Conditions haven’t been kind for Greater Boston commercial real estate, and the market could have more turbulence ahead. Boston’s office sector in particular has endured nine months of declining lease activity, driven by a reduction in tenant demand. The root cause of today’s commercial real estate woes involve a combination of remote work and higher interest rates.
Remote work has proven somewhat resilient against return-to-office mandates. Boston has seen growth in hybrid arrangements, which typically require at least 3 days of in-office attendance per week. While there is a mix of opinion on the future of remote work, there is one consequence that may be permanent. Namely, the savings discovered by employers who have reduced their office expenses by allowing remote work in some form.
Higher interest rates have become a challenge of their own. The cost of money, along with the pressures of inflation, forced a number of companies to put hiring and expansion plans on hold. Higher borrowing costs affect debt-carrying companies who are finding it more expensive to refinance loans and maintain daily operations. Reducing labor expense, and lease expense, is a defensive move in response.
Still, Boston commercial real estate continues to fare better than most large cities. Nationally, office vacancies stand over 18% as of the third quarter of 2023. According to Fortune magazine, office building valuations could fall by as much as 30% in some cities. Boston, meanwhile, has been adding jobs. The Bureau of Labor Statistics reports that Greater Boston employment increased by 6% by mid-2023. Wage growth, and an increase in convention and travel bookings, has helped boost the hospitality sector.
Looking ahead, there is a reasonable expectation that interest rates will ease in the future, due to softening inflation. Improved economic conditions will help stabilize the office market in the months ahead. Getting it back to pre-pandemic levels will take more time.
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