Cambridge’s life sciences market appears poised to rebound long before the rest of the region’s commercial real estate market, thanks to tight constraints on space, healthy demand from small users, and a bit of fortuitous timing.
The submarket’s relative strength has flown under the radar, in part because of an absence of mega-deals.
“The activity is still more of the slow and steady variety,” said Peter Bekarian, a senior vice president at Jones Lang LaSalle. Bekarian said the city’s lab space has been buoyed by a number of small- to mid-sized deals. “Cambridge’s bread and butter continues to be the 10,000-square-foot tenant,” he said.
“In relative terms, it’s in fairly good shape,” added Gregory Lucas, a principal at CB Richard Ellis New England. “There is activity.”
Availability in Cambridge lab space ticked up to 16.6 percent in the third quarter, according to data from FHO Partners. FHO’s managing partner, Joe Fallon, said, “Long term, East Cambridge and Kendall Square will continue to be great opportunities for landlords.” He said a diversity of companies in the marketplace, as well as a balance of lab space to office space, have helped the market’s vacancy statistics as a whole, since tech firms have not shed jobs at the same pace that service-oriented firms across the Charles River have.
Lucas said second-generation space like MIT’s portfolio and the Beal Co.’s 1 Kendall Square have benefited from the small-scale demand dominating the market. “They don’t want 10-year leases,” he said. “They’d rather take existing space, do short leases, not do a lot of TI. They’re really the lifeboat for the Cambridge market.”
“The underlying fundamentals continue to be pretty good, in general,” Bekarian argued. “You don’t see that [strength] in other submarkets, and it translates into asking rents.”
Healthy Market
Nancy Kelley, a veteran real estate executive now with Murphy McManus, said Cambridge’s life sciences market has fared better than the rest of the commercial market because it’s anchored by established giants like Biogen, Genzyme and Novartis. Those companies, in turn, sustain the plethora of small space users that have been transacting this year.
One of the Cambridge market’s saving graces was a deal that didn’t take place: Vertex pharmaceuticals backed out of a move to Boston’s Fan Pier and wound up absorbing huge chunks of sublease space that would have otherwise weakened the market.
Kelley also pointed out that while Cambridge’s lab vacancy rate “sounds high,” the small- to mid-sized companies currently in the market have few realistic options for space. “Half the available space is obsolete,” she said. Much of it is concentrated in a pair of MIT properties, at the Osborne Triangle and 640 Memorial Dr. Both are slated for future redevelopment. As a result, Kelley said, “There’s very little available space.”
What’s more, two new speculative developments account for another 40 percent of the submarket’s total lab vacancy. Those buildings are the 420,000 square foot 301 Binney St. and the 280,000 square foot 650 East Kendall St. Both belong to Biomed Realty Trust.
301 Binney has stood nearly empty since it opened last year. Its first tenant, Ironwood Pharmaceuticals, will soon be joined by the Broad Institute. Nearly 220,000 square feet remain to be filled. Biomed is carrying a $201 million construction loan from Anglo Irish Bank on the property.
Construction on 650 East Kendall began just as the market was cresting. Work is now wrapping up on the still-vacant building. Wachovia provided the project’s $245 million construction loan.
The two new buildings have put Biomed in an interesting position. On one hand, the San Diego-based REIT is in the position of hawking large chunks of new, expensive space to a market with no apparent demand for large chunks of new, expensive space.
“I don’t see someone today who can step up and take 200,000-plus square feet,” Lucas said, adding, “That doesn’t mean they’re not out there.” At the depths of the last downturn, Novartis swooped in with a huge space requirement. “It only takes one,” Lucas said.
That’s why Biomed’s position, while far from ideal, also isn’t dire. “If and when the big users in the market look for Class A space, their options will be limited,” Bekarian said. Ironwood is expected to eventually take more space at 301 Binney, making the REIT’s lease-up task slightly less taxing. And the international pharmaceutical firm Sanofi-Aventis is said to be snooping around Cambridge in search of 200,000 square feet. Meanwhile, Biomed’s other Cambridge holdings boast solid occupancy figures. Across the river, its Center for Life Science Boston was filled at sky-high lease rates.
Brokers also credit the two Biomed projects for helping keep rents across the submarket from sliding steeply. “Asking rents are averaging in the mid-$50s,” Bekarian said. “Suburban markets are all in the $20s. That speaks to the overall health of the market in Cambridge. It bodes well for a recovery. Whenever we see a recovery in the economy, we won’t have a deep hole to crawl out of. Cambridge is better positioned.”
In fact, Kelley predicted, supply constraints in the market make new development a virtual certainty. “As the capital markets thaw a bit, you will definitely see more development.”
