Absorbtion rates in Cambridge picked up as new tenants moved into properties across the city, including 125 Cambridge Park Drive, which now houses offices for Whole Foods.
The Cambridge office and lab market is showing signs of recovery as availability rates decreased for the first time in four quarters. Cambridge recorded 214,000 square feet of positive net absorption during the fourth quarter, for a total of nearly 440,000 square feet in 2004. This marked the third consecutive year of positive net absorption in Cambridge. The fourth quarter’s increases in occupancy were primarily in East Cambridge and split almost evenly between office and lab space.
A significant portion of the net absorption in Cambridge in 2004 was fueled by tenants who were new to the market. New office tenants include Whole Foods Market (33,172 square feet at 125 Cambridge Park Drive), The Chickering Group, an AETNA Company, (56,000 square feet at One Charles Park) and Management Sciences for Health (61,000 square feet at 784 Memorial Drive, the former Polaroid facility). New lab tenants include Organon (27,000 square feet at 245 First St.), Schlumberger (looking at roughly 200,000 square feet at One Hampshire St.) and Broad Institute (231,000 square feet at 7 Cambridge Center). The Broad Institute, a collaboration between the Whitehead Institute, MIT, and Harvard University, was established in Cambridge because of the academic foundation in the area which no other region in the country can offer. An estimated 600 employees of the Broad Institute will move into the new building in early 2006.
Conversely, Cambridge has seen a few of its tenants relocate to office and lab space outside of Cambridge. Two large tenants that are leaving are David L. Babson (50,000 square feet) and Carter Burgess (35,000 square feet), to Boston and Charlestown, respectively.
On the lab side, 2004 started with large blocks of new sublease space coming from the market’s major biotech and pharmaceutical companies, including Millennium Pharmaceuticals, Vertex Pharmaceuticals and Genzyme. These firms had recently moved to new facilities and were giving back older space. Much of this space remains available, including 265,000 square feet at 675 Kendall St. West for sublease from Vertex Pharmaceutical.
The trend seems to have plateaud or even reversed slightly at year-end, however. Genzyme took space, which it had been marketing for sublease, off the market and has just signed a large renewal for 200,000 square feet at One Kendall Square, space that was thought to be potentially coming back to the market. In addition, several new life science leases were signed during the fourth quarter including GenPath (55,200 square feet at 75 Sidney St.), Gene Logic (19,000 at 38 Sidney St.), and Momenta Pharmaceuticals (20,000 square feet at 675 Kendall St. West). The influx of tenants from outside the market also seems likely to continue. St. Elizabeth’s Hospital, which is currently in Brighton, is looking for approximately 100,000 square feet of lab space and has shown interest in 640 Memorial Drive.
Office and lab availability both decreased from last quarter to 22.8 percent and 23.9 percent, respectively. This represents only the second quarter on record in which lab availability exceeded office availability. At the submarket level, East Cambridge has the highest office availability at 29.2 percent, followed by Alewife at 19.6 percent. The niche Harvard Square submarket remains among the tightest in the region at only 5.6 percent office availability. With overall availability still hovering well above 20 percent, average asking rents for both lab and office space continue to slide, decreasing slightly over the past quarter and between 5 percent to 10 percent over the past year.
Cambridge is the last submarket in the region with significant commercial development in the pipeline, including the build-to-suit lab projects for the Broad Institute at 7 Cambridge Center, Smithsonian Astrophysical Observatory at 35 Acorn Park and a potential build-to-suit for Schlumberger at One Hampshire St. Lab build-to-suits have generally achieved a 10 percent to 15 percent premium to existing space in comparable tenant leases. Large lab tenants favor build-to-suits in order to have a customized building constructed to meet their specific needs. For example, the Smithsonian Astrophysical Observatory required a 40-foot ceiling in order to accommodate a large telescope.
Given the significant build-to-suit activity that has taken place in the Cambridge market over the past few years, the number of available build-to-suit options has begun to dwindle. Currently, Cambridge has only six large development sites remaining. These include an additional 225,000 square feet at Acorn Park, 435,000 square feet at 301 Binney St., 175,000 square feet at 750 Main St., 275,000 square feet at 650 Kendall St. East and several sites at NorthPoint totaling over 2 million square feet of proposed office and research space.
With its world-renowned scientific institutions and a high concentration of life-science firms that often work directly with these institutions, Cambridge will continue to benefit from influx of both private and public funding. Substantial funding from the National Institute of Health, along with new IPOs, will hopefully spur growth among these local firms. Boston and Cambridge received a total of $1.9 billion in grants from NIH in 2003, and these cities ranked No. 1 and No. 21, respectively, among grant recipients nationally. In addition, after seeing no IPO’s in Cambridge in 2003, four out of eight Massachusetts IPOs that took place in 2004 were headquartered in Cambridge. All were life-science companies. Two of these Cambridge companies signed leases in 2004, Alnylam Pharmaceuticals (44,058 square feet) and Idenix Pharmaceuticals (39,014 square feet). Viacell, which also signed a lease in 2004 at 245 First St., just announced plans for an IPO.
Cambridge remained a hot investment market in 2004. With the sales of One Brattle St. and 1414 Massachusetts Ave., both to Wells Real Estate for $703 and $538 per square foot, respectively, Cambridge continues to attract institutional investors looking for Class A facilities with solid tenancy. Both properties have long-term commitments by Harvard University and other nationally recognized high-credit tenants. Other significant transactions are close to being finalized including the 365,313-square-foot Charles Park One and Two, which is under contract, as well as the 665,000-square-foot Riverfront Office Park, which is under agreement to RREEF. Cambridge did not see a high number of sales transactions in 2004, but those that did trade saw significant interest from investors who were attracted to Cambridge’s tenant base and unique market dynamics. This shows investors have great long-term confidence in the market despite shaky leasing fundamentals over the past few years.
Overall, we expect to see gradual improvement in the Cambridge market during 2005. Lab development will likely continue, fueled by the still burgeoning life-science and health-care industries and lab tenants with specific needs. Office development, given the current level of availability and options, will remain on hold in 2005. Cambridge should continue to benefit from a flight-to-quality mentality among tenants, but overall demand will be only moderate until the area’s high tech and supporting professional services companies catch the next wave and start hiring in greater numbers.
