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CAMBRIDGE, MA-Rents for class A buildings in the city’s office market are expected to drop 3% to 5% in 2005, according to Cresa Partner’s third quarter market review. The report indicates that office rates for class B space are likely to remain flat.

Average asking rents for class A offices are now $30 per sf, while class B averages $23 per sf and laboratory space is $46 per sf with sublease rents usually 25% to 50% less. These figures have remained virtually unchanged for the last three quarters.

According to Daniel Sullivan, a Cresa Partners vice president, office rents for class A space will likely drop because most Cambridge property owners, who were hoping for a fast market recovery, are now resigned to a very slow process. “It’s now more cost effective for landlords to discount their space and retain tenants than it is to lose those tenants and carry the vacant space as a liability,” he says, adding that many companies in Cambridge will likely find flat rents in “class B+ or A-”, quality buildings that may offer fewer amenities.

The report demonstrates that sublease office inventory continues to decrease, with property owners taking back the space at a moderate rate. But with such a great surplus of space on the market, Cresa Partners says it does not expect rents to start rising for at least another year, or until the overall vacancy level goes below 15%.

The firm’s Cambridge Group reports that overall office vacancy for class A and B is hovering at nearly 22%. Lab vacancy is now 23%. “The biggest recent deals in Cambridge have been build-to-suit, and that doesn’t eat up excess space,” notes Sullivan. According to the report, the hottest submarket in Cambridge is Harvard Square, with limited supply and vacancy at under 5%.

A perennial potential bright spot for Cambridge is the life sciences industry, says Cresa Partners vice president Adam Subber. “On one hand, Cambridge remains the center of biotech research, and it’s encouraging to see more new products in the pipeline and more new startups with strong business plans. Also, the biotech industry isn’t subject to job offshoring the same way high tech is. On the other hand, these positives haven’t translated into increased velocity. If anything, activity in this market is down somewhat compared to last year.”

According to Chris Crooks, Cresa principal, a bleak forecast for property owners is actually sunny news for area tenants. Contractual flexibility still favors the tenant, and companies are in a good position to use their leverage and negotiate early lease renewals. “Landlords are still offering concessions such as free rent and generous tenant improvement allowances,” says Crooks.

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