Boston Follows Global Trend Toward Over-Development in Office Market

BOSTON— Cushman & Wakefield recently published its Global Office Forecast Reports, which detail the trend of new office development. Around the world, more than 700 million square feet (MSF) of space remains under construction and set to deliver between now and the end of 2019. The report details economic drivers, supply and demand forecasts and prospects for rent growth in more than 100 cities around the world.

According to the report, although demand, as well as job growth, will remain healthy through 2019, totaling approximately 520 MSF, it will fall far short of supply, which will cause vacancy to rise in most cities around the world. From that perspective, the world is overbuilding.

However, it also has been abundantly clear throughout this global expansion that most occupiers generally favor new, high-quality office space over older, Class B and C product. For example, in the U.S., 65% of all office absorption since 2012 has consisted of newly built high-quality space. The combination of an accelerating global economy with low-interest rates has increased demand for offices, meaning developers have been successful even in markets with a higher vacancy rate.

“Developers are certainly placing some big bets on new product, but the bulk of it is concentrated in the major global cities, which is precisely where the greatest appetite is for these shiny new buildings,” says Kevin Thorpe, Cushman & Wakefield Global Chief Economist. “I’m less concerned about the new space leasing up, because, in a sense, that is supply rushing to meet demand. It’s giving tenants exactly what they are asking for. I’m more concerned about what this wave of supply means for lower-grade product, which I suspect will have a difficult time competing,” concludes Thorpe.

The research team at Cushman & Wakefield believes Asia Pacific, particularly, Greater China, will lead the development boom. This region also has the highest demand for this modern, high-end office space.

Although construction peaked in 2017 for the Americas, the U.S., Canada and Latin America will also all build more space than they will absorb over the next few years. Again, the amount of new development varies from one city to the next, but the majority of it will be concentrated in the largest cities, which need the space the most.

Development is also growing in Europe, but not at the same rate as in the Americas and Asia Pacific. “Broadly speaking, supply and demand seem to be the most balanced in Europe relative to the other global regions,” Thorpe remarks.

Boston Key Facts

Boston does not differ from the rest of the world in terms of the high concentration of office development happening there. According to the report, it is clear from recent building availabilities that Greater Boston tenants prefer new construction. At the end of the second quarter, the availability of buildings constructed prior to 2000 was 13.0%, while the availability of buildings constructed after the turn of the century was 8.3%.

The majority of recent negative absorption in Boston has been the result of tenants moving to new construction. Boston Consulting Group will leave its spaces at 1 Beacon Street and 53 State Street (150,000 SF in total) on the market for new development in the Seaport. Sapient (Digitas) also leaves its former office spaces vacant at 131 Dartmouth Street (80,000 SF) and 33 Arch Street (175,000 SF). Meanwhile, Partners Healthcare vacates its spaces at 1 Constitution Center and 500 Washington Street (200,000 SF in total).

New construction has also ignited an arms race for amenities in existing buildings. The report notes that office space has become a key recruitment tool for businesses and has motivated more and more downtown tenants to renovate. During the third quarter of 2016, 53 State Street completed a newly renovated roof deck. Similarly, construction still remains in progress at 100 Federal Street for a winter garden.

According to the report, Boston remains on trend with the rest of the world as businesses see the benefits of new construction and relocate to these modern workspaces, driving the market for office development.

Kevin Thorpe