640 Memorial Drive, Cambridge
The Cambridge office and laboratory markets have both witnessed a sluggish first half of 2003, with vacancy rates in both markets on the increase. This environment is not expected to improve in the near-term for either market, though the laboratory market will do so sooner than the office market.
While the Cambridge office market can expect a fairly long recovery period, the strength and appeal of the Cambridge laboratory market will bring it back to the sub-5 percent vacancy rates the city has historically enjoyed.
At the mid-point of the year, the 13 million-square-foot Cambridge office market continues to experience escalating vacancy, reduced activity levels and declining rental rates. Given the economic environment, activity has been, at best, spotty in 2003. Many tenants are taking longer to make decisions and consequently transaction volume has slowed.
There are some bright spots, however; Cambridge has emerged as a price alternative to Greater Boston with some of the lowest priced sublease space in the market. The tenant activity, traditionally driven by the high-tech companies that prefer an urban environment, is now more diversified and includes firms based outside of Cambridge that are looking for cost-effective office space solutions.
Overall vacancy in the Cambridge market as of mid-year 2003 is 16.9 percent compared to 12.7 percent at year end 2002. Direct vacancy accounts for 11.5 percent and sublet vacancy accounts for 5.5 percent of the mid-year vacancy.
The availability rate in Cambridge has also increased, from 16.9 percent at the end of 2002 to 24.3 percent, in the first half of the year. The 7.2 million-square-foot East Cambridge submarket currently has a vacancy rate of 18.8 percent and an availability rate of 26.9 percent. The 3.5 million-square-foot mid-Cambridge office market has a vacancy rate of 9.5 percent and an availability rate of 14 percent. And the 2.2 million-square-foot West Cambridge market has a vacancy rate of 22.5 percent and an availability rate of 32 percent. All submarkets have experienced negative net absorption in 2003.
While leasing activity has picked up in the first half of 2003, the decision-making process is taking much longer and many of the tenants considering their options have yet to make a commitment. Richards Barry Joyce is currently tracking more than 500,000 square feet of office requirements. Many of those groups are looking for 5,000 to 10,000 square feet, and their options are somewhat more limited than the “larger” requirements of 15,000 to 30,000 square feet, who have a multitude of choices.
In this type of market, all tenants are demanding aggressive rental rates and significant concession packages, such as free rent, phased-in occupancies, large tenant improvement allowances, and assumption of lease obligations in other buildings. As a result, tenants with lease expirations in 2003 and 2004 are out early looking to trade up to better quality, more efficient space.
The prime Class A buildings continue to be the most active and the owners of those buildings have been forced to compete with the aggressively priced subleases. Many potential sublessors, such as CSG Systems, Sapient, ATG, ZDNet, have recently aggressively lowered their asking rents. As a result, asking rents range widely from $9 per square foot to the upper $20s per square foot depending on the strength of sublessor, quality of the building, and the length of available term.
The Cambridge office market is continuing to correct and can expect a long recovery period due to the vast availability of space and shallow demand. Cambridge will continue to struggle with high vacancy and limited velocity for the second half of 2003. The expected absorption of the sublease space in Cambridge would be an encouraging sign as it would help stabilize the overall vacancy rate and rental rates by the end of 2004.
Cambridge has long been considered the premier laboratory market in Massachusetts due to the presence of MIT and Harvard University. Biotechnology companies have traditionally been drawn to Cambridge because of its reputation as a research and discovery hub. Companies cite the urban environment, accessibility to former MIT and Harvard professors, and the established clusters of biotechnology companies with their desire to locate in Cambridge.
The commercial laboratory market in Cambridge is comprised of 4.9 million square feet of existing laboratory buildings. An additional 1.2 million square feet is currently being constructed or converted to laboratory space. The overall vacancy rate for existing laboratory space is currently 12.9 percent. Direct vacancy is 8.8 percent and sublet vacancy is 3.6 percent. The vacancy rate for laboratory space in Cambridge has increased significantly in the past six months.
Vacancy has increased due to a pickup in the sublease market as well as the completion of some new laboratory projects. Rents for prime, direct laboratory space currently range in the $40s, triple net, with $80 to $100 per-square-foot tenant improvement allowances. Sublease space commands much less due to the increased inventory ranging in the upper $20s to mid-$40s per-square-foot, triple net, on an as-is basis.
The current increase in vacancy can be directly linked to the health and condition of the economy and the capital markets. Many biotechnology firms have struggled in the past few quarters and have begun to sublease existing space.
The demand side of the Cambridge laboratory market has improved in the first six months of 2003, because many new firms received an influx of venture funding in the past few months. Richards Barry Joyce & Partners is currently tracking more than 400,000 square feet of new laboratory demand.
There have been very few transactions recently, but this will hopefully change as the companies currently evaluating their options commit to buildings. We expect in the short-term that the downward pressure on the laboratory rental rates will continue and additional opportunities, both direct and sublet, will become available.
In the long-term the Cambridge laboratory market will return to its historical vacancy level of less than 5 percent. The Cambridge market has proven to be one of the premier laboratory markets in the country and appeals to both fledgling firms as well as established biotechnology giants.
The success of this market will continue to be driven by the consistent emergence of innovative science evolving from the major universities and medical research facilities in the Cambridge market.
