Life sciences company Arkopharma LLC’s recently completed lease of more than 33,000 square feet at 200 Research Drive in Wilmington was a positive note for a Massachusetts flex market that struggled at times in 2005.
Commercial real estate’s flex market seems a bit twisted entering 2006.
Incongruous data disputes whether the struggling product type, also known as research-and-development space, had positive absorption in Massachusetts last year for the first time this millennium, but even the most optimistic assessment revealed that any rebound was muted by a late swoon in leasing activity. Real estate services firm Spaulding & Slye registered the dive at minus-200,000 square feet of negative absorption during the fourth quarter, while counterpart Richards Barry Joyce & Partners put absorption negative by 408,000 square feet for 2005 as a whole, citing difficult conditions in fringe commercial locations to the north and west of Boston.
“It’s challenged,” RBJ Research Director Brendan Carroll said in describing the current climate for flex buildings, a category he delineates as being 10 percent to 30 percent office space and the remaining designed for manufacturing, light assembly and/or production operations. In a report to be issued this week, Carroll will unveil an intriguing pattern for flex properties showing that the metropolitan Boston region had a ratio of 3.1 to 1 of office buildings to flex structures in 1990, making the latter essentially 25 percent of the supply. Fifteen years later, that ratio is 11.5 to 1 of office buildings to flex, according to Carroll’s research. Route 128 has been especially fallow in developing flex properties in recent years, he added, owing to the “highest-and-best use” mantra that only appears to be strengthening on the inner belt.
According to Spaulding & Slye, for example, another 1.7 million square feet of flex space was removed in 2005 for alternative real estate ventures ranging from retail and entertainment to hotels and multifamily construction. Virtually no new flex space has been added locally in recent years, and Carroll said he believes New England’s shift away from a manufacturing-based economy makes in unlikely flex development will ever recover to any significant degree, and certainly not to the levels seen in the 1970s and 1980s when most of the Massachusetts stock was erected.
“The production of goods is not a natural fit with our core competencies,” said Carroll, maintaining the tepid demand for flex properties is a harbinger of the future as other parts of the country vie for manufacturing jobs once concentrated in the Bay State. While the area will have a difficult time doing battle with more aggressive, cost-competitive markets, Carroll stressed there has been some successes in attracting medical devices firms and life sciences companies into Massachusetts flex facilities, reflective of the state’s growing dependence on “intellectual capital” to consume space.
‘Relatively Stable’
Mimicking trends in the office market, existing flex buildings closer into Boston had the best performance in 2005, according to Carroll, whose firm tracks 14.4 million square feet of flex inventory along Route 128 and 15.7 million square feet throughout the Interstate 495 submarkets. Another 1.5 million square feet is situated in other areas including Boston proper. There were a few positive flex deals recorded in 2005, Carroll acknowledged, including a 50,000-square-foot commitment by Armstrong Pharmaceuticals at 10 Dan Road in Canton and Hyaluron’s lease for 15,000 square feet in Burlington.
In another such transaction just completed, Arkopharma LLC has leased more than 33,000 square feet at 200 Research Drive in Wilmington, a single-story flex building located within the Wilmington Technology Park. The 151,000-square-foot property is owned by Wakefield Investments, which was represented in the lease negotiations by Mark Mulvey of Trammell Crow Co. The tenant, a life sciences company focused on “natural medicines,” was represented by Meredith & Grew Senior Vice President David J. Pergola and Assistant Vice Presidents Matthew S. Adams and Elias T. Demakes. Neither side would disclose lease terms such as length or rental rate.
While such activity has been encouraging, the flex market nonetheless stumbled into the new year, said Carroll, indicating that landlords “took it on the chin” in the final two quarters of 2005 and predicting a slow beginning to the new year.
Spaulding & Slye also showed the latter stages of the year to be the harshest for the flex sector, with five of seven suburban submarkets in the red during the fourth quarter, led by negative absorption of 155,000 square feet in the I-495 North block. The Northwest submarket also had a difficult end at negative 148,000 square feet of absorption in the fourth quarter and I-495 West was set back by the departure of injection mold company Vaupell Inc. from 60,000 square feet in Marlborough.
The slide in 2005 was reminiscent of the previous year in which a poor ending put the flex market’s availability rate at a record high of 32.8 percent. Even with the recent troubles, Spaulding & Slye gave the flex market positive absorption for the entire year, reporting a gain of 1.08 million square feet, nearly half of which – 481,000 square feet – was in the I-495/Massachusetts Turnpike corridor. As a result, Spaulding & Slye research director Benjamin Breslau reported that availability in the suburbs dropped to 26.7 percent, while direct vacancy is now at 22.1 percent. Availability has remained alarmingly high at 31.1 percent in the Northwest, however, disconcerting given that it is among the largest submarkets for flex space, accounting for 9.3 million square feet of the 43 million square feet in Spaulding & Slye’s sampling.
Spaulding & Slye officials described the flex pricing situation in 2005 as “relatively stable” given that rental rates had plummeted steadily for the past several years. But while the backsliding of pricing has apparently ceased in the wake of an improving economy, average rental rates have not recovered back above double figures from the flex market’s last boom in 2000, with Spaulding & Slye putting the current suburban mark at $9.39 per square foot. The Route 128/Massachusetts Turnpike submarket easily outshined all others at an average of $15.34 per square foot, well above the second place rate of $9.85 per square foot recorded in the South submarket. Only I-495 North at $8.06 per square foot averaged below $9 per square foot, according to Spaulding & Slye.
