Small But Mighty Cambridge Office Market Primed for More Growth
Although one of New England’s smallest geographical submarkets, spanning only 7.1 square miles, Cambridge packs a serious one-two punch between its thriving office and life science sectors.
Routinely ranked as one the nation’s most densely populated cities, universities, research institutes and private corporations employ many of the 110,000 residents of Cambridge. Not surprisingly, 44 percent of those residents are highly educated millennials between the ages of 18 and 35, according to the most recent U.S. Census and American Community Survey. Those millennials form the unparalleled labor pool that has employers clamoring for talent.
Hosting more than 230 life science and high-tech companies, research from CBRE suggests that Cambridge contains upwards of 700 start-ups, many of which are pioneered by entrepreneurial professionals spinning out from larger institutions. Known as the city of squares, Cambridge is divided into three distinct submarkets, each with their own distinctive flavor — East Cambridge, anchored by MIT and Kendall Square; Mid Cambridge, home to Harvard University and West Cambridge/Fresh Pond area. Collectively the city contains roughly 11.2 million and 14.6 million square feet of commercial office and life science space, respectively.
Low Vacancy, High Rents
Cambridge finished 2018 maintaining incredibly low office and life science vacancy rates under 2 percent, which promoted significant asking rate growth. In Economic terms, tenant demand and price sensitivity has become highly inelastic with asking rates approaching $80-$100 NNN per-square-foot for premier locations. Rents have been largely driven up by the influx of demand from large out-of-market users and Fortune 500 companies like Apple, Boeing and Google who find relative value in Cambridge compared to other leading global markets.
Cambridge’s eclectic ecosystem, cultivated by academics and researchers, has evolved into an arm’s race with many of the world’s leading companies gobbling up large blocks of available space. Consequently, start-ups and incubating companies are being pushed into the city’s outer reaches towards Fresh Pond and Somerville where rents are 30 percent lower and space is marginally more available. More recently, displaced companies are relocating to Boston, Watertown and Somerville for both rental rate relief and growth opportunities. Addgene, Alexion Pharma, Rapid 7, Sonos and many others have left the Cambridge nest in the past 18-24 months.
Innovation, Technology, Discovery
Cambridge is at the heart of Massachusetts’ economic and technological growth. Over the past two years, the state has averaged over $6 billion and $2.8 billion of venture capital and NIH funding, respectively. The majority of those funds have been injected locally into Boston and Cambridge-based companies, which has promoted sustained growth from many healthcare, pharmaceutical and Biotech firms.
Marking the largest lease of the year, Sanofi Genzyme signed a 900,000-square-foot lease in December for two new office/lab buildings in Cambridge Crossing, East Cambridge’s hottest development. Divco West is leading development of the 43-acre campus, with the first commercial property, 250 North Street, anticipated to be delivered by the end of 2019. The 430,000-square-foot building, which began construction on a speculative basis is now 80 percent leased by Philips North America and Goldfinch Bio with strong interest on the remaining vacancy.
If You Build It, They Will Come
Cambridge Crossing is just the tip of the development iceberg. Currently there are eight major commercial projects totaling 2.9 million square feet under construction across Cambridge. Roughly half of these developments began construction on a speculative basis and were quickly leased up.
As it stands today, the development pipeline is currently 76 percent leased. East Cambridge’s largest landlord, MIT, has gained significant leasing momentum at 314 Main Street now that the project is officially under construction. This past summer, the property secured a 100,000-square-foot lease from Aurora Flight Sciences (Boeing) and more recently has reportedly received signed LOI’s from both Apple and Capital One for multiple floors.
On top of the 2.9 million square feet actively under development, Boston Properties recently received approvals for an 18-story glass tower in Kendall Square at 325 Main Street. The 390,000-square-foot project will reportedly accommodate Google’s expansion and allow connectivity to their existing offices at 355 Main Street. Several other sites across the city including the Volpe Center, 325 Binney Street (former Metro Pipe Company) and 585 Third Street will be some of the next projects permitted.
Thinking Outside the Box
While most developers are looking to develop from the ground up, several groups have had success converting underutilized assets to higher uses. Across the city, smaller flex and warehouse type buildings have been converted for office and/or life science use. Perhaps most infamously, Leggat McCall has been working for years to convert the former Middlesex Jail into modern office space.
Most recently, New England Development proposed a plan to convert a portion of the third floor of the CambridgeSide Galleria Mall from retail to office and/or life science space. A similar plan is being crafted for the west end of the mall where a former three-story Sears store is ripe for redevelopment.
Prevailing indicators point towards sustained growth across Cambridge with the city’s strong cultural and economic backbone prepared to weather any turbulent external market conditions.
— Ethan Robert, Lincoln Property Company