , insurance and real estate, according to VTS, including Boston, Chicago and New York. But on the other hand, there were strong national job gains in July, including in office-using industries like financial and professional services. The US economy also added 315,000 jobs in August, with professional and business services leading the gain.

“There are a lot of mixed signals in the economy these days,” said Jeff Myers, director of research at Boston-based real estate brokerage Colliers, noting both concerns about interest rate hikes and the inflation as well as stronger employment figures.

This growth in office-using jobs implies a growth in the need for office space, Myers said. While some companies are looking at their real estate footprint and determining that they don’t need as much space as they did before COVID-19, there are others – like InterSystems, SimpliSafe and Amazon – that don’t. stopped growing in the city.

“There’s a really interesting mixed bag,” Myers said. “At the end of the day, we will see where we get rid of. We may continue to see a slowdown in the market given some macro headwinds. »

In Boston, upscale Class A buildings perform better than Class B properties, Myers said. There is more Class B space available for lease than at any time in the last 20 years.

Class A properties had a mid-year vacancy rate of 13.2%, slightly, but not much, above the historical average of 11.8%. Class B properties, meanwhile, had mid-year vacancy rates of 22.3%, he said, nearly nine percentage points above the historical average of 13. .5%.

“Quality certainly captures the rental of this cycle,” he said.

Catherine Carlock can be reached at [email protected] Follow her on Twitter @bycathcarlock.

Jose C. Birney