Class B > Class A
by Aaron Jodka | Feruary 2017
Boston’s office market has historically been driven by its Class A inventory. As rents in that segment of the market rise, the Class B market rents will usually follow. Not this time around. While both segments of the market have risen in this cycle, it’s been the B market that has led the way. As the chart below shows, the B market has posted gains approaching 50% from 2011 lows, while the A market has lagged behind.
In fact, after the finance-induced Great Recession took hold, the Class B market has either posted less severe rent losses or stronger rent gains in nearly every year. Class A rents are just 31% higher than B market rents. Going back to the late 1980s, that premium has averaged closer to 53%. In 2008, the Class A market had a nearly 72% premium over the Class B market, but we are currently seeing examples of brick and beam buildings in the Seaport asking higher rents than the low-rise portion of downtown towers. That is a brand new phenomenon.
Class A rents rose 3.5% in 2016, well below the 11% gains of the B market. With elevated tower vacancies, it will be difficult to continually push rents on Class A product. We expect 2017 to be a better year for absorption, but rent growth will be harder to come by than in years past.