East Cambridge, the global epicenter for life sciences, offers little room to experiment in a very tight, top-tier market for commercial laboratory space.

Barring brand-new construction, almost no vacant Class A space exists in the biotechnology mecca, according to a new study showing only 3.2 percent vacancy in the area for top-shelf lab real estate. And landlords for those spaces that are available are asking such premium prices that no small or mid-sized companies can afford them.

Additionally, with no new construction on the immediate horizon, if demand accelerates like it has in the last four quarters, the high-end lab market could be even tighter by the end of 2011, according to Brendan Carroll, senior vice president of research for Richards Barry Joyce & Partners (RBJ), authors of the report.

The RBJ report does exclude new construction delivered over the last 24 months. At 650 East Kendall St., 311,000 square feet lies completely vacant. More than 170,000 square feet at 301 Binney St., or roughly 41 percent of the total 417,000 square feet, is still available.

Including those new trophy properties, lab vacancy has increased to 17.1 percent, up from 12.9 percent at this time last year, Carroll said. Even so, the last four quarters have seen positive absorption of 230,000 square feet in East Cambridge.

“Last year at this point we had just come off a little bit of a lull,” Carroll told Banker & Tradesman. “Now we’re seeing a return to demand.”

Inferior Inventory

Still, that demand has yet to creep up to those “Class A-Plus” properties, where high rents are leaving most startups and medium-sized companies out in the cold.

But while affordable Class A space remains tough to come by, 23.4 percent of the 701,000 square feet of Class B lab space in East Cambridge is sitting vacant.

“The bifurcation of the market is challenging, because for the startup company looking for a location and a foothold in East Cambridge … there’s not a lot of great space, excluding these huge blocks that are still being marketed to the big pharma companies,” said Adam Subber, a principal at CresaPartners. He said few mid-sized companies are willing to pay up and sign a 10-year lease right now.

“What’s left is sort of in the B building category, [and] that is lab space only because someone made it lab space over the last 15 or 20 years, and the vintage of the building can be anywhere from the 1910s to the 1940s,” Subber added. “If you’re a start-up or mid-size company and not willing to pay for top-level space, you’re forced to deal with a lot of very inferior inventory.”

For landlords willing to pony up for renovations, the demand is there for outdated Class B spaces that have been mothballed, according to John Osten, senior vice president at Jones Lang LaSalle (JLL). Upgrading those properties with the necessary mix of lab components that today’s users require could pull rents in the mid-$40s, he said.

“These sub-40,000-square-foot tenants aren’t looking for the Taj Mahal – they’re looking for good science space,” like solid Class B product in serviceable condition, Osten added. “They’ll pay a premium for being in Cambridge over going to the suburbs.”

An obvious example of that is in Kendall Square, where the Beal Cos. have converted much of their 600,000 square feet of mixed-use Class B properties to lab and incubator space.

“On the lab side of things, we’ve become an attractive alternative,” to the more expensive new Class A buildings, said Robert Doherty, vice president of leasing and brokerage for Beal. “We’re able to give a new build-out a more competitive rent because our cost base is less. We’re hitting a sweet spot in that market.”

 

Slow Conversion

Doherty suggested it would be worthwhile for any property owner with lower-end Class B properties to renovate their space with upgrades to modern lab equipment since the demand seems to be there, “whether it’s pent-up demand or just more optimism.”

Another example of converted Class B space can be seen at 200 Technology Square, owned by Alexandria Real Estate Equities, which was renovated and repurposed into a lab facility and reopened in 2008, according to RBJ’s Carroll.

Essentially every parcel in East Cambridge that isn’t currently lab space has the potential to be converted to biotech uses, Carroll told Banker & Tradesman. There does remain some vision in the market for upgrading office or second generation lab space, he said – and nearly every owner of Class B lab space would consider it if the financing were there – but no conversions are presently underway, he added.

Properties in complete disrepair, along with expensive but vacant shell space, are not leasing, according to JLL’s Osten. And there are ample amounts of both. Yet steam could be building for interest in those dilapidated properties.

“In certain times over the last five to 10 years, they didn’t really seem to serve a purpose,” Carroll said. “A return to venture capital investment in early stage lab concerns has had the effect of rejuvenating interest in the Class B lab market in East Cambridge. With the way things have changed and these smaller groups seeing some funding, there’s actually a little bit of optimism surrounding the fate of these smaller, older, dated lab facilities.”n