Boston Office Towers Hint at Risk of Looming U.S. Recession

(Bloomberg) --

There’s no clearer sign of Boston’s flourishing economy than the office towers expanding its skyline. But along with the flashy amenities inside like free beer and game rooms, the latest trend is caution.

For the first time since Great Recession of 2009, tenants in the third quarter cut back on office and lab space in Boston, Cambridge and the suburbs, said Aaron Jodka, who leads the research team at Colliers International Group Inc.’s Boston office. A quarter-over-quarter reduction in occupied space in all three markets has only happened during recessions or in the early stages of a recovery, he said.

“I don’t think a decline in any of the markets individually would be surprising -- the surprise was all three together,” Jodka said. “It’s a potential red flag for the top of the real estate market in Boston. “

Talk of a coming U.S. economic slowdown -- from the Boston Fed chairman’s projection on Friday of U.S. gross domestic product growth of only 1.7% in the second half to the trade war to slowing job growth -- may be taking the edge off Boston’s office boom, Jodka said. The city has 7 million square feet of office construction in the pipeline from 2021 to 2023, the most for a three-year period since the late 1980s, he said. Rents in the priciest markets have hit $100 per square foot, which in previous cycles was as high as it got.

It’s strange to even think about a recession in a city like Boston, where roads are crowded, hotels are packed and the unemployment rate is below 3%. After all, if business softens, the area’s universities and hospitals will cushion the blow. Still, it’s a mistake to assume Boston is immune, Jodka said.

To fill vacancies, office landlords have been chasing startups with tech company-like amenities. At Boston’s 100 Summer Street in the financial district, for example, a private club for employees of companies in the building offers free craft beers, a gym with private showers, arcade games and baristas who finish off cappuccinos with foam artwork.

After the last tech bust, in 2000, Boston’s office vacancy rate jumped 13.5 percentage points. After the 2008 financial crisis, it increased by 7.7 percentage points, Jodka said.

“Recessions have a tendency to be identified after the fact,” Jodka said. “Could it be that we will look back on this quarter as the start of a larger slowdown, or recession?”

The U.S. office market’s strength in this cycle has been bolstered by the technology sector, which -- if it stumbles -- would ripple across markets from Boston and New York to Los Angeles and San Francisco. The implosion of WeWork, the largest U.S. coworking firm, already threatens to temper office growth in key markets.

Boston remains one of America’s strongest office markets, and Colliers’ data could be a blip, Bloomberg Intelligence analyst Jeffrey Langbaum said. And so far, the biggest problem for office markets in cities such as New York is not demand -- it’s too much supply, he said.

Historically, companies have reduced office space after a slowdown was obvious, not when it was a hypothetical, Langbaum said. But these are not normal times.

“The environment is filled with so many unique circumstances, from trade wars to impeachment,” Langbaum said. “That might make this time different.”

--With assistance from Andres R. Martinez.

To contact the reporter on this story: Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editors responsible for this story: Rob Urban at robprag@bloomberg.net, Steve Dickson

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