Q4 Tenant's Guide Predicts Rents in Cambridge Market to Drop

CAMBRIDGE, MA-The declining rents and rising vacancies that have plagued most of the Greater Boston market over the past year are slowly starting to make their way into what was once considered the healthiest submarket in the area.

The Cambridge market has been a tale of two cities ever since the recent recession with an office market that was more vulnerable to the vagaries of the economy and a thriving biotech market. But recent numbers indicate that the office market is going to experience further setbacks that will be evidenced in declining rents while the biotech market’s struggle to find financing could be reflected in its ability to fill its space.

According to CRESA Partners’ tenant’s guide for the fourth quarter of the year, 1.7 million sf of direct space is available in the Cambridge office market, with an additional 570,000 sf of sublease space. Of that sublease total, approximately 70% has a term of three years or less.

Chris Crooks, a principal at CRESA Partners in Boston, where he heads the Cambridge market group, notes that that rents, which peaked at $70 per square foot for Class A office buildings in the third quarter of 2000, now range from $25 to $36 per sf, and about $7 per sf less for Class B space. He says that rates are expected to fall another 3% to 7% in the next six months on a direct basis and 5% to 10% on a sublease basis; rents should then remain flat until the end of 2004.

The vacancy rate here, which was among the country’s lowest at below 1% in 2000, is now 20%, down from 22% in the third quarter. The report indicates that it is expected to remain around that level for about another year. Net absorption was 30,000 sf in the last quarter and the year-to-date absorption is negative 650,000 sf.

Crooks points out that the decreased demand, which began in the third quarter of 2000, can be attributed to the failed dotcoms and technology consulting firms. “The corporate real estate industry will remain sluggish until significantly more jobs are created, and that kind of growth is not on the immediate horizon. There is moderately more activity today, but most deals are for lease renewals,” he says.

In the biotech market current rents range from $55 to $65 per sf for the most desirable buildings in East Cambridge, with $75 to $100 for tenant improvement allowances. The report indicates that rates should remain steady or increase slightly in the next two quarters. According to Crooks, 1.6 million sf of lab space will be coming on the market in the next two years as a result of new construction or conversions. Of that amount, 600,000 sf can be available immediately.

Crooks predicts that the biotech vacancy rate, now 9% compared to 5% in the last quarter, will likely not decline further for some time but he points out that the expense of funding a biotech start-up is higher than a high tech start up and “there are signs that funding is becoming more scarce.” Also, very few new biotech firms are expected to survive.

The fact that the pendulum here has swung in favor of tenants means that property owners are more willing to negotiate and offer concessions. Crooks notes that tenants are in a good position to renew or restructure leases even if their terms don’t expire for another two years.