Why the Kendall Square Lab and Office Markets Are Out of Whack

5/15/13Follow @NAIHunneman

In the beginning of Kendall Square’s biotech scene, everyone knew that partially built-out lab space was rare and precious, and its availability usually spread through word of mouth.

For Cambridge commercial real estate brokers, that phenomenon added to the mystery of trying to keep track of the growing biotech scene: there were very few choices on which to build a lab space practice.

Though new developments like One Kendall Square added more space, Kendall Square has continued to have a general lack of office and lab availability, particularly for smaller companies that cannot lease full buildings.

The times, however, have changed. As you see in the graphic below, we are now in a period with a glut of lab space and practically no office space.

Here are four reasons why:

1. Developers have been encouraged to build. For more than a decade, we have had a very small, focused group of lab developers who knew the biopharma space metrics well enough to realize that if they could build lab space in Cambridge, the lab users would come. Come they did, at rates much higher than office space. Even when some tenants went outside of Cambridge to save money there were still so few existing lab units available at any one time that there was plenty of incentive to build out lab space in any building that could physically accommodate it. Lab space as a percentage of total inventory in Cambridge has ratcheted up to about 45 percent in the last decade.

2. Big office users are competing for space. In the last few years, big office users, such as Google, Microsoft, Amazon, and Nokia, have joined the big pharma and biotechs in East Cambridge, creating a serious competition to get Kendall Square branding and to hire the best and brightest. The result: the office buildings that can’t adapt to lab uses have more and bigger credit tenants while the small and medium office users are left to fill in between or escape to other affordable, plentiful submarkets.

3. The CIC phenomenon. The Cambridge Innovation Center (CIC), a hugely successful incubator/accelerator/satellite office center now occupies around 200,000 square feet of space right on Kendall Square. The CIC is so good at what it does that most of the time it’s full (no doubt its recent expansion from One Broadway to 101 Main Street will fill up soon). As the mostly tech companies in the CIC grow, the CIC keeps the rest of the office market really tight by launching companies into the rest of Cambridge as well as adjacent submarkets.

4. Vertex moves to Boston’s Seaport. Who knew that Vertex Pharmaceuticals, with its many ups and downs over two decades, would become a household name? That’s what happens when you build the largest construction project in the U.S., a million square feet in the most visible section of Boston with a mayor who loves to promote it! What also happens is you leave behind nearly 500,000 square feet of existing (gulp) lab and office space next year in a Cambridge market that already is out of balance on the lab/office equation.

So what’s going to happen now? Here are a few predictions:

Lab absorption will happen as nascent companies grow: There are still a lot of growing Cambridge lab companies that may surprise us with how much space they need.

Developers may convert lab space to other uses: Some owners who have lab space will consider returning it to office use, especially if it’s outmoded or can easily adapt to the trend toward cool office or unorthodox residences.

The office development incentive: For now, anyone who can provide office space will provide office space in Cambridge.

Greg Larsen is a senior vice president at NAI Hunneman, a real estate services firm. Follow @NAIHunneman

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