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NAI Hunneman’s Greg Larsen on the Dwindling Supply of Lab Space in Boston-Cambridge

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Life sciences companies looking for office and laboratory space in Boston and Cambridge, Mass., have seen the market tighten in recent months, judging from sharp increases in the asking rents sought by property owners and a steady drop in the supply of available space.
 
That consensus view of the region’s commercial real estate market was borne out by studies issued by several brokerages at the end of the first quarter. Richards Barry Joyce & Partners, for example, recorded in its quarterly “bioSTATus” report a drop of 5 percentage points in a single year for the Cambridge lab vacancy rate – down to 9.6 percent during the first three months of 2007. In its quarterly “Tenants Guide” report, CresaPartners noted that rents have risen over the past six months to an average of $47 per square foot for top-dollar “class A” space.
 
And in its quarterly “Eastern Massachusetts Life Sciences Report,” NAI Hunneman recorded even higher average asking rents for new lab space – within the $60 range, “triple net,” meaning tenants pay utility and tax costs.
 
NAI Hunneman found that the vacancy rate for lab space in Cambridge dropped 2.6 percentage points year-to-year, to 10.6 percent at the end of the first quarter. Lab space accounts for 42 percent, or 7.3 million square feet, of the total 17.5 million square feet of inventory in Cambridge as of the first quarter of 2007.
 
In Boston, according to NAI Hunneman, the supply of non-institutional leased lab space now stands at almost 2 million square feet compared with 1.8 million last year, with the vacancy rate plunging from 6.6 percent to 3.6 percent.
 
BioRegion News this week spoke with Greg Larsen, senior vice president with NAI Hunneman Commercial and director of its quarterly Life Sciences Report about the most recent study and the prospects for life sciences companies in Boston-Cambridge.
 
Were the vacancy decreases reported for Cambridge and Boston skewed by a specific deal or two? Or do they reflect overall activity?
 
Overall activity. The inventory is growing at the same time that it’s getting absorbed. There were a few [new properties] that were added in. And there are more [properties] probably coming, because Alexandria and BioMed [Realty Trust] have been in this duel to absorb as much of Cambridge as they can.
 
There has been a little bit of different strategy shown by both of them. BioMed has bought a big existing portfolio over time – the Center for Life Sciences and all the other properties they bought from Lyme Properties. . .They have done one other transaction with a group in the western part of Cambridge last year. Alexandria, more because of the market being really spiking, is on a tear, and they’re not through yet. At some point, they’re going to run out of lab properties to buy or conversion candidates. But they haven’t run out of them yet, so stay tuned.
 
With Alexandria and BioMed, both [real estate investment trusts] competing in the market, have prices begun to tick up as well as vacancies going down?
 
Very definitely. And it’s hard to say whether they’re leading them up or following the market. The market is plainly getting tighter.. .. So is Blackstone [which recently acquired the former Equity Office Partners portfolio], and Blackstone is being very aggressive as well in asking prices and pushing things up. Usually the increments go up, say two, three, five dollars a foot in an escalating market. But we’ve seen and heard about some ten-dollar or more price jumps of asking rent just from Blackstone. People are trying to leap ahead. The lab market had dipped down in the early part of the decade to where you had existing spaces, even in Cambridge — the better ones got down to around $30 a [square] foot, and the new shell deals for space built from scratch got down to somewhere in the $40s, both triple net. And both of those had gone a good $10 to $15 from where they had been.
 
[Rents] got right back up last year, and now they’re up another level. I’m starting to hear people asking 60-something [dollars per square foot] instead of even 50s, where there was a jump last year into the 50s. Now there’s a jump to at least asking in the [$]60s [per square foot, triple net].
 
That is for what type of lab space?
 
New first class, lab-capable shell space, in-town Boston and Cambridge. For existing space, average asking rents have risen from the $30s to asking in the $40s [per square foot, triple net]. But there are a number of real deals on record in the 50s. And I still think a classic new lab space deal in Cambridge is sort of in the low 50s in the first five years, high 50s in the second five years, over the past year or so, as back when things were good in the late 1990s, and before the dip.
It probably will go up even further because things will tighten up. And at some point, Alexandria will get through converting Technology Square, the former Polaroid complex where Novartis and others came in. Building 200, which is 177,101 square feet, is getting redeveloped and is already partly committed, via letter of intent, I’m not sure to whom yet. BioMed will get through building and converting. They’re finishing out 301 Binney Street.
 
[Both REITs] are buying up most of the lab space in East Cambridge, it seems like. And it will get even tighter. We’ll start to think of $60s as a usual deal. I think that’s coming.
 
Coming this year? More like next year?
 
Good question. It’s a little hard to know. Not necessarily right away. It only would take a couple of big [deals] to tighten it that much.
 
Why hasn’t the inventory of space yet risen in the market?
 
Because it takes a while to do the projects.
 
How does NAI Hunneman calculate market inventory?
 
We calculate existing lab space when it’s completed. Some people include buildings when they are six months or a year from completion. Some include proposed sites. We have a narrow definition of existing lab when it is delivered. We usually go far enough so that if there’s a wing of a building that is lab, and a wing that isn’t, we just piece out the part that’s the lab until it’s made sort a biotech or life sciences building. Say if the suite has 50-50 office-lab split, we call the whole suite part of our lab inventory. And even given all of that, the number is climbing in Cambridge. The town is turning very much into a lab area, East Cambridge particularly.
 
One of the real questions for the future is, how many options are office tenants going to have in East Cambridge in the future? They will be pretty limited. There are towers that are never going to be lab, and they may become office spaces for the lab companies that need more office space.
 
What do you see on the rent front for straight office space as a result?
 
That’s jumping too. Even just a year ago, it was probably in the mid-$30s [per square foot] for the best stuff. Now I’m regularly hearing $45 to $50 [per square foot] quotes. I’ve been hearing rumors of a $60 gross quote from Blackstone and they’re trying to do deals in the 50s. It depends on build-out. They’re really trying to lead the market. There is going to be such a constrained office supply with all these lab conversions going on that it fuels it [rising rents] even more.
 
In the Longwood Medical area, you can’t get a more constrained sub-market than that. It’s just surrounded by institutions, all of which are growing. There’s very little third-party leased office, because most space is institutionally owned.
 
Has that condition compelled anybody to at least start looking to build new? Or will owners wait for rents to go up even more?
 
In that area it’s hard to get a site because institutions are always planning more in additional space.
 
Is it fair to say the squeeze in the market may reflect the fact that more tenants may be giant pharmaceutical companies or biotech giants as opposed to smaller companies?
 
Yes, because they’re pushing into the most prime spots in East Cambridge. It’s the more mature, second- and third-stage companies, not the brand-new ones usually — although some of the brand new ones might want to beat their chests and prove that they’re players. They may get a big bucket of venture money. They won’t spend it to buy, but in some cases to lease. It depends how badly they want to hire people that are in town. There is a corridor of development occurring [along] Route 2 — Watertown and Lexington, it takes a left at Waltham, and it takes a right to go through Lexington, jumps over to Bedford and then skips over Burlington and jumps to Woburn, where Cummings Properties is an aggressive landlord and has low costs. They have 4 million square feet of single-story flex buildings they can convert in 1,000 square-foot increments usually to anything. About a million or so square feet of that is lab space now.
 
What range of lease sizes are you seeing?
 
When the pharmas come in, they take some pretty impressive chunks …In general, most of the companies — even the large pharmas when they’re leasing — may take 20,000 square feet, maybe less, about a floor of space, and then they go from there. Some start as small as 10,000 [square feet]. They get a foothold in a building and go from there. Some of them can ramp up pretty quickly.
 
The deal sizes in East Cambridge aren’t huge. Novartis made a huge impression bringing in their whole research division and starting with 250,000 square feet, then another 500,000, now they’re into taking increments of 100,000 square feet or less.
 
How much are big pharma companies driving deals outside of Boston and Cambridge?
 
They’re looking around. As they grow bigger, many of these tenants in a typical search will compare Cambridge prices and inventory to nearby suburbs around Route 128. It’s getting to be a well-trod path to this Route 2 corridor to Lexington and Waltham.  … So far they tend to keep the research and office and lab space in a core near the city, then put other things a little further. Shire took a 50,000 square-foot building at corner of Route 2 and Route 128. They were paying $33 [a square foot] with a little bit of fix-up work for a nice new lab building in a very well-located park called Patriot Park, the former Raytheon corporate headquarters.

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