As Boston Sub-Lease Space Comes Due, Class B/Low-Rise ‘A’ Operators Facing Tough Decisions

BOSTON — Across the Boston Market, much has been written about a few key topics in the commercial real estate space. The downturn in life sciences properties, high levels of activity with Class A properties downtown, and a shrinking supply of high-quality office space in the suburbs are all prevailing points of discussion for brokers and tenants alike. However, there’s another undercurrent taking shape that isn’t as obvious but is just as significant.

Over the next few quarters, Class B and low-rise Class A office space is expected to see an increase in vacancies due to portions of the existing 3.8M SF of sublease inventory transitioning to direct vacancy. A few specific conditions that have taken shape in the market will make this increase in vacancies particularly challenging for landlords.

As they continue to evaluate whether their property layouts meet the needs of tenants shopping for space in the current market, non-trophy building owners catering to office users should be prepared to make additional adjustments to attract new tenants as leases expire.

Upgrades and improvements drive tenant behaviors

Factoring into these looming adjustments is the fact that many Class B and non-trophy Class A spaces do not meet the needs of the current tenant makeup. Much of the existing sublease space features layouts that are more conducive to technology companies, with open floor plans and a reduced emphasis on private office areas. Current demand in today’s market is largely coming from more traditional businesses, such as legal, finance, and insurance firms, which prefer a partitioned environment. Without renovations, this will make some Class B or low-rise Class A space (coming up for renewal) unappealing to tenants and require investment from landlords.

Furthermore, there’s no denying that market forces have adjusted in the wake of a post-pandemic environment, with the transition to hybrid workplaces, full-time RTO, and everything in between, creating opportunities for upgrades. For some smaller to mid-size firms, making the jump to Class A mid- or high-rise space that previously would have been unattainable is now possible due to favorable lease terms. Concessions by landlords to get those buildings leased made it possible for firms, who would not have previously considered such an upgrade, to make the move to higher-grade space, potentially in a more desirable location. In addition, some trendlines are pointing to construction pricing falling, which will, in theory, make moving more feasible.

Coupled with this is the fact that tenants are increasingly seeking to reduce their footprint, reflecting the impact of a hybrid workforce and reduced days in office, even as more firms institute RTO policies. If a tenant chooses to reduce its space requirements, it can make the jump to a Class A office by effectively spending the same money to get into a right-sized space in a better building and/or location.

Tough topic: keeping buildings filled

With current conditions allowing occupiers to upgrade to better space, along with the changes in the tenant mix entering the market, the increase in Class B and low-rise Class A direct vacancies will drive those landlords to make some tough choices about how to retain or attract new tenants.

Matt Harvey