The cache of Cambridge as the country’s heart of life sciences is taking on new meaning as more venture capital and jobs flow into the city. Investments in local life sciences companies more than doubled in 2006 as hundreds of new jobs were added. The boom was led by drug giant Novartis, which is moving a new manufacturing division – and another 250 jobs – near the company’s global research headquarters in Central Square.
Asking rents at year’s end for Class A lab space averaged $58 per square foot, up from $50 per square foot in the second quarter of 2006 and $55 per square foot in the third quarter.
The trend is expected to continue this year, with rates climbing 5 percent to 10 percent. In fact, landlords are attempting to be even more bullish in their negotiations with tenants, despite the fact that lab vacancy has actually risen slightly. Cambridge vacancy, which now stands at 11.6 percent, versus 10.3 percent last quarter, will rise further with Lyme Properties’ addition of 420,000 square feet at 301 Binney Street – the first speculative laboratory building in East Cambridge in almost five years – coming in the first quarter of 2007. Still, demand keeps growing, with few options available for high-quality research and development space with more than 50,000 square feet.
Lab Gains
As the lab market continues to expand, office space is declining. Today, the overall Cambridge market consists of approximately 12.5 million square feet of Class A and B office space and 5.5 million square feet of lab space, about a 65-percent-to-35-percent differential. Over the next five to seven years, however, this ratio is expected to approach one-to-one.
As we begin the first quarter of the new year, the office market remains robust, with average rents continuing a slow-but-steady rise, up to $36 per square foot for Class A and $27 per square foot for Class B, both slight increases over 2006’s third quarter. Velocity is strong for leasing as well as investments.
At One Memorial Drive, the price leader in East Cambridge, Equity Office has raised asking rents from $36 per square foot to $43 per square foot since last summer, a 20 percent increase. Other high-quality Class A space is following suit. Recently, Boston Properties purchased 435,000 square feet of office space, including 844 parking spaces, at 4 and 5 Cambridge Center in Kendall Square for $186 million.
Office rents for space users are expected to increase by 5 percent to 7 percent this year. As was the case with lab space last quarter, office vacancy actually increased slightly, to 10.5 percent. However, as research and development space expands at a faster clip, availability for offices will tighten, and this will lead to higher rents. At the same time, tenant concessions – including free rent, short terms, and options to expand, contract and terminate prior to lease expiration – will become less generous.
During the last six months, the overall Cambridge market has absorbed almost 500,000 square feet, a trend that is expected to continue in both the office and laboratory sectors. For Class A office space and Class B office space, a total of 1.31 million square feet is now available: 1.08 million square feet on a direct basis and 230,000 square feet on a sublease basis. For laboratory space, 637,000 square feet is available, 357,000 square feet of which is direct while 280,000 square feet is sublease.
Looking Ahead
Commercial space in Cambridge, especially for choice properties, will likely tighten below the 10 percent mark, which typically represents a balanced market for tenants and landlords. However, Cambridge is experiencing an interesting dynamic right now, as the city reasserts its prominence in biotech, medical devices, and high-tech. Even though the vacancy mark is over 10 percent, landlords for lab as well as office space are sensing that leverage has already shifted in their direction. This is particularly true for larger, Class A locations, which come at a premium. At the same time, in Harvard Square, no options are currently available for companies requiring more than 10,000 square feet.
With timing becoming more critical, where does this leave companies that are looking to renew their leases or relocate? They need to study the market, weigh their options and protect their interests when dealing with landlords. They should evaluate their long-term plans with the understanding that the longer they wait, the more risks they may incur as rents continue to rise. In addition, they should consider partnering with a corporate real estate advisory firm that specializes in tenant representation and project management services.
New life has been pumped into the vital industries in Cambridge, and this is good news for the entire region. But it shouldn’t be a time for companies to fold under undue pressure being exerted by overzealous landlords.
