Offices are the most standardized form of commercial real estate. Office
buildings may look different from one another on the outside, but on the inside
most are built out with carpeted floors, painted drywall walls, and suspended
ceilings. Few offices drop below a rating of "average" for quality, and few rise
above "good." The 1980s boardroom look with its expensive dark paneling,
polished stone, and brass handles has given way to spaces with simple carpet
tiles and interior glass walls. It's hard for an office building to achieve
Class A status unless it has a double height lobby and more than five stories.
Most of the offices that we all use don't rise to those heights.
But for all their standardization, a lot of variety gets shoehorned into the
office category: medical offices, biotech labs, day care centers, and schools.
The data for high-rent lab space in a market like Cambridge skews measures of
average rent to the high side. This office's study of office space excludes
space of that kind to allow us to compare apples to apples and see how attributes
like location and building size affect different buildings' prices per square foot.
In a study of 149 sales of office buildings and office condominiums that took
place in 2017 and early 2018 in the Greater Boston area, we unearthed these
• an average price per square foot (total of selling prices divided by total square feet) of
• an average suburban price per square foot of $183.70
• an average Financial District and Back Bay price per square foot of $550.83
If our task were to value a Class B building in the Financial District, we
wouldn't do badly to think first of a value in the range of $475 per square
foot of building. A surprisingly high number of sales of Class B buildings
come in near that price. It can be helpful for an appraiser to have an approximate
idea of where a valuation is likely to lead. The Financial District is full of
Class B buildings. It is useful to be able to begin with a stable indicator
As it has been since offices came into being as a commercial real estate sector,
the Financial District is a world of its own. Nobody uses comparable sales of
suburban buildings to analyze downtown buildings, and no one uses sales of
downtown buildings to analyze values in the suburbs. No other sector of the
commercial real estate world has this kind of separation or this concentration of
space and value at a central location. Other sectors spread out. This one is
If we were to think of the office market the way we think of a topographic map,
with peaks where the values are high and valleys where they are low, the peak
would be at the Financial District and Boylston Street in the Back Bay. High
foothills are at Harvard Square, East Cambridge, and the South Boston Seaport.
Route 128 has foothills at Burlington, Waltham, and Wellesley. Lowell and
downtown Worcester are able to maintain a level of prices near the suburban
average, but outlying locations in Worcester County are in a broad plain of
lower value. Southeastern Massachusetts is a similar low plain of value.
Big buildings with elevators and big lobbies sell at higher prices per square
foot than do smaller buildings. This is contrary to the trend for industrials,
where larger size typically results in a lower price per square foot. Office
condominiums make up a high proportion of spaces that transfer in the suburban
market. These are usually owner-occupant spaces, and they transfer at a premium
above the prices paid for small multi-tenant buildings.
PriceWaterhouseCoopers, which surveys large investors in commercial real estate
markets, finds that Greater Boston, like Greater Los Angeles, has experienced
recent strong demand on the part of both tenants and investors, with capitalization
rates strengthening in Boston. PWC finds capitalization rates for investor
buildings in Boston's downtown office market averaging 5.03%, versus 6.98% in the
suburbs. As is typical across all commercial real estate markets, high rent,
low vacancy, and low capitalization rates go hand in hand.
In the course of 30 years, the office market has moved in two directions. Some
suburban buildings have sold in 2017-18 at prices that are not much different
from those in previous transfers in 2003-2006. Prices for many office buildings
were hammered down by steep declines in 1990, 2001, and 2009 that counteracted
their steady appreciation in better times. Meanwhile, downtown Class A buildings
sell at historically high prices. Rents may not be at historic highs.
But investor demand more than makes up the difference.