Strong tenant demand and record levels of Wall Street capital recently have helped trigger record commercial real estate rates in Cambridge. Led by The Blackstone Group, which purchased Equity Office Properties, giant investors have brought a new mindset and new dynamics to major markets across the country – and Cambridge is a prime example. Those groups, flush with capital, are gobbling up trophy properties. In the process, they have consolidated much of the market and are pushing the envelope regarding office and laboratory rents.

As reported in CresaPartners’ third-quarter market review, in the last two quarters, average asking rents for Class A office space increased from $39 per square foot to $44 per square foot, the largest spike since 2000. In East Cambridge, where Class A space is now on the market for as much as $75 per square foot, asking rents for offices such as One Memorial Drive, an Equity Office building, have increased as much as 100 percent in the last 18 months. Class B asking rents range from $35 per square foot to $45 per square foot.

At the same time, vacancy for Class A and B office space has dropped to 9.2 percent, with quality blocks of space in short supply.

Job growth, meanwhile, continues to be robust in the technology and life sciences sectors, and demand will likely be strong for some time. Global giants continue to expand their presence in Cambridge, reaffirming the city’s prominence as a world-class location. Microsoft has committed to about 170,000 square feet at One Memorial Drive, and large space-users such as Google, Novartis and MIT-affiliated space-users are evaluating long-term options in East Cambridge.

In the laboratory market, asking rents have held steady at $70 per square foot (NNN) for Class A space. Lab rents should rise if the balance of 301 Binney Street, more than 275,000 square feet, is committed.

Indeed, the signposts suggest that this truly is a landlords’ market, with investors banking on big returns that come at the expense of commercial tenants. But while tenants have relinquished much of the control they have wielded in previous years, they are advised to hold their ground and not make hasty and costly decisions.

Many factors suggest that tenants can still protect their interests while the landscape begins to settle. For one, it is interesting to note that tenant improvement packages have remained attractive despite the spiraling rents, with allowances ranging from $35 per square foot to $55 per square foot for Class A and up to $25 per square foot to $35 per square foot for Class B space. While this may seem like an anomaly, it makes sense considering the fact that many landlords are willing to underwrite leases that maintain high “face rates.” In other words, the investors, enjoying good cash flow, are more concerned about valuation than operating costs, and they will allow for certain tenant concessions, given their aggressive buying-and-exiting strategy.

It remains to be seen if the market demand will remain as strong in 2008. While rent increases may subside, the trend has been a steady upward spiral, and even a sudden drop in demand may not be enough to depress prices for the foreseeable future.

While companies will continue to be drawn to the epicenter around MIT, inflated rents may start to push tenants to seek less costly alternatives in the suburbs. An example is ImmunoGen’s negotiations for lab space at 830 Winter St. in Waltham. Yet space is tightening in Waltham as well as Lexington, and rents are climbing. As a result, additional alternatives for many start-ups such as Burlington and points north will continue to attract Cambridge some tenants.

Overall, the Cambridge marketplace contains approximately 12.5 million square feet of Class A and B office space and 5.5 million square feet of lab space. A total of 1.15 million square feet is available for Class A and B office, with 596,000 square feet available for lab space.

In West Cambridge, Class A asking rents average $28 per square foot to $43 per square foot. In Harvard Square, Class A asking rents average $50 per square foot, and the vacancy is below 3 percent.

Tenant Tips

Next year, tenants can expect that landlords will try to raise rents, albeit more deliberately, and require significant security deposits or other credit enhancements. Of course, these are all points for negotiation, which begs the need for tenants to engage advisors who advocate for their best interests.

In the meantime, what is our advice to companies looking to renew or relocate? If their leases are expiring soon, they should plan to act before they incur greater risks with rising rents. With the likelihood that rent increases will lessen, tenants should also consider the wisdom of short-term leases.

As always, tenants need to put their interests first, especially now that the stakes are higher. To do so, they should ask their prospective brokers what landlords and properties they are now representing or trying to represent—and what areas of conflict exist. They should weigh the advantages of partnering with objective corporate real estate service advisors who represent them, not landlords.

Overall, tenants should avoid the pitfalls in today’s market and not allow themselves to fall prey to overzealous landlords. As the market remains hot, tenants should keep their cool.