A Tale Of Two Class Bs

By Jay Norman, Colliers Research Intern - Fall/Winter 2017 | December 2017

Almost 10 years after the economic downturn, the recovery that followed hasn’t been the same in all areas of the market. While Class A product has bounced back across Greater Boston, Class B product tells a different story.

The previous chart shows occupied space in Class B buildings in Boston and the suburbs, indexed to the peak of the last cycle, around the middle of 2008. Following the downturn, the Class B market in Boston took five years to return to occupancy levels at the height of the last cycle. However, the Class B market in the suburbs has not yet reached those levels, and almost a decade later has only 95% of the occupancy at the previous peak. This differs from the downturn in 2000, when both Boston and suburban Class B markets recovered together in about seven years.

So why is the suburban Class B market still struggling? The next chart shows the same concept as the previous one, but compares occupancy levels of Class A and B product in the suburbs.

After the downturn, Class A product dipped only slightly in occupancy levels, but just a year removed from the decline had already recovered and had more occupied space than at the height of the cycle. This trend — fueled at first by lower rents and more recently by build-to-suit developments — has continued too, with no signs of stopping.

Given these points, there has clearly been a flight to quality within the suburbs. After the downturn, Class A landlords were more aggressive about leasing, resulting in lower rents and an opportunity for tenants to trade up as the gap between Class A and B rents closed. In fact, just a year after the downturn, the rent differential between Class A and B product in the suburbs had decreased by 25%. With newfound purchasing power, tenants seized the moment to move into newer spaces with better amenities. Class A space in the suburbs, especially office parks, can offer lifestyle perks such as fitness centers, retail, and restaurants; some parks even boast a hotel and apartments. These amenities have come to be expected by suburban tenants, and landlords who can provide them are in a better position to compete.

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