Cambridge has long been acknowledged as a global hub for life sciences, but the attraction to Kendall Square was as evident, if not more so, in 2011 than ever before.
Big pharma/bio companies made significant lease commitments during the year as they looked to tap into one of the most talented work forces in the world.
The 8.8-million-square-foot lab market finished 2011 with a deceivingly high vacancy rate of 17 percent, up from the year-end 2010 rate of 15.1percent. Although absorption was negative 41,000 square feet for the year, 2011 ended on an upbeat note, with positive absorption in the fourth quarter of 111,000 square feet.
Much of the negative absorption was due to the demolition of several older lab buildings located along Binney Street in East Cambridge and totaling approximately 100,000 square feet. The buildings were demolished to make way for two future buildings that Alexandria Real Estate Equities will eventually construct as part of its Alexandria Center at Kendall Square project.
It is also important to note that much of the exceptional leasing activity that occurred in 2011 were transactions that will not affect absorption for 18 to 24 months when to-be-constructed buildings are completed and occupied.
Velocity (signed leases) in the lab market totaled approximately 1.4 million square feet during 2011, with all but 440,000 square feet representing at least some level of growth.
Two build-to-suit lab leases totaling 435,000 square feet were signed in 2011. Pfizer signed a lease with MIT for 184,000 square feet in a 230,000-square-foot building to be constructed at 610 Main St. on the Osborne Triangle. Boston Properties will build a 250,000-square-foot lab and office building at 75 Ames St. for The BROAD Institute, adjacent and connected to its existing 7 Cambridge Center building. In addition to these build-to-suit leases, Novartis started construction on two new lab and office buildings totaling approximately 550,000 square feet on land that it leases from MIT, also located on the Osborne Triangle, at 181 Massachusetts Ave. and 22 Windsor St.
At the close of 2011, tenants in the market represented approximately 1.2 million square feet of demand. As was the case throughout 2011, this is driven by larger users and activity from small-medium sized biotech companies remains relatively light.
Suburban Appeal
Tenants seeking and willing to pay for Class A lab space have the most options in the Cambridge market. A tenant seeking 25,000 square feet has 10 viable options (six shell, four existing lab), including one building currently under construction on a speculative basis at 150 Second Ave. Younger biotech companies looking to keep rents in the $40s psf NNN range or below have only five options (three existing lab, two shell), with most of the options having sat vacant for several years due to their poor condition.
These dynamics have forced many of the early-to mid-stage companies to consider suburban alternatives. While not at the levels experienced in the past, mainly due to the lack of activity in this segment of the market, there were a handful of younger biotech companies that relocated to the suburbs in search of lower priced options.
Larger tenants (150,000 to 300,000 square feet +) in East-Mid Cambridge able to wait up to 24 months for delivery have 10 options (4 existing lab, 1 shell, 5 build-to-suit) with six different landlords.
Headed into 2012, we expect demand from larger users to remain strong and activity from the early/mid-stage biotech sector to pick up as venture capital investing increases. Rents should hold steady, as most tenants do have options to choose from and the suburbs remain a very viable relief valve for those tenants unwilling to pay East Cambridge rents.
Tucker Hansen is senior vice president of Colliers International in Boston. E-mail: tucker.hansen@colliersmg.com
