BOSTON – The commercial leasing team at Boston Realty Advisors, the largest Boston-based independent real estate brokerage, said today that, despite an excess vacancy lingering from the last couple of years of pandemic effect, one bright spot showing up recently has been the “flight to quality” among tenants in Boston.
According to early indications from an analysis of 2022-year commercial leasing activity, transactions between landlords and tenants have picked up toward the end of the year, after a robust spring and summer tour season.
“There was a deal flow lag in the summer, and tours dropped off somewhat in the late summer, but leasing deals are getting done,“ said Robert LeClair, Managing Director and Partner at Boston Realty Advisors. “And the result is that, with less competition for space, some tenants are taking advantage of increased options and moving up to better and now more amenity-rich buildings.“
Boston Realty Advisors has conducted annual analyses of commercial leasing activity for 17 years. The complete study will be released at the end of December or early after the new year.
Baker Newman Noyes, with Boston and Portsmouth, N.H., offices moved to better space at both their locations in the company’s effort to improve the employee experience. The Boston office moved from 175 Federal St. to 133 Federal St. LeClair said that more natural light, building amenities, and a more modern design and appearance were the drivers.
Galen Healthcare, which like Baker Newman Noyes also stayed in the same basic square footage, was looking to upgrade in order to attract talent and employees back to the office. “The company took advantage of custom-designed space and a highly amenitized building, moving from 70 Federal St. to 77 Summer St. Likewise, JPA Health moved from 15 Broad St. to 3 Post Office Sqare.
And Deerpath Capital moved from 361 Newbury St. to 45 School St., taking even more space per employee, but the new deal lowered its previous overhead cost and paid for an upgrade to the space the company occupies. A building in which common areas were recently renovated is designed to attract people who have been working more often from home back into the office.
“The flight to quality was in full view for Milligan Rona Duran & King LLC, which vacated 50 Congress St. and instead sublet space at 28 State St. for a long term. “The Class A tower was paramount for the firm’s growth,“ said Wil Catlin, Managing Director and Senior Partner at Boston Realty Advisors. “This will allow them to recruit other top talent with a new location that compares favorably.“
The background of the current activity was the highly unusual pandemic period, when record rents and occupancy suddenly stopped in their tracks.
“It was a unique environment in the last 2 ½ years,” said LeClair. “The only thing close to it was around 9/11,” when the nation was attacked by terrorists.
The pandemic paralysis began to subside in late 2021, and now more traditional economic forces are in play, with somewhat of a hangover from the Covid pandemic, LeClair said. “There’s been a slow return, and people don’t need as much space as they used to,” he said.
But the market will absorb those changes in time as companies make adjustments and seek new space for new employee work habits. “That’s like a normal recession, and we will adjust,” he said.
Landlords will make concessions, as they have done in lean times before. And a common theme, he said, is that, as companies resume transacting, the office experience is more important than ever because it encourages collaboration, encouraging people to come back.
“We know the recipe,” LeClair said. There will be in-office work schedules, often Tuesday through Thursday. “People again have lunch and drinks downtown, and the building owners are accommodating this new way of work by providing quality space.”
LeClair noted that Cambridge Associates is moving from 125 High Street to shiny new Winthrop Square. Eaton Vance is moving to fully renovated One Post Office Square. “Landlords are investing in real estate knowing what the tenants want,” he said. Harborvest is taking space that State Street vacated at One Lincoln Street, kicking off a multimillion-dollar renovation of the building.
Chevron Partners’ 10 Winthrop Square did a full leaseup after the owner made high-end, hospitality-level improvements. “The market responded. The tenant spaces are amazing,” LeClair said.
“There’s normal flight to quality in any down market,” he said. “But now the primary driver is the tenant’s evaluation of the real estate experience, even ahead of cost.” He said this limited return is filling the gap between companies that have gone fully remote and those mandating a return to the office.
“The lease is less a liability than a potential asset,” he said. Companies and their architects are creating experiences in space to bring people together, with a focus on design and purpose.