After a year of relatively flat numbers in Cambridge office rents and vacancy rates, we are seeing small ripples of change, according to CRESA Partners’ First Quarter 2005 Market Review. As sublease space disappears, rents will stabilize and may even start to rise, at least slightly.
In June 2003, there were 900,000 square feet of sublease office space available in Cambridge. Today, that total is 350,000 square feet, of which 150,000 square feet has 18 months or less remaining on lease contracts. IBM and CSG Software are among the companies with lease terms expiring during the next 14 months.
While sublease availability varies in Cambridge submarkets, no sublease space is available in West Cambridge.
Perhaps even more startling is the fact that so little “plug-and-play” space remains in the Cambridge market. Companies are finding fewer existing options that don’t require expensive build-out costs, and most of those options are for less than 5,000 square feet.
Meanwhile, as office sublease inventory continues to be absorbed, landlords in some prime locations are beginning to increase their asking rents (which are usually 5 percent to 7 percent off contractual rates) for direct space, particularly for Class A offices. Examples include One Memorial Drive (an Equity building), One Main and 101 Main St. (both of which were recently acquired by RREEF), and 55 Cambridge Parkway (owned by Cabot, Cabot & Forbes).
CRESA Partners reports that Class A office space in Cambridge now averages $31 gross per square foot, up $1 over last quarter, or 3.2 percent. Class B is unchanged at $22 gross per square foot. Lab space now averages $45 triple net, down $1 from Q4 2004, or 2.2%.
Vacancy for Class A and B office space in Cambridge is 17.9 percent, down one percentage point. Lab vacancy is 20.8 percent, steady from last quarter, with 630,000 square feet of sublease space available (compared with 720,000 square feet of direct lab space). Demand for lab space continues to be lower than in 2004.
Construction Costs Climb
Along with the recent rise in Class A asking rental rates, an equally significant trend is the rising cost of tenant improvements. In fact, tenants who have been building out space in recent months have faced a marked increase in construction costs. While this isn’t unique to Cambridge, we’re seeing expenses that average 25 percent to 30 percent compared to one year ago, and this has necessitated greater tenant improvement allowances. To deal with this issue, some tenants have either had to pare back construction plans or look into extending their lease terms as a way to free up additional dollars.
In the biotech community, tenant improvement allowances for research & development space continue to be much higher than for Class A and B offices, ranging from $50 to $100 per square foot.
Overall, there has been very little positive absorption in Cambridge during the last 12 months, with three of the largest transactions being build-to-suits. However, we are seeing more velocity for office deals in the 5,000 to 15,000 square foot range, particularly among professional services and software companies. There has been slow and deliberate growth in these sectors, and that bodes well for a healthy real estate recovery. But at this clip, it will take much longer for significant space to be absorbed.
Few transactions over 75,000 square feet are expected this year in Cambridge, since the typical tenant tends to be smaller than in Boston, and significant biotech deals are infrequent.
In the life sciences arena, we don’t anticipate any major changes. We experienced a couple a significant biotech transactions last year, but activity is necessarily limited because there are a finite number of players, very few of which have products on the market. Also, while the stem-cell research issue continues to grab headlines, we don’t expect that to have much of a local impact.
Tenant’s Market Continues
While the window of opportunity may be closing, in this still-soft market, proactive tenants can lock into very favorable deals. If they exercise due diligence and study the market, tenants can apply their leverage with landlords at the negotiating table. With the proper advising, tenants will be in a position to secure free rent, short-term deals, and options to expand, contract and terminate prior to lease expiration.
Some tenants in Cambridge are looking at early lease renewals, some are looking to relocate, but few are looking to migrate out of the area because of cost factors. In most instances, Cambridge tenants realize that they still have the upper hand in dealing with their landlords.
Looking ahead we are, without a doubt, coming out of the doldrums and we remain optimistic about the Cambridge market. The city’s leadership in the academic and medical research community is firm. Harvard and MIT are virtually recession-proof. Outsourcing isn’t a major factor affecting the city’s knowledge-based workforce. Biotech will inevitably continue to play a key role. In short, there is still a cachet about living and working here.
Yes, the market is recovering. Just don’t look for the kind of dramatic change we last experienced in 1999-2000. Those days are over.
