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Mind the Gap:  High-Rise Rent in Boston’s Skyline Hits a Five-Year High

Demand for the premier space in the high-rise segment of Boston’s Skyline buildings commands increasing rents but tightening fundamentals could draw attention to other asset classes, according to JLL’s 2015 Skyline Review.

Boston, June 12, 2015 – There’s no space like high-rise space. The premier high-rise segment in Boston’s skyline boast some of the most expensive office space to rent, garnering 24.7 percent more than low-rise space, according to JLL’s 2015 Digital Skyline. Average high-rise rates in the first quarter of 2015 were $63.77 per square foot compared to $51.13 per square foot for low-rise in the Skyline buildings. This gap between high-rise and low-rise space represents the largest gap since the Fall of 2008 when the difference was just 11.5 percent.

“The improving economy coupled with several notable transactions in the skyline in the last year and new owners looking at ways to capture higher rents has led the rent gap between high-rise and low-rise to widened significantly this quarter,” said Lisa Strope, JLL New England Research Manager.

Skyline tenants can expect little relief in rental rates in the near future, in spite of nearly 1.3 million square feet of new office space under construction in the Boston market. Nearly 70.0 percent of the new development is pre-leased, which means most tenants will have little negotiating leverage in their office agreements.

JLL’s proprietary 2015 Digital Skyline identifies and tracks micro-segments of 47 city centers across North America.  The Skyline features Trophy and Class A buildings where tenants and investors alike focus demand for office space in a flight to quality and efficiency.

A diminishing “home-team” advantage
If office rental rates are fierce, the price tag to buy an office building is even more so. Economic growth, business expansion and improving market fundamentals have resulted in a second consecutive year of plus-20 percent pricing gains, pushing Boston’s Skyline buildings more than ten percent above peak prices and driving cap rates 30 basis points below the 2008 peak.

The sheer volume of foreign capital chasing Skyline office deals is having a major impact on pricing across the U.S. Of the $35.3 billion transacted over the past five quarters, 34.6 percent was driven by international buyers. In Boston, offshore capital led more than 50 percent of office purchases while in Houston and Seattle every office deal transacted during this time period had a foreign buyer.

“International capital is making a long-term impression on the U.S. Skyline.  We predict foreign buyers to invest $50 billion into U.S. commercial real estate in 2015, and they appear to be buying for the duration.  This will have a major impact on future Skyline liquidity, particularly for Trophy assets in primary markets such as Boston, where more than half of foreign capital is being invested,” said Frank Petz, managing director of JLL Boston’s Capital Markets team.

Petz continued, “Going forward, domestic institutional investors will be forced to evolve their strategies, increasingly partnering with foreign investors and diversifying into non-core and non-CBD assets.”

A redefined Skyline
As investors begin to diversify beyond the Trophy for investment opportunities, a growing segment of tenants are also turning away from Skyline buildings in favor of non-core Class A and Class B buildings, inside and outside of traditional Central Business Districts (CBDs). The perception of an “address” has been replaced by the desire for highly customized office space, particularly among fast growing tech and other creative companies.

But the trend does not stop there: today, many companies are trying to mimic tech whether through business strategy, people strategy or even real estate strategy. The growing millennial workforce and their employers are increasingly drawn to architecturally significant Class B buildings located in dense neighbourhoods packed with amenities. For instance, Harmonix leased 25,000 square feet at 40 Broad Street and will relocate from Cambridge.

“Tech users and other creative firms want unique space – they’re mostly indifferent to building quality as long as they are able to design attractive, creative environments for their employees,” said Bill Barrack managing director with JLL Boston’s leasing team. “They have shown a preference in recent years for leasing lower-cost space in well-located historic buildings or converted warehouses because they can spend more on their space’s interior and less on rent. It allows them to create their own identity.”

Among the notable transactions fitting this trend are Sonos’ 170,000 square-foot lease at Lafayette City Center, coming from Cambridge, and Arnold Worldwide’s 115,000 square-foot lease at the recently renovated Burnham Building, relocating from the Back Bay.

Barrack added, “A lot of these B-buildings are on the perimeter of the traditional high-rise CBDs in areas that have more of a neighborhood feel. In turn, they like the idea of adaptive reuse and contributing to neighborhood revitalization. As the gap between low-rise Class A and boutique Class B continues to shrink over the short-term, we actually could be reaching a peak inflection point based on future demand patterns favoring space over building.”

About the Skyline Review
For the first time, investors and tenants alike can now access JLL’s Skyline Review via a digital platform.  The fully interactive website will feature JLL’s proprietary market insights regarding office supply, demand, rents, leverage and investment into 47 markets across the United States and Canada, with the ability to compare and contrast individual markets or multiples of markets.  In addition, the site will offer videos and infographics. All information will also be available via mobile access.  Users can also directly access information about Boston’s Skyline.

About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000.  On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $55.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit