So-called flex buildings in Boston and other Bay State communities are beginning to draw more interest from tenants. One example is 100 Apollo Drive in Chelmsford, where the General Services Administration recently leased more than 15,000 square feet.
The seed was planted in the dark of winter, and four months into 2004, a recovery in commercial real estate’s research-and-development sector does appear to have taken root, with the second straight quarter of positive absorption offering a measure of optimism among industry professionals.
“We are seeing some signs of spring in the market,” Trammell Crow Co. Senior Vice President Michael Dalton acknowledged last week. “There’s good news all around.”
Both Trammell Crow and Spaulding & Slye Colliers reported substantial progress in their first-quarter surveys for the R&D – aka flex – arena. Fueled by several major deals along Interstate 495, the 46 million-square-foot suburban flex market enjoyed 719,000 square feet of net absorption in the first quarter, according to Spaulding & Slye Colliers. Trammell Crow posted an even higher mark at 816,000 square feet.
“It’s busy,” concurred Cushman & Wakefield Associate Director Rich Ruggiero. “We’re pitching a lot of business right now.”
Indeed, C&W has just been selected by German-based Drager Medical to conduct a search for 150,000 square feet of R&D space in Greater Boston. The assignment is for a Siemens division recently acquired by Drager that is currently operating in 90,000 square feet in Danvers.
The Drager search will be concentrated from the North Shore westward to the Route 3 and 93 corridors. A built-to-suit outcome is one possibility, said Ruggiero, although he estimated there are nearly a half-dozen existing buildings that might fit Drager’s geographic and physical requirements.
Medical Impact
Drager illustrates the growing influence of the medical products field on suburban flex buildings, with Dalton citing several examples where such companies have taken over properties abandoned by the ailing high-tech industry. The $43 million acquisition of a former Lucent campus in Marlborough by Boston Scientific Corp. may have been the most dramatic example in the first quarter, but observers say the trend is spreading throughout the area.
Minuteman Park in Andover has been a leading beneficiary, with Swiss-based Straumann Holding AG entering into a 15-year, 160,000-square-foot lease agreement at 100 Minuteman Drive in February. Owner Brickstone Properties has previously lured such similar companies as Philips Medical Systems and Smith & Nephew Endoscopy to the complex. “Andover is becoming fairly well known for medical device companies,” said Dalton, partly due to the bountiful leasing opportunities available and a skilled workforce.
One deal in which Dalton participated last year was a 160,000-square-foot sublease in Chelmsford by Zoll Medical in space previously occupied by Tellabs. Although some retrofitting is typically required, R&D buildings are often a viable alternative for the medical market, said Ruggiero. “They are pretty adaptable for most uses,” he said, fulfilling the flex mantra.
Along with the medical driver, flex buildings are welcoming a resurgence of interest from traditional high-tech tenants and technology firms that are starting to secure new venture capital funding. In its 2004 R&D outlook, Spaulding & Slye noted that corporate technology spending reached a 17.6 percent annual growth rate in the second half of 2003, the highest level in five years and sharply above the 8 percent decrease seen as recently as a year ago.
“Across the board, there are a lot of good things happening,” said Dalton, who joined colleague Torin Taylor in leasing more than 15,000 square feet at 100 Apollo Drive in Chelmsford to the General Services Administration. Two major leases in Billerica in flex properties owned by Archon will help dwindle supply in that community. One of those assets on Technology Drive is being acquired by New Boston Fund upon completion of a full-building lease to a firm servicing the gift industry.
Poor fundamentals have kept flex buildings from attracting the surge of capital seen for downtown office, retail and multifamily properties, but there have been some transactions, including the first-quarter sale of 22 Alpha Road in Chelmsford to a user. Historically low interest rates and other favorable financing conditions are making it possible for tenants to buy R&D buildings, said Ruggiero, who joined Taylor in brokering the $3.9 million sale of 22 Alpha Road. Along with that 58,000-square-foot building, C&W has the similarly sized 20 Alpha Road under agreement to another user.
Working on behalf of Archon Atlantic in both dispositions, C&W is now helping the company market 19 and 21 Alpha Road for sale or lease as well. Chelmsford has been battered by the real estate crash, with Trammell Crow placing the flex availability rate there at 31.6 percent at the end of the first quarter for 2.8 million square feet of space. Even with nearly one in every three square feet available for lease, Ruggiero said he has been encouraged by the recent spate of demand from potential tenants.
“It’s not going to be a blockbuster year, but I think we are heading in the right direction,” he said, adding that vacancy rates could slip noticeably in the coming months. At the same time, Ruggiero and others cautioned that the overhang of flex supply and tepid job growth will make for a prolonged rebound, keeping rental rates depressed for the bulk of 2004.
“There’s still a lot of space out there,” said Spaulding & Slye principal Tamie Thompson.
Despite positive outcomes in six of the seven submarkets, suburban Boston flex space continues to sport an availability rate of 32.2 percent, according to Spaulding & Slye, representing 14.9 million square feet of inventory. The first-quarter net gain did complement 315,000 square feet of net absorption in the fourth quarter of 2003, but Spaulding & Slye said that had been the first time in 12 quarters that the flex market had seen positive absorption.
