At first blush, the third quarter commercial real estate numbers for Cambridge aren’t that dramatic: vacancy for Class A and B office space is down to 10.5 percent, reflecting the fourth consecutive quarter of decline; lab vacancy is 12.9 percent, following the same trend. Average asking rents for Class A space are up slightly to $35 per square foot; Class B shows a similarly modest increase, up to $25 per square foot. A more significant jump in rents is for lab space, which now average $55 per square foot, up $5 in the last quarter.

While these numbers point to a market that continues to recover, the growth appears to be slow and measured. In fact, 10 percent vacancy is indicative of a market that has reached a state of equilibrium, creating a level playing field for tenants and landlords.

However, upon closer inspection, we detect a more dramatic trend: At One Memorial Drive, arguably the price leader in East Cambridge, Equity Office has raised asking rents from $36 to $43 since the early summer, nearly a 20 percent increase. Other high-quality Class A space is following suit. At the same time, tenant concessions – including free rent, short terms, and options to expand, contract and terminate prior to lease expiration – are becoming much less generous. Another discernible trend is that completed deal rental rates, which have averaged 3 to 5 percent below asking rents, are now closer to asking prices.

Changing Dynamics

What accounts for these new dynamics?

Job growth – Many biotech companies, including Novartis, as well as high-tech firms, including Akamai, Intel and Oracle, are in a growth mode. Overall, while Massachusetts is still losing more residents than it is gaining, this does not seem to affect employment in Cambridge, as the city’s rate of unemployment is approximately 2.5 percent.

Fewer options – Prime corporate real estate space continues to tighten, especially for companies with large space requirements. For life sciences space, there are now only two options for more than 50,000 square feet.

In short, there is more demand for fewer properties. Fueling the increased competition for space is more interest from Boston companies looking into relocation options in Cambridge.

During the last six months, the Cambridge market absorbed almost 500,000 square feet. In the last two years, the Cambridge office market has experienced nearly 2 million square feet of absorption, a trend we expect to continue in both the office and laboratory sectors. Overall, the Cambridge marketplace contains about 12.5 million square feet of Class A and B office space and 5.5 million square feet of lab space. For Class A and B offices, a total of 1.317 million square feet is available, 1.12 million square feet on a direct basis and 197,000 square feet on a sublease basis. For lab space, 709,000 square feet is available, 348,000 square feet of which is direct while 361,000 square feet is sublease.

Recent major transactions in Cambridge include:

• Alexandria Realty Trust: $1.1 million sale at Technology Square;

• Schering Plough: 55,000 square feet lease/expansion at 320 Bent St.;

• Endeca: 46,700 square feet lease at 101 Main St.;

• The Brattle Group: 38,000 square feet lease/expansion at 44-48 Brattle St.;

• Bioscale: 29,000-square-foot lease at 75 Sidney St.;

• Cell Exchange: 23,350-square-foot sublease at 101 Main St.;

• Akamai: 20,625-square-foot lease at 4 Cambridge Center; and

• Maven Networks: 18,012-square-foot lease at 4 Cambridge Center.

Tenants in the market with large space requirements include: Middlesex Co. Court – 150,000 square feet; ITG/McGregor – 50,000 SF; EduVentures – 45,000 square feet; Brightcove – 35,000 square feet; and SmartBargains – 30,000 square feet.

A Sense of Urgency

It appears that the Cambridge market will continue to grow and new construction will continue, as the steel has been topped off at 301 Binney St. But for the remainder of the year, we are anticipating that commercial rents for all space users will increase from 5 to 7 percent. In 2007, office and research and development rents should continue to rise, perhaps as much as 10 percent.

Looking ahead, we at CRESA Partners expect commercial space in Cambridge, especially for prime real estate, will continue to tighten below the 10 percent mark and this will signal that the pendulum has swung in favor of landlords.

So what is the takeaway for companies looking to renew or relocate? They know typical transactions take about nine months to complete. And, if they study the market, they will realize that rates will continue to rise – and concessions will continue to shrink. Accordingly, they should be proactive in considering their options and not let over-zealous landlords have their way. To help tenants advocate for best-case solutions, they should also consider partnering with a tenant-only corporate real estate advisory firm that provides value-added project management to maximize space-planning opportunities.

In any event, companies in Cambridge do face a new sense of urgency regarding their real estate plans. And in many cases, tenants will see the wisdom of locking in to what remains of favorable terms now, rather than yielding their leverage later on.