Millennium Pharmaceuticals, based in Cambridge at 40 Landsdowne St., has contributed to the city’s credibility as a home to laboratory space.

The Cambridge office market was the big story last year as the vacancy and absorption rates fell by more than four percentage points – the biggest drop in five years – while some rents topped $35 per square foot.

“Cambridge rents are up and availability is down and the reason is very simple,” said Joseph Sciolla, managing principal of CRESA Partners, a Boston-based global real estate advisory firm that represents tenants. “It’s supply and demand. There was 1.75 million square feet of Class A office space available and now there’s only 1.26 million.”

But as Cambridge landlords reaped the benefits of a tightening market and higher rents, large blocks of office space along the Interstate 495 corridor were empty. The area from Andover to Tewksbury had a vacancy rate of 23.4 percent and a 28.2 percent availability rate at the end of the fourth quarter in 2006, the highest in Greater Boston, according to Jones Lang LaSalle, a global real estate services and money management firm with offices in Boston.

Overall, the region’s office market improved in 2006. The availability rate, the amount of lease and sublease space for rent, fell to 16.8 percent in Greater Boston, down from 18.8 percent at the close of 2005. Boston saw its availability fall to 13.7 percent last year from 14.4 percent in 2005. Availability in the suburbs dropped to 20.3 percent at the close of 2006 compared to 22.8 percent in 2005. At the same time, asking rents in the region averaged $26.89 in 2006, up from $24.16 in 2005.

A close examination of the submarkets shows that some areas did not do so well. While East Cambridge, Boston’s Back Bay and the Financial District benefited from availability rates in the 12 percent to 14 percent range in the fourth quarter of 2006, I-495 North continued to have large amounts of unoccupied space. At the close of 2006, nearly 3 million square feet of space was available, out of a total supply of 10.4 million or 28 percent, according to Jones Lang LaSalle.

“[Interstate] 495 is not going gangbusters like what’s happening in Cambridge or along [Route] 128,” said Matthew Daniels, a senior vice president at Meredith & Grew Inc., a Boston-based commercial real estate firm. “But the tighter central and north Route 128 get, the better [Interstate] 495 will do and that’s happening. It just won’t happen overnight.”

The I-495 market features large blocks of space that cannot be inexpensively subdivided, Daniels said. For example, he noted, 100 Old River Road in Andover is a 120,000-square-foot building; Andover’s Brickstone Square is comprised of three multi-storied buildings offering nearly 1 million square feet of space with large offices of 60,000 square feet.

Daniels also noted that last year’s purchase of 550 King St. in Littleton, a 490,000-square-foot office and research-and-development buildings at the intersection of I-495 and Route 119, made more space available. Prior to the sale, the formerly user-owned building was not tracked as available space. “That’s a big asset to come out of the user-owned marketplace,” Daniels said.

Still, the market could shift if three tenants rumored to be seeking a total of 1.5 million square feet of space settle on I-495 North. For example, brokers said Instrumentation Laboratory and Raytheon Co. are each seeking up to 500,000 square feet of space, and IBM could be seeking another 400,000 square feet.

“That size space meets all I-495 requirements,” said Daniels. “As tenants get forced off Route 128 because there’s a lack of good quality, competitively priced spaces of that size, they will come to the next ring and that’s Billerica, Lowell, Chelmsford and Andover where rents are about $19 [per square foot].”

The other area in which there are many available spaces is I-495/Massachusetts Turnpike, from Framingham to Worcester. Availability in the region was 22 percent in the fourth quarter of last year, the same as at the close of 2005.

Contributing to the double-digit availability was the fact that several Framingham area companies gave up space last year, including TJX Co., Oracle, CommercialWare Inc. and Iron Mountain. If Bose Corp. had not leased 180,000 square feet in Westborough, the absorption rate would have been less than 40,000 square feet last year.

‘Back to Normalcy’

Still, Philip DeSimone, senior vice present at Jones Lang LaSalle, is bullish on the region that includes Marlborough and Westborough. “We are starting to get back to normalcy,” he said. “When we get to15 percent availability that’s equilibrium – not a landlord’s market, not a tenant’s market.”

Cambridge’s good fortune has stemmed from the increased use of lab space driven by pharmaceutical companies who want offices in Cambridge. “Millennium has created a market and given it credibility and Novartis made a huge commitment,” said Daniel Sullivan, a CRESA principal. “Of course, the last new Cambridge office building was built in 1999 and there is no office or bio lab space under construction or in the pipeline, so supply is very limited.”

Millennium Pharmaceuticals Inc., the biopharmaceutical company, is based in Cambridge. In addition, Novartis Institutes for Biomedical Research Inc. has a pair of facilities at 100 Technology Square and at 250 Massachusetts Avenue totaling 750,000 square feet.

Nationally, the U.S. office market ended 2006 with a vacancy rate of 11.4 percent, down from 12 percent at the end of 2005, according to CoStar Group, the Maryland-based company that tracks office vacancies.

As space availability declined nationwide, so did absorption. Tenants absorbed more than 101 million square feet in 2006; that was down from 125 million square feet in 2005, CoStar said. Nationally, rents ended the fourth quarter at $23.33 per square foot, a 5 percent increase over rental rates at the end of 2005.
While nearly every Greater Boston market saw its vacancy rate fall, office markets in the four corners of the country ended the year with the lowest office vacancy rates in the nation. New York City had the lowest vacancy rate in the country at 5.9 percent; Long Island was close behind at 9.4 percent.