At the end of the second quarter of 2014, strong fundamentals continue to push the Greater Boston economy.
JLL Research reports that leasing activity was strong and diversified in the second quarter across Boston and core submarkets. Sublease space made up a large portion of the absorption story with over 250,000 square feet of occupancy gains, resulting in a sublease vacancy rate below 2.0 percent. This marks the lowest sublease vacancy level in years. With this sublease burn off, direct rents are likely to continue to rise.
Across the U.S., office market recovery is gaining greater momentum and diversifying. In the first half of 2014, U.S. occupancy growth totals hit a recovery high and 86 percent of markets experienced occupancy gains. Boston accounted for 8.6 percent of these gains, behind only NYC which has been clawing its way back after two years of stagnancy.
Urban Trophy and Class A are leading rent growth nationally. But in Boston the Class B segment is also thriving. Boston Class B rents have reached peak levels, breaking the $40.00 barrier – something unseen since 2008.
U.S. investment sales activity is robust and foreign capital continues to push pricing. Increasing competition for product has compressed cap rates below 5 percent in most major markets. U.S. office transaction volumes were up 31.0 percent in Q2 and 34.0 percent in H1.
For the first half of the year, Boston had the highest year-over-year growth of any market despite the fact that transaction volumes lagged behind other markets. Most notably, Oxford Properties signed a $2.1 billion agreement to acquire a five-building portfolio from Blackstone, making Oxford the largest Class A owner in Downtown Boston. This could have a substantial impact on the direction of future asking rents as ownerships will change and properties are repositioned.
The national economy is looking up. Corporate profits continue to eclipse record highs with companies sitting on more than $1.6 trillion in cash, which is more readily flowing into the market through M&A activity, stock repurchases and hiring growth. Consumer and business confidence levels are the highest since 2008 and provide evidence that many tenants are looking at a growth mode over the next couple of years.