MARKET OUTLOOK 2014 NEW ENGLAND. Hartford, Connecticut. Portsmouth, New Hampshire. Manchester, New Hampshire. Boston, Massachusetts

Transcription

1 Hartford, Connecticut Portsmouth, New Hampshire NEW ENGLAND MARKET OUTLOOK 2014 Boston, Massachusetts Manchester, New Hampshire Providence, Rhode Island Portland, Maine

2 A Message from CBRE/New England CBRE/New England is pleased to present you with our 2014 New England Market Outlook. This review seeks to explain the changing dynamics of real estate in the major urban and suburban markets we cover in New England marked a year of continued uncertainty for what the global and the United States economies had in store for us, yet much of the New England region continued to show signs of modest recovery. The business community exhibited signs of increasing confidence and beliefs that the economy was truly stabilizing, although some continued trepidation persists that this might only be short lived and not sustainable. There was definitive growth in the New England economy this year and, in particular, Greater Boston continues to lead the way as a top-tier gateway city with robust economic drivers attracting both national and global investors and companies. Technology and demographics continue to play an ever-increasing role in the way business is being conducted and ultimately is impacting the demand for commercial real estate. Workplace strategies took center stage in 2013 as one of the leading trends across the office sector. As the demographics of the workforce shifts towards the younger millennial population, companies are transforming the way they design workspace to accommodate the need for mobility, efficiency, collaboration and densification. Throughout 2013, CBRE/New England continued to invest in the services we offer our clients. Our deep bench strength across all our business lines provides us with opportunities to deliver exceptional results for our clients. Our enhanced and fully integrated Capital Markets platform, providing our clients advice and expertise in property disposition and acquisition, coupled with financing solutions from our Debt & Structured Finance team, continues to expand its presence and dominance in New England. The product and functional expertise offered by CBRE/NE professionals is unmatched in our region. CBRE/New England is your world-class commercial real estate partner, wherever your world may be. We are proud to report that the employees and the tenants occupying space in CBRE/NE-managed properties have continued to set new standards in 2013 through CBRE Cares for giving back to our communities and helping so many of our neighbors who find themselves in need of assistance. An important component of our CBRE Cares philanthropy mission is also to contribute to aid efforts when major tragedy and disaster strikes. Following the 2013 Boston Marathon, CBRE/New England employees contributed with overwhelming support to The One Fund for an overall donation of $39,000. Our philanthropic initiative, CBRE Cares New England, was launched in 2010 to unite our philanthropic goals under the mission to build a foundation for the local communities throughout New England by facilitating a variety of volunteer and giving opportunities that have a significant effect on the lives of families in need, building today for a stronger tomorrow. Since its inception, CBRE Cares New England has generated approximately $800,000 worth of items collected and donated to local designated beneficiary organizations. On behalf of the entire CBRE/New England community, we wish you a successful new year. Sincerely, Leveraging local market knowledge and a deep global platform, CBRE/New England has you covered. CB Richard Ellis N.E. Partners, LP, a CBRE Joint Venture For more information: Andy Hoar President/Co-Managing Partner CBRE/NEW ENGL AND M ARKET OUTLOOK 2014 Andrew W. Hoar Kevin M. Doyle President/Co-Managing Partner CFO/Co-Managing Partner A Message from CBRE/New Engl and 1

3 Table of Contents INTRODUCTION Introduction GREATER BOSTON Downtown Boston Office Market... 7 Spotlight: The Story of Smart-Sizing Spotlight: Growing Trend of Coworking Spaces Cambridge Office Market Spotlight: Cambridge IPOs Cambridge Lab Market Spotlight: The Emergence of a New Market Metro North Suburban Office Market Metro West Suburban Office Market Spotlight: New Construction BTS vs. SPEC Metro South Suburban Office Market Suburban Lab Market Suburban Industrial Market Downtown Boston Retail Market Suburban Retail Market CAPITAL MARKETS Greater Boston Office & Industrial Investment Market Debt & Structured Finance Market Greater Boston Retail Investment Market Greater Boston Hotel Investment Market Greater Boston Multifamily Investment Market CONNECTICUT City of Hartford Market Greater Hartford Suburban East Market Greater Hartford Suburban North Market Greater Hartford Suburban South Market Greater Hartford Industrial Market Central Connecticut Investment Market Greater New Haven Office Market Greater New Haven Industrial Market Greater Springfield Office Market Greater Springfield Industrial Market RHODE ISLAND Downtown Providence Office Market Suburban Rhode Island Office Market Rhode Island Industrial Market NEW HAMPSHIRE I-93/Route 3 Corridor Office Market Seacoast New Hampshire Office Market I-93/Route 3 Industrial Market Seacoast New Hampshire Industrial Market MAINE Southern Maine Market CORPORATE OVERVIEW Corporate Background Major Service Lines Table of Contents 2

4 Introduction INTRODUCTION by Scott Hutchinson, Since the Great Recession officially ended four and a half years ago, the overall economy has made significant improvements. When we concluded last year s introduction to the 2013 New England Market Outlook, the national economy was exhibiting signs of stabilizing capital markets, increased consumer confidence, and improved national employment conditions. These trends have continued and, in many cases, gained traction. According to the Institute for Supply Management (ISM), U.S. manufacturing grew in December at its second-fastest monthly pace in more than two years. ISM also reported increases in construction spending and the new orders index. These late 2013 economic statistics reveal that productivity is gaining momentum, retail sales are increasing and the services sector continues to grow. Additionally, there have been larger increases in consumer spending as well as business investments in commercial real estate, industrial equipment and intellectual property, like software. One area of strength for the U.S. economy is automobile purchases, which, in November, reached the best annualized sales pace since Looking forward to 2014, many economists project that the U.S. economy will grow around 3.3%, its largest move in the last 10 years, as the nation finally replaces all of the private sector jobs lost in the Great Recession. Notwithstanding some bumps in the road, as we now look back upon 2013, the headwinds that had been hindering the U.S. economy have continued to subside. At the beginning of the year, the national unemployment rate was 7.9%, though by November the metric had dropped another 90 basis points to 7%, its lowest level in the last five years. However, national job growth was sharply mitigated by October s 16-day U.S. government shutdown, stemming from a failure to reach an agreement on a budget, due to a standoff over the Affordable Care Act. Confident that job gains will continue, the Federal Reserve stated that it would soon start to reduce its bond purchases. The program, which began in 2012 as a way to stimulate the economy, will still continue to put downward pressure on longer-term interest rates that will both support mortgage markets, and make financial conditions more accommodative. As a result, the current low interest rate environment should continue well into 2015, which is a positive for the commercial real estate sector. REGIONAL DEMOGRAPHICS POPULATION LABOR FORCE 2013 PERCENTAGE OF REGION 2012 ANNUAL GROWTH RATE ANNUAL GROWTH RATE U.S. 316,700,000 N/A 314,200, % U.S. 155,600, ,000,000 (0.02%) New England 14,602,000 N/A 14,563, % New England 7,695,900 7,721,000 (0.49%) Connecticut 3,592, % 3,590, % Connecticut 1,851,100 1,879,700 (1.20%) Maine 1,331, % 1,329, % Maine 708, % Massachusetts 6,672, % 6,646, % Massachusetts 3,480,200 3,475, % New Hampshire 1,328, % 1,320, % New Hampshire 746, ,500 (0.44%) Rhode Island 1,051, % 1,050, % Rhode Island 557, ,400 (2.13%) Vermont 634, % 626,000 (0.3%) Vermont 352, ,400 (1.52%) Source Data: U.S. Census Bureau Source Data: The New England Economic Partnership Introduction 3

5 Introduction On a regional level, according to the New England Economic Project (NEEP), the overall New England economy is expected to grow at 2.8% per year on average through 2017, which is slightly below the projected national average of 3.1% for the same period. Growth in the regional economy is expected to peak in the fourth quarter of 2014 at 4.5% and then level off and remain at 4.0% through the first three quarters of The only state projected to experience overall economic and employment growth above the U.S. average is New Hampshire, which is forecasted to average 3.0% gross state product growth per year, while Massachusetts is expected to grow at an average annual rate of 2.9%. The Connecticut and Vermont economies are forecasted to grow 2.8% and 2.7% per year, respectively. Rhode Island and Maine are projected to lag the other four New England states with growth rates of 2.0% and 1.8% per year, respectively. Greater Boston comprises the largest real estate market in New England, with an office inventory of 209 million square feet. Readers might recall that last year at this time the downtown Boston market saw a dramatic increase in mega leasing transactions north of 100,000 square feet. Fast-forward 12 months and the office market has sustained its positive momentum, while at the same time experiencing a core shift in tenant preference. Boston s burgeoning 24/7 Seaport Innovation District continues to command the most tenant interest. In contrast, the Back Bay market has witnessed a dramatic slow-down in leasing velocity, and an increase in space dispositions. Overall, availability in downtown Boston stands at 16.2% with a vacancy rate of 8.1% as 1.27 million square feet was absorbed. Contributing to this positive statistic was relocation activity and the commencement of several build-to-suit projects. Urban migration trends continued, as companies from the suburban markets and Cambridge relocated to more urban addresses within the City of Boston and even some institutional corporations migrated across submarkets in downtown Boston. Most notably, Goodwin Procter, PricewaterhouseCoopers and State Street Corporation are each consolidating and relocating into more efficient build-to-suit locations within the Seaport. While the downtown Boston market has been supported by a diverse mix of financial services, insurance and legal operations enjoying continued growth, accelerated leasing activity in the Suburban Boston Office market and the Cambridge Office and Lab markets amongst small to mid-sized tenants continues to drive leasing velocity. Overall, the Boston Office market posted a year-end REGIONAL DEMOGRAPHICS UNEMPLOYMENT PER CAPITA INCOME HOUSING NOVEMBER 2013 NOVEMBER ($) 2011 ($) ANNUAL GROWTH RATE 2014 MED. PRICE PROJECTION ($) 2013 MED. PRICE ACTUAL ($) ANNUAL GROWTH RATE U.S. 7.0% 7.8% 42,693 41, % 202, , % New England 6.9% 7.2% 49,589 49, % 286, , % Connecticut 7.6% 8.3% 55,820 55, % 203, ,000 0% Maine 6.4% 7.2% 37,263 36, % 270, , % Massachusetts 7.1% 6.7% 51,655 51, % 191, , % New Hampshire 5.1% 5.7% 44,601 44, % 343, , % Rhode Island 9.0% 10.0% 42,433 42,179 (0.10%) 239, , % Vermont 4.4% 5.0% 40,615 39, % 254, , % Source Data: U.S. Bureau of Labor Statistics Source Data: The New England Economic Partnership Source Data: The New England Economic Partnership Introduction 4

6 Introduction net absorption level of 1.85 million square feet. Also of note is the reemergence of build-to-suit and speculative office development, signifying a tightening in the current leasing options, renewed confidence in the underlying market fundamentals, and a desire by tenants for state-of-the-art flexible space. The Cambridge Office and Lab market has benefited from inward migration from out-of-market tenants, as well as healthy organic growth from established companies that are expanding their current footprints. As office and laboratory space continues to be absorbed, tenants will find asking lease rates increasing as the pendulum has firmly shifted back to the landlord s favor. The second-largest market in New England is Greater Hartford with an office inventory of approximately 24 million square feet. Greater Hartford had a relatively stable year, ending 2013 with a declining availability and vacancy rates of 17.9% and 16.7%, respectively. In downtown Hartford, aside from the overall improving business climate, the key contributor to this momentum swing was The State of Connecticut Economic Development initiative to consolidate offices, resulting in two property acquisitions in the CBD for 840,000 square feet. Additionally, five new CBD multifamily conversion projects are removing roughly 550,000 square feet of Class B office space, essentially decreasing much of the city s antiquated, functionally obsolete office product that had been artificially inflating the overall availability and vacancy rates. The region s ability to attract venture capital investment, which is a key barometer of the local entrepreneurial economy s health, grew at a solid pace in the third quarter of Next to Silicon Valley, the New England region received the second-highest level of funding in the country. According to the latest Money-Tree survey by PricewaterhouseCoopers, New England venture funding increased 8.0% to $870 million from the same period last year. Overall 109 companies have received funding year-to-date, up from 102 over the prior 12-month period. Despite a slight cloud of uncertainty following interest rate hikes in late spring, lending and investment sales activity maintained forward momentum during the second half of the year. Large amounts of investment capital sought placement across the entire commercial real estate buyer spectrum in According to Real Capital Analytics, through November 2013 there was a 27% increase in national investment sales transaction volume over the same period last year. Regionally, overall New England investment sales volume, across all property types, increased roughly 14% to $9.8 billion. Life Insurance, CMBS Lenders and Commercial Banks are all providing debt financing for well-located properties with strong operating fundamentals as well as transitional assets and certain development projects investment activity is expected to remain brisk as investors and owner/users compete to acquire commercial properties in a low interest rate environment. As we move forward into 2014, companies that enter the New England region looking for space will find a vibrant economy benefiting from multiple demand generators. In many submarkets, top-tier space and sublease deals are virtually non-existent. In conjunction with the overall improving business climate, the cranes of new construction projects speckle the skyline in downtown Boston. Many new office, multifamily, retail and hotel projects are currently in various stages of development. Mixed-use projects, such as the Ink Block (Boston), Pier 4 (Boston), Millennium Tower (Boston), The Van Ness (Boston), Assembly Row (Somerville), Arsenal on Charles (Watertown), University Station (Westwood), and Marlborough Hills (Marlborough), have all started to take shape. Even in the midst of a successful year within New England s commercial real estate market, consistent and permanent employment growth is essential to sustaining additional positive absorption and further economic growth across the region. Boston, Massachusetts Photo by istockphoto, Introduction 5

7 Greater Boston MARKET OUTLOOK 2014 OWNTOWN BOSTON OFFICE MARKET FORECAST Boston, Massachusetts Photo by Dave Desroches,

8 Greater Boston DOWNTOWN BOSTON OFFICE MARKET by David Fitzgerald, Building on the peak performance of 2012, the Boston Office market continued its positive momentum in Relocations were prevalent in all markets, and development activity flourished as anchor tenants kicked off several build-to-suit projects. Goodwin Procter and PricewaterhouseCoopers chose to vacate their long-time Financial District headquarters, opting for build-to-suit developments in the Seaport that, while over 300,000 square feet each, still right-sized their real estate footprints. Both deals illustrated a growing trend towards efficiency and workplace strategy seen with many tenants, the largest being State Street Corporation s reorganization of approximately 1.3 million square feet from the Back Bay and CBD to accommodate their move to the 500,000 square foot build-to-suit at Channel Center. The existing product left by such sizable relocations had a significant impact on availability, as demand continued to favor technology-savvy, creative space. The technology sector continued to migrate to Boston from Cambridge and Route 128, desiring quicker occupancy and making deals at plug-and-play spaces, first-generation subleases and pre-built, spec suites. Demand for value space prevailed, cooling activity in high-rise spaces and high-rent markets such as the Back Bay. Havas, the parent company of Arnold Worldwide, signed 115,000 square feet at the Burnham Building in Downtown Crossing. Havas move from the Back Bay launched the combined rehabilitation of 10 Summer Street and construction of the new Millennium Tower at the former Filene s Basement site. While the Seaport remained the hottest submarket during 2013, Downtown Crossing gained momentum as a technology hub and Fenway made significant progress on several development projects. HISTORIC BOSTON SUBMARKET ABSORPTION (SF) 2,000,000 1,500,000 1,000, ,0000 CBD Back Bay Seaport CBD The CBD saw steady velocity, and demand for value space resulted in an increase in activity in the low-rise and Class B markets, while the majority of the premium Class A space languished. The CBD Class B market experienced high investment sales activity as institutional capital, foreign investors and local investors competed for this asset class ,000-1,000,000-1,500, Tenants preferred location continued to shift, moving the corner of Main & Main towards the Fort Point Channel and the MBTA Red Line. Sizable relocations created large blocks of availability, including Brown Brothers Harriman s space at 50 Milk Street; PricewaterhouseCoopers space at 125 High Street; AIG s space at 100 Summer Street; and Goodwin Procter s space at 53 State Street. Greater Boston 7

9 Greater Boston BACK BAY Following a period of strong growth, Back Bay momentum slowed during 2013 as demand began to stall, despite boasting one of the lowest vacancy rates in the country. Several large blocks became available due to relocations and/or downsizings, such as State Street Corporation, First Marblehead Corporation, MetLife and GE enough space to potentially triple vacancy rates over the next year. Spot premier pricing eclipsing $80.00 per square foot was still seen for the best spaces, however overall rents softened as a result of the large increase in low-rise availability. SEAPORT The Seaport experienced additional buzz as high-profile, corporate buildto-suit projects continued to change the landscape of the submarket. Both PricewaterhouseCoopers build-to-suit at 101 Seaport Square and Goodwin Procter s build-to-suit at 100 Northern Avenue added additional premier, Class A inventory to the submarket. Class A rents rose due to increased out-of-market demand, while the Class B market remained tight from highly sought-after brick & beam product. Work/life balance became an increasingly important factor to tenants and the Seaport s ability to deliver a 24/7 atmosphere with the addition of numerous retail and residential developments was a key part of the submarket s success in drawing office tenants. DOWNTOWN BOSTON OFFICE MARKET SNAPSHOT SUBMARKET TOTAL SF AVAILABILITY VACANCY SUBLEASE YTD ABSORPTION (SF) AVG. ASKING RENT ($/SF) Central Business District 37,040, % 11.5% 1.3% (687,217) $48.23 Class A 27,070, % 12.5% 1.5% (943,032) $51.18 Class B/C 9,969, % 9.0% 0.7% 255,815 $34.86 Back Bay 14,549, % 4.3% 1.3% (414,172) $52.63 Class A 9,749, % 4.6% 1.9% (250,457) $56.49 Class B/C 4,799, % 3.8% 0.0% (163,715) $43.16 Seaport 10,472, % 4.6% 1.7% 1,772,664 $46.73 Class A 4,592, % 2.5% 2.0% 1,794,846 $57.75 Class B/C 5,879, % 6.3% 1.4% (22,182) $38.51 Charlestown/East Boston 2,838, % 6.6% 0.2% 54,674 $28.29 Mid-Town 2,666, % 6.3% 0.0% 66,113 $34.95 North Station/Waterfront 2,750, % 3.9% 0.7% 340,978 $26.82 South Station 1,464, % 2.7% 0.0% 82,865 $40.63 Dorchester/South Boston 1,141, % 8.1% 0.3% (15,877) $23.69 Allston/Brighton/Longwood 1,730, % 11.4% 0.0% 36,826 $27.35 Fenway/Kenmore Square 2,077, % 2.2% 0.0% 38,654 $50.45 Overall Downtown Boston Office 76,732, % 8.1% 1.2% 1,275,508 $47.26 Greater Boston 8

10 Greater Boston HISTORIC BOSTON AVAILABILITY VS. VACANCY Vacancy Availability 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% HISTORIC BOSTON ASKING RENTS VS. AVAILABILITY Asking Rent Availablity 18% 16% $70 $60 14% $50 12% 10% 8% 6% $40 $30 $20 4% 2% 0% $10 $ DOWNTOWN BOSTON OFFICE MARKET FORECAST As we head into 2014, the large blocks of availability across the Downtown Boston Office market will greatly impact fundamentals. Both the Back Bay and CBD are positioned to experience large increases in vacancy if demand is not sustained. With large deal velocity on the decline, technology growth and demand from Cambridge and Route 128 will be pivotal to market growth. The potential for migration into the CBD and other submarkets, combined with the large blocks of existing availability in those submarkets, will create rent growth uncertainty. Creative, value space and short-term, immediately available options will remain prevalent to attract these companies. As the Seaport begins to experience lease roll from tenants who moved in at the start of the submarket s popularity, tenants now facing increases in rent may seek more competitive economics downtown or price alternatives such as the Marine Industrial Park. The Seaport will also face challenges such as traffic concerns and uncertainty of the new administration s effect on city support of new development projects. The once considered peripheral areas of Downtown Crossing, Fenway and the South End will continue to gain momentum in 2014, as Millennium Partners projects fuel the transformation of Downtown Crossing, Samuels & Associates projects further the development of the Fenway area, and the market looks toward the South End for new development opportunities. The once considered peripheral areas of Downtown Crossing, Fenway and the South End will continue to gain momentum in Greater Boston 9

11 SPOTLIGHT: THE STORY OF SMART-SIZING YEAR IN REVIEW LARGEST DEALS OF TOTALED 2 MSF WITH 12.6% DECREASE IN OVERALL SPACE YET ONLY OUT OF OUT OF reported decreases in headcount AND made space more creative HOW? smart siz ing \'smärt sız ing\ verb Analyzing a company s workplace and adjusting its real estate footprint to optimize efficiency, collaboration, productivity and talent retention. Most often resulting in a decrease in overall real estate footprint and costs, with increased use of creative space. TALENT RETENTION EFFICIENCY COST REDUCTION The future of work is changing, and, as employees needs and perspectives change, Boston-area employers must adapt to retain top talent. That is why we feel it is so important to adapt our workspaces to provide our people with the flexibility and innovation they want. George Neble MANAGING PARTNER ERNST & YOUNG office space is occupied roughly 48% of the time Individual mobility and the office s large common areas almost force employees to interact with one another and work together more effectively. Bob Sulentic PRESIDENT & CEO; CBRE, INC. CBRE Global Headquarters in Los Angeles moves to free-address office, with no assigned desks or offices 15% INITIAL BUILD-OUT COST SMART-SIZING STORY VS 30% OVERALL PROJECTED RENT 900,000 PIECES OF PAPER RECYCLED DURING THE SWITCH TO FREE-ADDRESS CREATIVE SPACE Space that is more dynamic and conducive to social interaction and collaboration. Design is a funny word. Some people think design means how it looks. But of course, if you dig deeper, it s really how it works. Steve Jobs COMPANIES THAT ARE SMART-SIZING We want to be part of something special, not just rent office space. JAMES CALHOUN CEO, CONVERSE Greater Boston 10

12 SPOTLIGHT: GROWING TREND OF COWORKING SPACES Flexibility and value are two of the most important office space attributes for startups and entrepreneurs. Coworking space combining multiple individuals/ companies into a single office space provides an outlet for companies in a period of early-stage growth to provide flexibility with shorter term deals and limited commitments. Some coworking spaces provide the resources and outreach for these companies to be prepared for what lies ahead, whether through formal or informal mentoring, concessions, or access to funding. Over one million square feet of coworking/shared office space has popped up in Greater Boston over the past few years; Boston s coworking spaces have more than doubled since The rise of this trend can be attributed to several factors such as: The increase of technology startups has contributed to the growing need for incubators and accelerators in order to secure funding, advisory services, and ultimately growth. With the advent of the internet, many people began to work independently from home including freelancers, technology industry soloists and more, creating a need for space that provides community and collaboration, as well as office space and amenities. So, what are the benefits of coworking space to entrepreneurs and business professionals? Reducing costs by sharing facilities, equipment and resources; gaining access to a network of startups and entrepreneurs; and collaborating with others in similar industries. As Boston s area institutions continue to produce the talent pool and great ideas, the current footprint of Boston s coworking environment will grow into The question is at what point will there be too much? 2014 will continue to bring a competitive pool of larger coworking space providers, which may limit the growth of these smaller to midsize groups. Greater Boston 11

13 Greater Boston CAMBRIDGE OFFICE MARKET by Charles Kavoogian, & Adam Brinch, The Cambridge Office market started the year off strong and continues to be white hot as 2013 draws to a close. The most active submarket, East Cambridge, has set record-high rents reaching levels not seen since pre-recession highs, driving tenants outward towards lower rent alternatives in West Cambridge. Fundamentals remain solid as the office market maintained a low vacancy rate throughout 2013, inching up 20 basis points year-over-year to 6.3%, and posting a respectable 155,000 square feet of positive absorption for the year, driven by a series of mid-sized transactions. Overall availability fell 110 basis points year-over-year to 10.3%, despite a modest increase in East Cambridge, proving that tenants are looking outside the hyper-competitive Kendall Square submarket in order to stay within the Cambridge city limits. Tenant activity stemmed from an inward migration from out-of-market tenants coupled with biotech and high-tech companies experiencing organic growth and expanding their current footprint in Cambridge. TENANT ACTIVITY Cambridge Innovation Center expanded its Cambridge footprint by 52,000 square feet into 101 Main Street in the first quarter. HISTORICAL CAMBRIDGE NET ABSORPTION (SF) 800,000 Office Lab Homegrown Hubspot finalized a blend and extend in the second quarter at its 25 First Street headquarters, taking an additional 67,000 square feet, for a total of 117,000 square feet. 600, ,000 Software company Intuit consolidated from Waltham to Cambridge, taking 200,000 61,000 square feet at 150 CambridgePark Drive, which proved to be the most resounding example of inward migration year-to-date , , ,000 East Cambridge has set record-high rents reaching levels not seen since pre-recession highs. -800, , Greater Boston 12

14 Greater Boston A strong third quarter saw four deals between 40,000 50,000 square feet: Pfizer expanded by an additional 40,000 square feet at 700 Main Street. New to the market, Twitter took down 48,000 square feet at 141 Portland Street. Alexion Pharmaceuticals renewed and expanded its office presence at 55 Cambridge Parkway to just over 50,000 square feet. Akamai converted 51,000 square feet of existing lab space to office at One Kendall Square, showing the narrowing net effective return between office and lab deals. INVENTORY Cambridge is still in a transformative growth stage, with 2.24 million square feet currently under construction and 4.5 million square feet of build-to-suit opportunities in the pipeline. West Cambridge continues to show its value as a strong alternative to the soaring East Cambridge rents as availability continues to tighten. Responding to the continued rise in East Cambridge rents, landlords will consider attractive net returns of converting large blocks of second-generation lab space to office. Strong start-up activity has caused small, well-located suites to be scarce, while big block options of 100,000 square feet are nearly non-existent. Limited quality space in Harvard, Central and Mass Avenue corridor. CAMBRIDGE OFFICE MARKET FORECAST Looking ahead, we will see that mergers, acquisitions and West Coast migration will have a strong impact on the Cambridge Office market in As availability remains low, rents will continue to trend upwards while tenants look to peripheral markets for space in both Cambridge and alternative nearby urban locations. Fundamentals will continue to remain tight and be greatly impacted by the lack of large block options. Moving forward, increased venture capital funding will continue to fuel robust start-up activity and office demand among small to midsize companies. As a result of this demand, additional supply of co-working and incubator space will naturally be added to the inventory providing a longterm pipeline for the Cambridge office market. CAMBRIDGE OFFICE & LAB MARKET SNAPSHOT SUBMARKET TOTAL SF AVAILABILITY VACANCY SUBLEASE YTD ABSORPTION (SF) AVG. ASKING RENT ($/SF) Cambridge Office East 7,299, % 5.4% 1.3% 195,289 $49.20 Cambridge Office Mid 1,870, % 2.5% 3.2% (35,258) $37.02 Cambridge Office West 1,927, % 13.3% 11.1% (5,113) $32.80 Overall Cambridge Office 11,098, % 6.3% 3.3% 154,918 (Gross) $43.32 Cambridge Lab East 8,620, % 7.2% 9.0% (605,533) $52.35 Cambridge Lab Mid 593, % 15.6% 1.7% 68,733 $47.57 Cambridge Lab West 812, % 6.9% 0.4% (354,567) $41.60 Overall Cambridge Lab 10,027, % 7.6% 7.8% (891,367) (NNN) $49.95 Greater Boston 13

15 SPOTLIGHT: CAMBRIDGE IPOs LIST OF 2013 IPOs: The biotechnology industry has had its best year for initial public offerings since Globally, there have been 34 biotech companies that have gone public in Nine of those companies are based in Massachusetts, and more specifically the Cambridge area, impacting both the office and lab markets in a material way. These companies include Acceleron Pharmaceuticals, Bind Therapeutics, Foundation Medicine, TetraPhase Pharmaceuticals, Enanta Pharmaceuticals, Epizyme, bluebird bio, Inc., Agios Pharmaceuticals and Karyopharm Therapeutics, with several more preparing to file. This IPO activity has had a tangible correlation to the Cambridge real estate market with a number of local tenants transacting over the course of Namely, Foundation Medicine tripled its real estate footprint in Cambridge in the second quarter, shortly after announcing its plans to go public. bluebird bio, Inc. took more space in the second quarter as well, moving to 43,000 square feet at 150 Second Street, which represented an expansion of 25,000 square feet. With a number of the aforementioned nine companies already in the market for additional space, and the remaining ones poised for growth, Cambridge landlords should continue to be the beneficiary of very historically favorable capital markets. COMPANY OPENING PRICE AVERAGE TRADING PRICE* GAIN/LOSS SINCE IPO LOCATION SQUARE FEET Acceleron (XLRN) $ Q13 ±$ % up 12 Emily, 24 Emily, 128 Sidney 19,711; 37,166; 37,700 Foundation Medicine (FMI) $ Q13 ±$ % up 150 Second Street 60,980 Bind Therapeutics (BIND) $ Q13 ±$ % down 325 Vassar Street 32,784 TetraPhase Pharmaceuticals (TTPH) $7.00 1Q13 ±$ % up 480 Arsenal Street 15,899 Enanta Pharmaceuticals (ENTA) $ Q13 ±$ % up 500 Arsenal Street 45,000 Epizyme (EPZM) $ Q13 ± % up 400 Technology Square 32,403 Agios (AGIO) $ Q13 ±$ % up 38 Sidney Street, 1 Kendall Square 38,536; 22,506 bluebird bio, Inc. (BLUE) $ Q13 ±$ % up 150 Second Street, 840 Memorial Drive 48,586; 17,648 Karyopharm (KPTI) $ Q13 ±$ % up 2 4 Mercer Road (Natick) 10,482 *As of Dec Greater Boston 14

16 Greater Boston CAMBRIDGE LAB MARKET by Adam Brinch, & Curtis Cole, As 2013 draws to a close, Cambridge has increasingly solidified itself as one of, if not the most, sought-after life science real estate markets in the country. Strong demand drivers coupled with limited availability have driven average asking rents to historical highs in East Cambridge reaching $52.35 triple net per square foot, with the highest concentration of lab inventory across all Cambridge submarkets. The overall vacancy rate rose slightly to 7.6% year-over-year. Existing industry stalwarts such as Novartis and Millennium continue to fortify their R&D operations, while a new crop of both mid-sized out-of-market tenants and homegrown companies have further legitimized Cambridge as the destination for laboratory development. However, relief is on the horizon, with the Vertex Effect impacting the market in 2013, adding roughly 700,000 square feet back to supply. The availability rate is currently 19.6%, rising from 10.4% in proved to be an active year for growth-stage biotech companies. Foundation Medicine tripled its square footage to 61,000 square feet, taking half of the newly built 150 Second Street. Shortly thereafter, bluebird bio relocated into nearly 43,000 square feet at the same address from 25,000 square feet at 840 Memorial Drive. Finally, Sarepta s HQ relocation from Bothell, Washington to 61,000 square feet at 215 First Street was a glaring example of the West Coast s desire to tap into the talent pool in the Cambridge market. LARGE TENANT ACTIVITY Ariad Pharmaceuticals expanded its Cambridge footprint, committing to 244,000 square feet with a build-to-suit at Alexandria Kendall Square in the first quarter, followed by an additional 142,000 square feet in the third quarter of HISTORICAL CAMBRIDGE AVERAGE ASKING RENT $60 $50 Office (Gross) Lab (NNN) Momenta Pharmaceuticals renewed its lease for 105,000 square feet at 320 Bent Street, with a total footprint of 182,000 square feet. $40 Industry leaders Millennium and Novartis expanded their Cambridge presence, taking 233,000 square feet at 300 Mass Avenue and 100,000 square feet at 700 Main Street, respectively. $30 $20 $10 $ Greater Boston 15

17 Greater Boston HISTORICAL CAMBRIDGE VACANCY Office Lab 16% SUPPLY SNAPSHOT Cambridge is still very much in a growth phase with 2.24 MSF of fully committed lab buildings currently under construction and an additional 4.5 MSF of permitted development in the pipeline. Build-to-suit activity and expansion of existing large users has limited the amount of big blocks available; however, a healthy inventory of quality second-generation lab space still offers small to mid-size tenants entry to the tight market, albeit at healthy rents. 14% 12% 10% 8% 6% 4% 2% As a result of the Vertex Effect, large blocks of second-generation space will be added back to the market, causing landlords to get increasingly creative with competitive inventory. 0% In some cases, given the strength of the office market, obsolete lab buildings or space will be evaluated for office conversion. INVESTMENT SALES MARKET Institutional investors are increasingly interested in lab buildings, however they are recognizing the importance of teaming up with local operators and typically choose to partner with established business groups in Cambridge. A number of important assets have traded hands during CY2013, with One Kendall Square, 245 First Street and 150 Second Street all expected to close before year-end. The strength of the market has expanded to West Cambridge, with two Pfizerowned buildings under agreement to local developers. CAMBRIDGE LAB MARKET FORECAST Looking ahead to 2014, it remains to be seen if public markets will continue to lend themselves to initial public offerings for the market s local biotech companies. The IPO activity has been an important demand driver in 2013, as capital raising to fund drug development and clinical trials has had a measurable effect on absorption. On a smaller scale, with the strength of the market always depending on the next group of young companies, Cambridge Innovation Center s new LabCentral concept offers open, flexible space for start-up life sciences companies, something that has long been lacking in Cambridge. Finally, using Ariad as an example, it should be noted that as top-heavy, larger companies continue to grow in Cambridge, there will be a need for flexible disposition strategies in the event of failed drug programs. However, the overall concentration of intellectual capital coupled with the deep bench of talented professionals in all phases of drug development will continue to make Cambridge one of the premier places in the country to build companies, and the real estate that supports them. Greater Boston 16

18 Greater SPOTLIGHT: Boston THE EMERGENCE OF A NEW MARKET by Robert Fitzgerald, robert.fitzgerald@cbre-ne.com Twenty-five years ago, Cambridge was an afterthought. Back then, Boston and its Route 128 suburbs dominated the commercial real estate scene. Downtown Boston in the late 80s was home to powerhouse companies such as Fidelity, Putnam Investments, Bank of New England, Shawmut Bank and other financial service institutions. Meanwhile, Boston s Route 128 market boomed as the Massachusetts Miracle exploded in an era when tech companies like Digital Equipment Corporation, Wang Laboratories, Data General and Apollo Computer leased millions of square feet annually. During this time Cambridge was a lonely planet. Cambridge s commercial real estate market in the late 80s consisted of about 10 million square feet of space, occupied by an array of untested industries. Unproven companies such as Genetics Institute, Genzyme, Biogen and Lotus Development occupied a small, but growing segment of the Cambridge marketplace. Unbeknownst to most at the time, these companies were planting early seeds for Cambridge s blossoming into a dominant commercial real estate market. Today, Cambridge s commercial real estate inventory stands at 20.5 million square feet of space double that of 25 years ago. Cambridge is still in a growth mode, as there is nearly two million square feet of construction underway. Indeed, Cambridge is becoming a large market unto itself. By way of context, the entire city of Providence, RI contains six million square feet of office space (as tracked by CBRE/New England), meaning the Cambridge market contains 3.5 times more space than Rhode Island s state capital. Soon, Cambridge will have as much space as the communities of Waltham, Lexington and Burlington combined. GREATER CAMBRIDGE Real estate in cities and towns such as Somerville, Medford and Watertown has historically been linked to various markets. Watertown, for instance, has traditionally been tied to Waltham and Route 128. Real estate in Somerville and Medford were pulled north and often closely allied to markets such as Woburn, Lynn and Wilmington. The rise of Cambridge and the size of its commercial real estate sector (crammed into seven square miles) have created a gravitational pull. The lure of Cambridge has produced satellites orbiting the city. Behold, the emergence of the Greater Cambridge Market (GCM). CORE MARKET SINGLE DISTINCT SUBMARKET The emergence of a stand-alone overlay district called the Greater Cambridge Market has become apparent in recent years. The Greater Cambridge Market consists of eight communities including Charlestown, Medford, Malden, Somerville, Arlington, West Cambridge, Watertown and Allston-Brighton. Combined, these municipalities possess 12.8 million square feet of commercial space housed in 145 buildings. Greater Boston 17

19 Greater SPOTLIGHT: Boston THE EMERGENCE OF A NEW MARKET CONTINUED Six common threads bind these communities together. First, they are geographically close to the core of Cambridge s market (East Cambridge and Harvard Square). Second, these towns are chiefly urban with high-density populations. Third, companies and employees located in the GCM are reliant on public transportation. Fourth, on-site parking spaces are modest in number as compared to those provided in more traditional suburban locations. Fifth, commercial real estate in the GCM is relatively affordable as matched against downtown Boston or Cambridge rents. Finally, these communities are bound by traditional migratory patterns. For instance, a tenant considering commercial office space in Charlestown invariably will consider buildings in Medford, Malden or Somerville. Likewise, a tenant seeking space in Watertown will often mull over buildings found in West Cambridge or Allston-Brighton. The gravitational pull of Cambridge coupled with these six common threads has knit the eight communities into a single distinct market. DEVELOPMENT The emergence of Greater Cambridge certainly has caught the eye of real estate developers. Urban in-fill development is sizzling. Housing construction has exploded with 1,400 units of new construction underway in West Cambridge alone. Watertown has seen nearly 1,000 units built or about to break ground while Malden has three housing projects comprised of 400 units underway. Malden is also in the late planning stages for the construction of a new 6,500-seat minor league baseball stadium scheduled for completion in Commercial mixed-use projects in the pipeline include Assembly Row in Somerville, which has approximately 450 housing units and a speculative 100,000 square foot office building under construction combined with hundreds of thousands of square feet of modern retail space and a new MBTA Orange Line Station. Meanwhile, New Balance in Brighton has started construction at Boston Landing on its new 250,000 square foot corporate headquarters. Upon completion, Boston Landing will possess nearly one million square feet of office space, a 325,000 square foot sports center, and a new MBTA Commuter Rail stop. Last spring, athenahealth closed on the purchase of the Arsenal on the Charles in Watertown for $168 million to be used for its long-term corporate headquarters. Athena also recently joined forces with Boylston Properties/Wilder in the $70 million purchase of the adjacent Watertown Mall. The strategy here is to link the mall with the office park and turn this area of Watertown into the next innovation district. All of this real estate development is a clear sign of an improving local economy. Underpinning it, however, is the intrinsic strength of Greater Cambridge s real estate market. Understanding the dynamics within this Greater Cambridge Market has become increasingly important to users, developers and owners of commercial real estate. Likewise, real estate professionals need to view these formerly disparate markets through a new lens in order to best advise their clients on how to maximize opportunities within the Greater Cambridge Market. Like so many of the leadingedge companies within Cambridge, this market will continue to morph and grow. Paying attention to these trends will yield optimal results for savvy tenants and investors ignoring the changes afoot will leave others in the cold. Soon, Cambridge will have as much space as the communities of Waltham, Lexington and Burlington combined. Greater Boston 18

20 Greater Boston METRO NORTH SUBURBAN OFFICE MARKET by Jason Levendusky, HISTORICAL BOSTON SUBURBAN OFFICE ABSORPTION (SF) Metro North Metro West Metro South The most significant story of 2013 within the Metro North Suburban Office market was the dramatic number of investment sales in Burlington. Beginning late in the first quarter, approximately 65% of Burlington s Class A office product changed ownership within a 10-month period. These transactions were comprised of Piedmont s purchase of 5 and 15 Wayside Road (270,000 SF) from Behringer Harvard; Charles River Realty/National Development s purchase of New England Executive Park (1,035,000 SF) from Equity Office; TA Associates purchase of 25 Mall Road (285,000 SF) from Equity Office; The Davis Companies/Principal Financial s purchase of Burlington Centre (490,000 SF) from Bentall Kennedy; Griffith Properties/Artemis Capital s purchase of 1 and 3 Burlington Woods (267,828 SF) from Colony Realty; RJ Kelly s purchase of 77 South Bedford Street 2,000,000 1,500,000 1,000, , ,000-1,000,000-1,500, GREATER BOSTON SUBURBAN OFFICE MARKET SNAPSHOT SUBMARKET TOTAL SF AVAILABILITY VACANCY SUBLEASE YTD ABSORPTION (SF) AVG. ASKING RENT ($/SF) Close-In Suburbs North 4,147, % 11.8% 2.4% (30,596) $18.41 Route 128 North 19,475, % 13.5% 3.2% (93,242) $20.11 Route 495 Northeast 5,096, % 22.3% 0.4% (99,755) $15.27 Route 3 North 14,232, % 19.9% 3.2% 318,051 $15.56 Metro North 42,951, % 16.5% 2.8% 94,458 $17.45 Route 128 West 27,087, % 12.3% 1.8% 669,521 $27.00 Framingham Natick 7,418, % 13.2% 2.6% (93,326) $19.60 Route 495 Route 2 West 4,735, % 20.4% 3.7% (35,035) $15.20 Route 495 Mass Pike West 13,548, % 24.2% 2.8% 282,479 $17.24 Metro West 52,789, % 16.2% 2.3% 823,639 $21.00 Route 128 South 13,788, % 20.9% 1.1% 239,076 $19.61 Route 495 South 2,190, % 14.3% 0.7% 159,073 $16.76 Metro South 15,979, % 20.0% 1.1% 398,149 $19.20 Overall Suburban Office 111,721, % 16.9% 2.3% 1,316,246 $19.68 Greater Boston 19

21 Greater Boston (144,000 SF) from Equity Office; and Nordic/Nordblom s purchase of 15 Network Drive (130,000 SF) from Pallomar Medical. Additionally, two other assets, 10 and 20 Mall Road (154,000 SF) and 5 Burlington Woods (103,000 SF), are on track to close in early These sales are a result of Burlington s continued emergence as a suburban version of Boston s Innovation District and East Cambridge. Suburban high-tech companies, driven by their constant quest to retain and attract young employees, are increasingly drawn to Burlington s true live, work, play environment, which has been fortified by the restaurant, entertainment and retail developments currently in planning stages and under construction. One of such developments is Third Ave, which will be comprised of Wegmans market, Kings Bowling complex, and several new restaurants. The increased investment sales activity in the Burlington office market has led to a rapid increase in asking rates. From mid-year, Burlington asking rents have increased approximately 8% year-over-year, with rents currently achieving low-$30s levels. While these increased rates have yet to be seen in a significant number of completed transactions, the fact that the new ownership groups have all bought their assets at a basis ranging from $ per square foot, and most plan significant capital investments, means that rents in the low- to mid-$30s are likely to become not only a market reality, but a market requirement. The higher asking rents in Burlington have already spread to other contiguous areas of the Metro North market. The overall leasing performance of the Metro North market during 2013 was moderate. The net result was 94,000 square feet of positive absorption in a total market of 42.8 million square feet. Availability and vacancy rates stood at 20.5% and 16.5% respectively, compared to 20.8% and 15.7% in With the exception of the rapid and significant rent increase in Burlington, and a corresponding but more tempered increase in immediately neighboring areas, such as Woburn and Bedford, rental rates remained relatively flat in Metro North through the course of the year. Most activity was focused on higher-quality well-located buildings, while activity on lower-quality product and buildings in areas with limited amenities remained slow. The most active submarket within Metro North was Route 3 North, which experienced 318,000 square feet of positive absorption this year. Significant transactions include Verizon s renewal and expansion of 251,000 square feet at Cross Point in Lowell; Raytheon s renewal of 152,000 square feet at 880 Technology Park in Billerica; Cynosure s renewal and expansion of 144,000 square feet at 3 and 5 Carlisle Road in Westford; Emprix s lease of 56,000 square feet at 600 Technology Park in Billerica; and Holcim s lease of 30,000 square feet at 24 Crosby in Bedford. METRO NORTH OFFICE ASKING RENTS VS. VACANCY Asking Rents Vacancy $ % $ % Beginning late in the first quarter, approximately 65% of Burlington s Class A office product changed ownership within a 10-month period. $15 $10 $5 $ % 10.0% 5.0% 0.0% Greater Boston 20