Vacancy rates for lab space in Cambridge fell during the second and third quarters this year, with net absorption of 58,000 square feet posted in the city, while laboratory rental rates appear to be holding their own despite new supplies of space being added to the market.
As the World Series champion Red Sox proved last week, good things come to those who wait, and that is essentially the message being delivered in bioSTATus, a twice-yearly overview of Greater Boston’s life sciences real estate market.
Compiled by Richards Barry Joyce & Partners, the latest report being released this week acknowledges the region’s lingering struggles, including a tepid reception on Wall Street for some local biotech firms which have gone public during the past year and the glut of available laboratory and research space emanating from new construction or by firms downsizing. Even so, bioSTATus offers reasons for optimism going forward, including additional evidence that Massachusetts is faring well on the worldwide stage as a center for biotech and pharmaceutical research.
“Generally speaking, it’s positive,” RBJ&P director of research Brendan Carroll said of the bioSTATus report, which covers the second and third quarters of 2004. Vacancy rates for laboratory space fell in most sectors during that timeframe, with net absorption of 58,000 square feet posted in Cambridge, while laboratory rental rates appear to be holding their own even in the face of the new supply being added. By Carroll’s estimates, 2.2 million square feet of new lab space has been developed in Greater Boston since the fourth quarter of 2001, offsetting 1 million square feet of actual leasing.
“Demand is not the problem,” explained Carroll, predicting that the lack of new space in the pipeline ultimately should reverse the recent difficulties, which saw the laboratory vacancy rate skyrocket from 7.3 percent in 2001 to 19.9 percent by early 2004. In the new bioSTATus, RBJ&P estimates there was 691,000 square feet of positive absorption in the second and third quarters in Greater Boston, bringing the area’s laboratory vacancy rate down 3 percent to 16.9 percent.
The opening of Merck & Co.’s new research laboratory in Boston’s Longwood Medical Area helped bolster the absorption numbers, with Merck increasing Boston’s laboratory market by 410,000 square feet to 2.4 million square feet. And while that and the arrival of Novartis AG earlier in the year to Cambridge have been on the radar screen for some time, Carroll said the physical presence of both firms has further bolstered the perception of the region’s life sciences universe.
According to bioSTATus, Novartis AG and Merck are helping foment additional interest in the Bay State by competitors, with Schlumberger Ltd., Genentech and Serono SA among the firms now exploring possible locations in the area. The biggest draw for all those companies, and the state’s biggest benefit, has been the concentration of qualified researchers in the area. Even so, Carroll said it is likely that firms will have to bring in talent from outside the region to fulfill their research employment needs, increasing the need for new space down the road.
City vs. Suburbs
Massachusetts also is looking good in drawing new venture capital funding for life sciences, said Carroll. During the 12 months ended June 30, Massachusetts biotech companies nearly doubled the amount of venture capital financing received compared with any previous 12 month period, with $891 million invested in the latest stretch. The average investment size for Massachusetts firms has also grown, bioSTATus reports, from about $6 million in the mid-1990s to $14.6 million for the 12 months ending June 30. The average investment nationally in that period for biotech companies was $11.5 million.
Carroll cited several reasons for the local increases, including a desire among investors to finance research conducted by large companies or to back biotech products further along in the approval process. Massachusetts firms tend to be larger and have done a better job of bringing products through advanced levels of testing than other regions, including the Silicon Valley, which remains the center for most venture capital funding of life sciences, Carroll said.
Although he warned that the region must do a better job to promote initial phase development of products, Carroll opined that venture capital’s growing aversion to risk has made them more likely to invest in advanced-stage research, a trend that would benefit Massachusetts.
On the flip side, with Wall Street typically the exit strategy favored by venture capitalists, Carroll concurred that the lukewarm response to several initial public offerings from local biotech companies would seem to curb investor enthusiasm in that regard. “Its an interesting clash,” he agreed, noting that in the last bioSTATus report, there were six Massachusetts-based biotech firms which had filed for an IPO with the Securities and Exchange Commission. All four which subsequently completed their IPOs were forced to reduce the amount of their offerings and the valuation of their companies, while one firm withdrew their IPO completely following negative lab testing results. The sixth company has been idle in its second attempt after filing its IPO six months ago, according to bioSTATus, which concluded that “these performances should serve as a cautionary note to the industry and may threaten valuation of earlier-stage efforts.”
Cambridge remains the center of life sciences activity in the region, and bioSTATus indicated that the city remains relatively strong despite such large space opportunities as 210,000 square feet at 675 West Kendall St. and 180,000 square feet available at 640 Memorial Drive. Cambridge has a laboratory vacancy rate of 20.4 percent at present, down 0.8 percent from the previous bioSTATus report.
Among the recent deals completed in Cambridge was 83,000 square feet at 75 Sidney St. subleased by Genpath and Metabolix occupying 28,000 square feet at 21 Erie St. Those deals have helped drop the vacancy rate for Class A lab space in mid Cambridge to 9 percent. On the suburban front, Lexington has been the biggest winner in 2004, with NitorMed taking 52,000 square feet at Lexington Technology Park and Hypnion taking 102,000 square feet in the park, the former headquarters of Raytheon Inc. Just up the street on Hartwell Avenue, Eyetech leased 47,000 square feet. In the report, bioSTATus maintains that the emergence of Lexington as a suburban destination for biotech companies speaks to the maturation of the industry vs. the decentralization of the workforce, with researchers employed in Cambridge during the 1990s simply aiming to move closer to where they live.
