Boston’s Commercial Real-Estate Market Hints At Looming Recession

As commercial real-estate markets in the world’s hottest urban centers wobbled following the collapse of the WeWork IPO, the city of Boston flashed a particularly alarming warning.

According to Bloomberg, as the price per square foot for office space in Boston’s trendiest neighborhoods nears levels last seen during the dot-com boom, the city’s commercial real-estate market experienced a seemingly minor hiccup with dark connotations. For the first time since the financial crisis, commercial tenants cut back on office and lab space in Boston, Cambridge, and the surrounding suburbs, according to Aaron Jodka, the lead researcher at Colliers International Group Inc.’s Boston office.

A QoQ decline in rented commercial office space across all three markets has typically only happened during recessions or the run-up to a recession.

“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 economic slowdown in the US, as economic data suggest that the divergence between the US economy and ROW might finally be running out of steam, has intensified lately, with many of the biggest banks forecasting an imminent recession over the next 12 months.

As BBG pointed out, even Boston Fed President Eric Rosengren is forecasting an imminent slowdown, anticipating GDP growth of just 1.7% during the second half of 2019 as the trade war and a slowing job market bite.

While Boston’s commercial real-estate market is still in the middle of what could be described as boom times, it’s possible that the market could be about to enter a serious glut.

For example, Boston 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.

Commercial rents in Boston’s priciest neighborhoods have already hit $100 per square foot, tied with the peaks from previous cycles.

Of course, with its bustling roads, crowded hotels and booming financial and tech industries, some might find it hard to imagine Boston as a harbinger of recession. After all, the city’s unemployment rate is below 3%, one of the lowest in the region. And if business contracts, Boston always has academia and health-care to fall back on.

But it’s a mistake to imagine that Boston is immune. And already, landlords have been battling to woo tenants with perks like fancy private employee clubs with craft beer on tap, gyms and private showers. For an idea of just how quickly things can turn around, after the last bust in 2000, Boston’s office vacancy rate jumped 13.5 percentage points. After the financial crisis, it jumped 7.7 percentage points.

In fact, Boston and the rest of the American economy could already be caught in the early stages of the downturn.

“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?”

And while companies typically wait until after a downturn has started to start cutting headcount, as one analyst pointed out, 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.”