Downtown Boston hasn’t had this much empty office space in years, even as construction hums along on some of the biggest towers the city has seen in decades.
That’s raising questions about who will lease all these high-rises when they’re finished.
As businesses start to emerge from more than a year of remote work, many are rethinking how much pricey real estate they will need. At the same time, developers of tower projects that were launched in better days are in the hunt for tenants.
How those efforts play out in the coming months and years will say much about the appeal of downtown Boston as a business hub following the COVID-19 pandemic. There are implications for the city’s tax base, and for the health of restaurants and other small businesses whose fortunes depend on office workers.
The One Congress and Winthrop Center towers, along with a soup-to-nuts overhaul of One Post Office Square, are set to open over the next two years. Not far behind is a 51-story tower atop South Station. Together, they will add about 3.3 million square feet of office space to the heart of downtown — nearly the size of two John Hancock towers. But aside from the lower half of One Congress and roughly 180,000 square feet at One Post Office Square, none of it is yet spoken for.
Together, these projects represent roughly $4 billion bet that downtown Boston will soon bustle again, just as it did up until last March.
It may be a tough sell.
There is currently 4.1 million square feet of empty space in high-end downtown towers ― the toll of a pandemic that scuttled new lease deals ― and at least 2 million square feet that tenants with long-term leases have decided they no longer want. That much space, combined with lower demand, means it could take years for Boston’s office market to recover from the events of the last 12 months, analysts say, with vacancy relatively high and rents flat at best.
“Barring some big resurgence in demand, I think we’ll continue to see vacancy [rates] elevated for the next couple of years,” said Aaron Jodka, research director at real estate firm Colliers.
Boston’s office market has changed dramatically since 2017 and 2018, when big-name companies such as Wayfair, Verizon, and Amazon were leasing huge blocks of space and coworking company WeWork was gobbling up floors wherever it could find them. The times were so heady that usually-conservative Boston builders launched construction without having tenants lined up — “on spec,” in industry parlance — confident the companies would come.
Instead, the pandemic came.
Today, major tenants are few and far between. Just a handful of large leases have been signed since last March and only one — Amazon’s deal in January for 630,000 square feet in the Seaport — was big enough to fill a new building. Brokers are tracking just a handful of major tenants shopping for space right now. Facebook has long been rumored to be looking for a Boston office. Investment firm Eaton Vance is near the end of its 300,000-square-foot lease at International Place.
“The next biggest tenants [in the market] are like 100,000 square feet,” said Jodka, noting that each of three buildings underway has seven or eight times that much space to fill. “A 100,000-square-foot tenant is not an anchor for a tower.”
So developers with partly-built towers to lease are getting busy — and creative.
Tom O’Brien, managing director of The HYM Investment Group, said he’s been giving more tours lately at One Congress. State Street Corp. has leased 500,000 square feet, but the upper half of the 43-story building is still available. The lookers are mostly law firms, tech companies, and financial services businesses, O’Brien said. They had put their growth plans on hold during the pandemic.
“There was so much uncertainty over the last year, it was hard for companies to make decisions about their space needs,” O’Brien said. “But there are still large tenants out there, and some of them are deciding they need more space than they had.”
Some tenants also are deciding they have new priorities, like better airflow, increased natural light, and more flexible space in which to move around. The developers of new towers — which have such features built in from the start — are playing up their assets.
Millennium Partners built out a sales office in a downtown storefront for its $1.3 billion Winthrop Center project, complete with a movie-trailer-quality video touting the building as “a new breed of healthy, human-centered workplace.” Principal Rich Baumert said Millennium’s betting that blue-chip companies will value Winthrop’s healthy touches even more now, enough to fill its 812,000 square feet of office space by the time the 691-foot tower is ready to open in 2023.
“We were talking about this stuff before the pandemic, but now everybody gets it,” Baumert said. “These are priorities now for companies. They’re seeking it out.”
Of course, if companies move to Winthrop Center or One Congress from an older downtown building, they’ll leave empty space behind. That’s what happened in recent years when downtown stalwarts such as Goodwin, PwC, and Boston Consulting Group decamped from Financial District towers for new buildings in the Seaport. Those spaces gradually filled up, however, often with younger tech firms looking for room to grow. This time though, those tech firms, too, may be less eager to crowd into older offices that lack post-COVID safety amenities.
“There is going to be obsolete real estate,” said Ben Heller, managing director of brokerage at real estate firm JLL, which is marketing One Post Office Square, a tower built in the early 1980s that’s partway through a $300 million makeover. “It’s going to put a lot of pressure on owners to compete with the new buildings. It’s not easy.”
But brokers who work with smaller, older buildings say they’re also seeing a notable uptick in interest from potential tenants.
More firms are coming out of their pandemic mode, said Wil Catlin, head of commercial leasing at Boston Realty Advisors, and realizing they don’t want employees to work from home full time forever. His group is giving almost as many tours these days as it was in the fall of 2019. Some of those tours will lead to leases, and revive the lower end of the market. The higher end, he said, might take more time. But as vaccine distribution continues and workers return to offices, bigger firms will start making deals to lease space.
“Right now, the larger companies are being super cautious,” he said. “I think people are going to get a lot more comfortable as the year goes on.”