Cambridge is seeing an increase in laboratory space, including Lyme Properties’ ongoing 415,000-square-foot project at 301 Binney St.
At the midpoint of 2006, commercial real estate veteran Robert B. Richards Jr. could not be happier with the Cambridge office and laboratory markets. Or could he?
“I think we’re going to have a blockbuster second half,” the president of Richards Barry Joyce & Partners predicted last week, an outlook borne from several hefty leasing transactions said to be nearing completion and further enhanced by investor confidence in the city that resulted in record-breaking property sales during the last six months.
Alexandria Real Estate Equities is not only wrapping up its $600 million purchase of Technology Square, mega-deals already done include the $210 million purchase of One Kendall Square by the Beal Cos. and Rockwood Capital plus the preceding disposition of 300 Third St., a state-of-the-art life sciences building in East Cambridge that reaped more than $72 million. The seller in that transaction was a partnership of Beal and Cornerstone Real Estate Advisers.
“The investment commitments only help to validate the vitality of the Cambridge community,” said Richards. “And their appetite for stable product remains very strong.” A dwindling supply – especially for office space – is leading to rental rate increases, added Richards, whose firm estimates that Class A office asking rates are now 17 percent above where they were at the market’s nadir in the second quarter of 2004. There have now been four consecutive quarters of Class A rent increases, RBJ Research Director Brendan Carroll said. Asking rents have risen 23 percent at 215 First St. and One Kendall Square in the past year alone, with the latter property now pitching space at $34.22 per square foot. Twenty-Five First St. is up to $29.50, a 26 percent jump from midyear 2005.
As hot as office demand has been of late, ardor for laboratory space is even more intense, and is driving rents into the $50 range, said Richards. That fervor has spawned construction of new lab space, such as the 415,000 square feet under way at 301 Binney St. by developer Lyme Properties, a speculative project which held a topping off ceremony last week. Completion is anticipated by next summer. Existing office space is also being upgraded to attract laboratory users, although Richards said those who stand pat may ultimately benefit the most from that trend.
“It’s happy days for office landlords,” he said. “They don’t have to worry about the threat of new office construction, because everyone is doing lab now.” That should lead to office rents growing even faster, he said, and also may assist properties in the central and western reaches of the city as East Cambridge tenants seek rental relief in nearby submarkets and beyond, especially out Route 2 to Lexington, Bedford and Waltham.
The rental disparity is enough, perhaps 30 percent less, that “many companies are evaluating” whether to explore those alternatives, said Richards. In its report on the laboratory/research stock in Cambridge, Lincoln put the average asking rate for lab space in East Cambridge at $50 per square foot compared to an average of $31.28 for the city overall.
Startup firms backed by venture capital may be especially sensitive to the pricing situation, said Richards, but even life sciences companies and pharmaceutical giants that can afford the rates could be impacted by the dwindling stock of office space. As it is, Richards said, “for the first time in years, we are having multiple companies competing for space in multiple locations.” The fervor has not approached the days of zero percent vacancies and record rents that defined Cambridge just before the market cratered in 2001, but Richards said interest is encouraging when compared to the dark years that enveloped the city after the crash ensued. “We are definitely back to the more normal old days,” he said.
The Biggest Leases
Other midyear market reports support RBJ’s positive outlook. Lincoln Property Co. Director of Research Emily Schwartz is forecasting nearly 1 million square feet of positive absorption in 2006 after the figure hit 548,000 square feet for the opening six months, including more than 217,000 square feet of net office absorption and a gain of just under 300,000 square feet of positive laboratory absorption.
Among the biggest leases during the first half was Sanofi-aventis taking 73,000 square feet at 270 Albany St. ITA Software expanded to 56,000 square feet at 141 Portland St. and Merrimack Pharmaceuticals leased 32,000 square feet at One Kendall Square. RBJ principal Steven M. Purpura and Richards brokered a 64,000-square-foot lease expansion by Schering-Plough Corp. at 320 Bent St. to cap off the first half of the year. Also, Novartis leased an additional 40,000 square feet at Technology Square.
The latter complex, which features seven buildings and 1.1 million square feet, does have some office space coming available, but observers said the aggressive price tag being paid for the property and the surge of demand could prompt the new owners to convert that to a lab function as well. “It’s something they are going to have to look very hard at,” said one real estate professional familiar with the property. The owners of 640 Memorial Drive also have a large block of lab space to peddle, but the 180,000 square feet there is subleased through 2008 by Millennium Pharmaceuticals, keeping its near-term future somewhat clouded.
In the Lincoln report, Schwartz put the overall availability rate for the Cambridge office market at 18.9 percent, down from 19.7 percent at the start of the second quarter, while the overall availability rate for the lab submarket fell from 16.1 percent to 14 percent. Sublease space in the lab sector “decreased significantly” during the second quarter, from 6 percent to 4.6 percent, according to Schwartz, and East Cambridge saw that figure drop below 1 percent, with just 22,500 square feet of lab sublease available in that 3.5 million-square-foot inventory.
Meredith & Grew recorded 310,000 square feet of net absorption for Cambridge office space in the second quarter, bringing the year-to-date mark up to 560,000 square feet and dropping the vacancy rate to 13.1 percent. In the overview, M&G Chief Research Officer Mary S. Kelly showed East Cambridge as the most active of the three submarkets, the others being Harvard Square and the Alewife district. East Cambridge has seen 572,000 square feet of net positive absorption this year, said Meredith & Grew, although Harvard Square has the tightest vacancy rate at 5.4 percent.
Spaulding & Slye tracked a similar performance, although different sampling and accounting for when deals are completed created some vagaries between the various reports. Covering 15.9 million square feet, Spaulding & Slye puts the overall Cambridge office market at 9.7 percent vacancy, including Harvard Square at 4.6 percent and East Cambridge also at 9.7 percent. The 2.1 million-square-foot Alewife district has a vacancy rate of 15 percent, Spaulding & Slye indicated, even in leading the second quarter absorption activity with just under 50,000 square feet of net positive absorption. Year-to-date, East Cambridge was again the big winner in the Spaulding & Slye overview at 414,000 square feet of net positive absorption.
