Demand for office space in Boston is still a fraction of what it was before the pandemic, according to a new analysis by real estate software company VTS.
VTS tracks and analyzes the office viewing requirements of prospective tenants in major cities across the United States and found that July demand in Boston was down 26 percent month-on-month and 34 percent below rates before the COVID-19 pandemic sparked a wider acceptance of remote work. Nationwide, the VTS office demand index fell by 17.5 percent in July to its lowest level since February 2021.
“We’re used to office demand being cool in the summer months, but not at this rate,” VTS CEO Nick Romito said in a statement. “Unique to 2022 is the ever-changing economic outlook, which is likely to contribute to a drop in demand for new offices as uncertainty prompts some prospective tenants to postpone or reconsider their current office space needs.”
The Federal Reserve’s hike in interest rates to its highest level since 2018 – to fight inflation – is particularly impacting markets with a greater concentration of office tenants in the financial, insurance and real estate sectors from Boston, Chicago and New York, according to VTS. But on the other hand, there were strong national job growth numbers in July – including in office sectors such as financial and professional services. The US economy also added 315,000 jobs in August, with professional and business services leading the rise.
“There are a lot of mixed signals in the economy today,” said Jeff Myers, research director at Boston real estate agent Colliers, citing concerns about interest rate hikes and inflation as well as stronger employment numbers.
This growth in office jobs implies a growing need for office space, Myers said. While some companies are examining their real estate balance sheets and finding they don’t need as much space as they did before COVID-19, there are others — like InterSystems, SimpliSafe, and Amazon — that have continued to grow in the city.
“There’s a really interesting mix,” Myers said. “At the end of the day we’ll see where we’re defeated. It could be that we continue to see the market slow down amid some macro headwinds.”
In Boston, high-end Class A buildings outperform Class B properties, Myers said. There is more Class B space available for lease than at any time in the past 20 years.
Class A buildings had a mid-year vacancy rate of 13.2 percent — slightly, but not much, above the historical average of 11.8 percent. Class B buildings, meanwhile, had mid-year vacancy rates of 22.3 percent, he said — almost nine percentage points above the historical average of 13.5 percent.
“Quality is certainly conquering tenancies in this cycle,” he said.
Catherine Carlock can be reached at [email protected] Follow her on Twitter @bycathcarlock.
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