Industry observers estimate as much as 350,000 square feet of space may be available at Watertown’s Arsenal on the Charles business park, which is owned by Harvard University.

Harvard Yard is apparently getting closer to Watertown every day.

More than a year after acquiring the sprawling Arsenal on the Charles business park in Watertown, Harvard University is leaning toward moving more of its operations to the 30-acre property. School officials acknowledged last week that they have suspended efforts to lease excess space at the Arsenal while they weigh the relocation of certain divisions from Cambridge to the Watertown complex.

“We have decided not to respond to certain [leasing offers] pending resolution of some university needs,” Harvard real estate official Edward Reiss told Banker & Tradesman last week. “There’s a lot of uncertainty right now, and we’re trying not to pre-empt our ability to use the space if it is in our interest.”

The decision represents a shift from the school’s earlier intentions to lease vacant space to private businesses, a program that was being conducted by the Beal Cos., which also serves as property manager of the Arsenal. Beal principal Robert Beal refused to conclude, however, that Harvard has made its mind up entirely to permanently take the space off the market.

“There has been no commitment one way or the other,” Beal said. “We are doing an internal review and that is all that is happening at this point.”

Neither Beal nor Reiss could estimate just how much space is available for lease at the Arsenal, but Reiss said industry estimates of up to 350,000 square feet “would not be unreasonable.” The park has just over 700,000 square feet of office and retail space, most of which was leased and then given back by either struggling high-tech companies or by Arthur D. Little, a Cambridge consulting firm that took nearly half the park before deciding to forego a move to the site. The company has since filed for bankruptcy protection, effectively killing its Arsenal lease.

Of Harvard operations, the Harvard Business School Publishing has the greatest amount of space leased at the park, having signed on as one of the Arsenal’s initial tenants when it was still owned by O’Neill Properties of Philadelphia. At the time, HBS Publishing took 112,000 square feet, but it is unclear whether the group has taken more space since that time.

According to sources following the situation, Harvard University has attempted to encourage various other divisions to consider a move to Watertown, but those efforts have largely been without success, as most groups appear more interested in remaining in or near Cambridge. “They are having a difficult time luring [staff] away from Harvard Square,” said one source. “People consider that ground zero and are not interested in moving to Allston or Watertown.”

The source, who added that Harvard has also considered relocating some of its museums to the Arsenal, said it is unclear how much sway the school leadership holds in forcing divisions to the Watertown property. One possibility, according to the source, is for Harvard to use portions of the Arsenal as so-called “swing space” and temporarily locate entities there while facilities in Cambridge are renovated or new ones are constructed.

But while the Beal Cos. could be in danger of losing the leasing business at the Arsenal, both Beal and Reiss dismissed industry rumors that the property management contract is also in jeopardy. Although some speculate that Harvard would manage the property in-house if the Arsenal becomes dominated or fully occupied by the school, Beal said there is nothing to suggest such a scenario is in the works. “We’re still handling the account, absolutely,” he said, a notion backed up by Reiss.

“I know of no plan to change managers,” Reiss stressed. “They are doing a very good job for us.”

PILOT on Course

Physically, there appears to be no dilution of the Beal Cos. presence, with a leasing banner sporting its name draped prominently over one side of an Arsenal building last week, and colorful Beal Cos. flags adorning the sidewalk in front of the complex. The Beal Cos. has had a longstanding relationship with Harvard University, including one controversial program in which it served as a straw to acquire multiple properties in Allston on the school’s behalf during the early 1990s. In any event, most industry observers spoken with concurred that any change Harvard makes will be more driven by its own internal considerations rather than being a reflection on the Beal Cos.’ performance.

Another issue at hand is what impact, if any, Harvard’s leasing of additional space at the Arsenal would have on a special payment program it is currently negotiating with Watertown. The so-called payment-in-lieu-of-taxes, or PILOT, agreement has been in the works ever since Harvard paid $162 million last year to purchase the complex. Although some maintain Harvard will ensure long-term stability at the Arsenal, town officials fear that the school’s tax-exempt basis could prevent Watertown from reaping the benefits of the Arsenal’s reconstruction. The former U.S. Army facility was turned back to Watertown in the mid-1990s, with the community eagerly anticipating the additional tax revenues it would generate upon being sold to O’Neill. The property represents about one-third of the community’s tax base.

Watertown Town Manager Michael Driscoll was on vacation last week and unavailable for comment, while Reiss said he is unsure of the status of the PILOT negotiations. Attorney John Lynch, who is overseeing the talks on behalf of Watertown, said last week that the discussion is likely to begin in earnest again this month. Lynch would not comment on how Harvard’s increased presence at the Arsenal would impact PILOT, but said he believes both sides are working in good faith toward a resolution.

“There are some open issues remaining, but there has been a lot of cooperation on both sides to get this done,” Lynch said. “I do think it’s going to have a happy ending; we’re just not quite there yet.”

Harvard Unwilling to Book Outside Tenants at Arsenal

by Banker & Tradesman time to read: 4 min