Dan Sullivan

Just half a year ago, average asking rents for Class A office space in Cambridge were rising to near record levels. In the last quarter of 2007, average Class A rates across the city were up to $47 per square foot, vacancy was under 10 percent and landlords were predicting that the tide would continue to roll in the same direction. Today, as we review Cambridge office and lab statistics in the first quarter of 2008, it looks on paper that the market continues to be very strong.

Taking a closer look, however, it appears that that the market actually hit its high watermark last quarter and is now leveling off.

Indicators include:

• Rents. For the first time in 18 months, asking rents for Class A and B office space have not increased, hovering at $47 per square foot and $38 per square foot, respectively; Class A laboratory (NNN) rates are also steady at $65 per square foot, the same as last quarter. Also, for the first time in more than one year, deals are being signed at 5 percent to 10 percent below asking rates.

• Vacancy. While the Cambridge office market continues to have some of the lowest availability rates in Greater Boston, vacancy is now 11.8 percent (above the traditional 10 percent point signaling a balanced market); lab vacancy is 13.6 percent.

• Velocity. Fewer large transactions were reported last quarter (the most significant of which were Juniper Networks for 41,000 square feet at One Rogers St., Kling Stubbins for 21,500 square feet at 1030 Massachusetts Ave., and ZipCar for 21,000 square feet at 25 First St.). Moreover, the unspoken word on the street is that velocity, or overall demand, has diminished.

Focusing on the lab market, while there’s no question that Cambridge will retain its cache as the epicenter of the life sciences industry, recent developments and trends bear watching.

‘New Opportunities’

As options for second-generation space continue to decline and rents continue to be high, some biotechnology firms are migrating to the suburbs for more favorable terms and improved quality of life. Recent examples include Altus Pharmaceuticals’ relocation to 168,000 square feet at Hobbs Brook Park in Waltham; Shire Pharmaceuticals’ relocation to 135,000 square feet to Lexington Technology Park; and Immunogen’s move to 90,000 square feet at 830 Winter St. in Waltham. Meanwhile, while Millenium remains entrenched at 40 Landsdowne St. and elsewhere in East Cambridge, the impact of its recent purchase by Takeda remains unclear.

New opportunities may come to market if more companies opt to migrate to the suburbs, but we still expect the overall commercial real estate market in Cambridge to be flat.

Also worth watching are any forthcoming deals at 301 Binney St., a 450,000-square-foot lab building owned by BioMed Realty Trust. Should all or a portion of that building be committed, asking rents will likely rise again for Class A lab space. Without any new announcements there, lab rents will probably flatten for the remainder of this year. Nonetheless, development continues with the 275,000 square feet of speculative lab space at 650 East Kendall St. by BioMed Realty.

Why is it believed that the Cambridge market has peaked? Primarily because of recession fears and economic uncertainty. This is tied to the credit crisis and the subprime mortgage meltdown. After record-setting activity by giant outside investment firms that expected fast and significant payoffs, potential buyers are finding it more difficult to borrow money needed for deals. While Cambridge hasn’t felt the pinch of this crisis as much as the financial community in Boston, the ripple effects are undeniable.

Cambridge also isn’t experiencing job layoffs that have been more prevalent in the financial community. But there’s no question that the same dynamics affecting Boston and major markets nationwide – namely, the economic downturn – are coming to roost here. In fact, Cambridge is following the scenario of many Boston suburban submarkets that plateaued over the last two quarters.

Overall, the Cambridge marketplace contains approximately 11.4 million square feet of Class A and B office space and 6.9 million square feet of lab space. A total of 1.1 million square feet is available for Class A and B office space, with 608,000 square feet available for lab space.

So what can we expect? A slowdown in activity and a halt on asking rent increases for the foreseeable future. In other words, after a long wave of brisk market activity and landlord leverage, we are now in a more tempered state of equilibrium.

What is our advice to companies looking to renew or relocate? Be patient. But also be more aggressive in negotiations with landlords, who will be more inclined to be reasonable and make concessions.

After all, the signposts are showing that the pendulum is slowly swinging in the favor of tenants once again. Whatever the statistics say, we know that stats are better at reflecting the past than predicting the future. What’s more important are real-time market dynamics. And today on the streets of Cambridge, the word, spoken or unspoken, is that the market has peaked.

DAN SULLIVAN and ADAM SUBBER are market experts in the Cambridge group at CresaPartners in Boston, New England’s largest corporate real estate advisory firm focusing on tenant representation and corporate services, including project management, lease administration and capital markets.