think DCX at the end of this article!
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Commercial vacancies up; rents fall
Space in Cambridge now 10% available
By Richard Kindleberger, Globe Staff, 3/25/2001
AMBRIDGE - Last year's commercial real estate market, as hot as they come, has suddenly gone cool. Dot-coms are disappearing, vacancies are rising, rents are falling.
And nowhere does the reversal appear as sharp as in this university stronghold of 100,000. Long known for being at the intellectual forefront, Cambridge now appears to be leading the real estate market as well.
It rode the Internet boom and the biotech surge in 2000, driving up rents and pushing commercial vacancies under 1 percent. Now, in just a few months, struggling companies have dumped enough sublease space on the market to boost the vacancy rate to almost 10 percent, considerably higher than Boston's, according to brokers.
Maybe that explains the standing-room-only turnout for a symposium on the Cambridge market held last week by National Association of Industrial and Office Properties (NAIOP). Brokers who are puzzled about the market's direction seemed to think Cambridge was a good place to look for clues.
''I think everybody in the market is wondering where is this going to end up,'' Joseph Flaherty, a senior vice president at Meredith & Grew Inc. and the forum's moderator, told the crowd at University Park Hotel at MIT.
For the moment, the market seems to be taking a pause. Its 600,000 square feet of suddenly available sublease space is not being snapped up. Firms that need space already have seen rents fall 30 percent in three months. They may wait to see if there's a further drop rather than lock in at current levels.
''I don't think we've seen the end of it,'' Mark Winters, a Cushman & Wakefield executive, said of the vacancy surge. ''Demand, because of the volatility in both the stock market and the venture-capital market, right now is very, very slow.''
But developers who have profited from the hard-charging biotech sector were more optimistic. Despite recent hits in the stock market, biotech remains strong, they said, especially compared to the battered Net domain. Starting from nothing 20 years ago, biotech is on track to make up a third of the Cambridge market as buildings now under construction open up.
''I think the market is dramatically overreacting to all of the sublease activity,'' said Erin O'Boyle of Beacon Capital Partners, which sold major chunks of its Cambridge holdings last year at a huge run-up in price.
If the market did not remain strong, she added, Beacon could not have sold a half-billion dollars of commercial property to ''two very savvy investors.'' The reference was to the sale of Tech Square to the Massachusetts Institute of Technology and Riverfront Office Park to Hines, of Houston.
Gayle Farris, whose Cleveland-based Forest City Enterprises has made University Park a biotech research center, said biotech is increasingly seen as no ''flash in the pan'' but a solid, maturing industry. The major investments made in laboratory space in Cambridge over the past decade, along with the presence of Harvard and MIT, should keep biotech tenants from leaving the city to take advantage of cheaper rents elsewhere, she added.
Real estate watchers remain uneasy, nonetheless. With the economy slowing and the stock market nosediving, no one can be sure that more sublease space won't flood the market or that previously space-hungry businesses won't pull back sharply.
Circumstances can change quickly. One only need look at the soothing words issued three months ago as brokerage firms closed their books on the year. Even with the market softening, many said, demand was still so strong rents were unlikely to fall.
Certainly 2000 was an extraordinary year, and nowhere more so than in Cambridge. Space was so tight that some real estate firms put the vacancy rate at zero. That led rents to explode, shooting up 75 percent to 100 percent in a year by various estimates.
But as the dot-com debacle took hold, young companies that had been scooping up space in anticipation of continuing breakneck expansion began to dump it. Sublease space is seen as less desirable than space rented directly by the landlord, but its sudden availability has had an effect. Rents have fallen sharply despite the predictions they would hold.
Meredith & Grew's Flaherty said rents are being quoted in the range of $40 to $65 per square foot. Last year they peaked in the third quarter, with a high of $75 a square foot achieved on 8 Cambridge Center, a year-old building in Kendall Square.
So where goes the market from here? Christopher Crooks, a principal at Cresa Partners, said he wouldn't be surprised to see another 800,000 square feet of direct and sublease space hit the Cambridge market. In the absence of available space being absorbed, that would push the vacancy rate to 15 percent.
''Is this a trend or an aberration?'' Crooks wondered. He said he expected the lull in leasing to continue for three or four months. He doesn't expect decisive action when people are worried the economy may be sinking into recession and confused as to where the real estate market is going. ''I don't see anybody making moves,'' he said.
Those looking on the bright side see the recent shift as a return to sanity for an overheated market. ''There was an extraordinary amount of activity with very weak companies paying extraordinary prices and creating a kind of feeding frenzy,'' developer David Clem said of last year's Cambridge market.
For very weak companies, read dot-coms. Clem is understandably bullish on biotech. His Lyme Properties has two of Cambridge's big four biotech companies committed to taking major space in a $400 million complex it is building in Kendall Square. ''Virtually every major city looks at the success of Cambridge'' in nurturing biotech and wants to mimic it, he said.
The strength of biotech has some real estate people thinking about converting office space to labs. After all, biotech space is not only in much greater demand but also commands higher rents. But the hurdles are apparently formidable.
Research facilities are more complex and costly than office space. And converting to biotech in subleased space, with limited time to run on the lease and office tenants next door, is widely viewed as impractical. City zoning restrictions and the exhaustion of buildable sites suggests there won't be many more new biotech buildings erected in the future.
Richard Kindleberger can be reached by e-mail at kindleberger@globe.com.
This story ran on page H1 of the Boston Globe on 3/25/2001.
© Copyright 2001 Globe Newspaper Company.
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