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Savoring a Seller's Market in Biotech-Rich Cambridge, Mass.

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Curtis Cole
Senior vice president and partner
CB Richard Ellis
The second quarter was a good one for owners of the laboratory and office-space in Cambridge, Mass.
 
Figures released earlier this month by CB Richard Ellis New England showed Cambridge’s lab vacancy rate fell to its lowest level since 2001— to 6.5 percent during the three months ended June 30 from 7.9 percent during the second quarter of 2006, and 7.4 percent during the first quarter of the year.
Likewise, the percentage of properties available for lease, including those still occupied, dipped to 12.8 percent during the second quarter from 15.3 percent in the year-ago quarter and 14.4 percent in the first quarter of 2007.
 
Average asking rents rose 27 percent, to $51.25 per square foot triple net from $40.12 during the second three months of 2006. This was a 1.2 percent increase over $50.63 in the first quarter of 2007.
 
Topping the list of second-quarter leases was Novartis, which signed for 108,000 square feet at 45 and 75 Sidney St. That lease will allow Novartis to accommodate research staffers from its vaccines and diagnostics division, which is set to move by year’s end to Cambridge from Emeryville, Calif., following the company’s $5.4 billion acquisition of Chiron last year. The deal pushed Novartis’ occupancy in Cambridge past 1 million square feet.
 
Other key leases during the second quarter were Altus Pharmaceutical’s 75,000 square feet at 640 Memorial Drive; Sirtis’ relocation and expansion into 43,000 square feet at 200 Technology Square; and Biogen’s expansion into 35,000 additional square feet at 4 Cambridge Center.
 
BioRegion News spoke with Curtis Cole, a senior vice president and partner at CB Richard Ellis New England, about the health of the Cambridge lab market and some of the factors shaping its vacancy and rental rates.
 
Are these typical of the market, or are these bigger than usual deals?
 
I think the Cambridge market ranges in deal sizes. So what we have seen over the last five to seven years, maybe a little longer, is that when the big pharma requirements come or either grow from within the Cambridge market, then it’s not unusual for them to take down blocks of space in that 100,000–square-foot range.
 
Have there been that many defections, or were the spaces empty for a long time?
 
[The Novartis] deal was related to Millennium [Pharmaceuticals] giving up that space. It was one of a few larger blocks of space for Novartis to consider, and probably one of the driving factors was definitely proximity to their main headquarters, which is right adjacent to that park
 
Overall, what has been driving deals? Is it expansions, as with Novartis? Or is it relocations?
 
We’re seeing [that] a lot of it is expansion. Some of it is what we call big pharma — Novartis moved here five or six years ago, so they continue to have growth. Sanofi-Aventis, which did a deal nine months ago for 70,000 square feet, that was an expansion.
 
Another example of big pharma is Schering-Plough, which almost doubled their space. They’re upwards of 140,000 to 150,000 square feet right now. Those are the big guys.
 
And then you’ve got some early- and mid-stage companies that are doing well, that recently attracted some money. A company like Microbia went from 40,000 square feet to leasing 100,000 square feet at 301 Binney St. That’s kind of your classic biotech company that’s doing well.
 
It is a mix. It’s probably more of the bigger institutional growth as well as the middle-tier companies doing well.
 
To what degree are these deals being driven by fear of higher rents, given the increase seen over the past year? Are companies making deals now because they’re afraid rents will go up again in six months or a year if they don’t act more quickly?
 
I think there’s definitely a fear of rent growth, in the sense that it will happen because of the limited amount of space. The way to look at it is [that] the better capitalized a company is, the more appetite they will have to [obtain] growth space, to protect for their future. It’s really kind of case by case. There are clearly companies that won’t buy space just because they think they need it; they’ll wait till they really need it.
 
According to CB Richard Ellis, the average asking rent for lab space in Cambridge during the second quarter was $51.25 per square foot triple net. How much has that increased over the past year?
 
First of all, that’s an average asking rent, and that cuts across both class A and class B research space. If you’re looking to benchmark the top of the market for the lab world, you’re probably talking about $65-70 per square foot [triple net] right now as asking rent for the best space. That average asking rent can be a little deceiving.
 
Where were we 12 months ago? I would say we were probably $10 per square foot less — $55 to $60 [per square foot, triple net] for the best space [CBRE recorded an average asking rent of $40.12 per square foot triple net].
 
You mentioned 301 Binney St. before, which was acquired in April by a venture of Prudential Real Estate Investors and BioMed Realty Trust, one of the national real estate investment trusts that have assembled large portfolios of lab space in recent years. What effect are the national landlords like Alexandria and BioMed having on the lab market overall in Cambridge?
 
The long-term effect has yet to be seen. Right now, with those two chasing the same product type and competing hard with each other, I do believe the market remains competitive among the existing landlords, of which [Alexandria and BioMed] happen to be two. But as the world shrinks, as it has, down the road as the market gets even tighter, those two [REITs] are going to have a lot more say as to where pricing goes. … I would say they are always shopping [for additional properties]. It seems like both entities have a real strong appetite. Both companies are looking hard for opportunities, particularly in East Cambridge.
 
With the REITs constructing new lab space, [why] is the vacancy rate in the single digits?
 
Why isn’t it creeping back up? No one else is building. And it’s a combination of, one, there’s very little well-located land that can hold a new property. Secondly, if you have a site that you buy today, your permitting process is somewhere between 12 and 24 months by the time you can actually go in the ground. People that had enough foresight two years ago to say, ‘It’s time to build a building. We know we won’t be able to put it in the ground for 12 to 24 months, but we’ve got to buy, we’ve got to get permits, we’ve got to get going,’ they’re going to do well. The reality is, there are very few of those [owners].
 
The other issue with land is that the residential market in Cambridge has improved dramatically over the last five to seven years. Either conversion to residential or new construction for residential have been viewed to have an endless demand. I know there are a number of [residential] projects that are being built right now that I think could have gone lab. But three years ago, the darling of the real estate world was residential.
 
Any sign that market conditions have started to change to allow more lab conversions?
 
The residential market has slowed. I don’t expect new residential to go in the ground. If there were sites that were residential that could be brought back or changed to lab, I think that could happen. The reality is, there just aren’t that many sites.
 
How much has tenant demand for lab space spilled over into Boston or its suburbs as a result of the lab space crunch in Cambridge?
 
Good question. I think for Boston, there has been very little benefit from the strong lab market. There are two Bostons — the Longwood Medical area, which is a great lab location and research location, where space typically gets gobbled up by the research hospitals. That space is costly, so the typical biotech company will shy away from Longwood just because of pricing. They’ll find space somewhere else that’s more economical. After that, there aren’t any lab-product projects that have created a cluster, a critical mass that these guys want to be around. There are still locations that many of these companies are just pioneering, because they don’t have someone that had done what they’re doing before them. There has not been a critical mass established somewhere in Boston to say, here is your life science park or location. But the suburbs, on the flipside, have benefited. There are requirements that are heading out to the burbs.
 
What do the next few months hold for the Cambridge lab market?
 
I think it’s going to be continued tightening of the market, still in the mid-single digits in terms of vacancy.

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