Life science growth will support Boston offices - Capital Economics
US Commercial Property

Life science growth will support Boston offices

US Commercial Property Update
Written by Sam Hall
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We expect the boost in demand for life science product will support Boston’s office market. At the same time, office-to-lab conversions will limit the impact of a relatively large development pipeline, reducing the downside for Boston in the coming years. We expect rental value growth will average minus 2% over the next three years, slightly better than the minus 1.6% average for the other five major cities.

  • We expect the boost in demand for life science product will support Boston’s office market. At the same time, office-to-lab conversions will limit the impact of a relatively large development pipeline, reducing the downside for Boston in the coming years. We expect rental value growth will average minus 1.2% over the next three years, slightly better than the minus 1.6% average for the other five major cities.
  • Boston’s office market achieved total returns of 4.0% in the first three quarters of 2020, which contrasts markedly with the minus 0.2% average return across the other five major cities we cover. (See Chart 1.) This reflects a more solid rental picture and the fact that yields have risen by less than elsewhere. Indeed, Boston’s rental value growth of 2.6% between February and November outperformed the other five cities.
  • Boston’s role as a hub for life science research is supporting both lab and office demand. Life science product is essential to the global recovery from the pandemic. As a result, scientific research and development has been one of the strongest performing sectors over the past year, with national employment in December up 2.8% from February. Thanks to Boston’s high concentration of these firms, its office-type employment has held up relatively well, leading to a less severe fall in office demand than in other cities. (See Chart 2.)
  • We expect life science companies will continue to expand in Boston. Brokers report that many firms receiving funding are yet to take on more workspace, which suggests that the additional demand for offices will be sustained. And the strength of Boston’s clusters of leading universities, hospitals and life science companies make the city an attractive location for firms needing more space. What’s more, the growth of life science companies may also generate productivity spillovers for other office sectors.
  • At the same time, Boston faces a relatively large increase in office inventory in the coming years. Indeed, its office pipeline is substantial, with approximately 5.1 million sq ft of new office space under construction downtown.
  • But all is not lost, because over 3 million sq ft of office space is planned for lab conversion. Office-to-lab conversions will limit the increase in office inventory at a time when occupiers are reassessing their requirements. Ultimately, this will support Boston’s office rents by keeping a check on supply.
  • In all, with remote working set to grow in the coming years, we expect demand for standard office space will decline. (See our Focus.) However, expanding life science firms will help cushion the blow to Boston’s office market by boosting demand and tightening supply. On balance, we expect rental value growth will average minus 1.2% over the next three years, slightly better than the minus 1.6% average across the other major office markets we cover.

Chart 1: Total Returns in Q1-Q3, 2020 (%)

Chart 2: Change in Office-Type Employment (%)

Source: MSCI

Source: Refinitiv


Sam Hall, Assistant Property Economist, sam.hall@capitaleconomics.com