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CAMBRIDGE, MA-During a forum yesterday at Le Meridien Hotel assessing this city’s 20-million-sf commercial real estate market, Colliers Meredith & Grew broker Joseph Flaherty wondered aloud why a full-floor office option he is marketing in Kendall Square has received scant traffic in recent months. With just five such choices in the core business district, Flaherty told an audience of 200 that he–and the landlord–anticipated a robust response once it came available, yet to date, that has not been the case.

“Because of the overall economy, tenants are being very cautions,” relayed Flaherty, adding, “There is a big disconnect where people seem to think everything is falling apart.” Opening the CM&G-sponsored program, Flaherty said many tenants fail to recognize the solid fundamentals of Cambridge and its dearth of space, especially for class A buildings in Kendall Square, a constituency whose vacancy rate is a thin 5.8%. “It’s very tight right now,” Flaherty said. “If you are a tenant wanting to stay in (Kendall Square), you’re probably going to have to look at a build-to-suit.” That is especially true, he explained, for companies needing more than one floor, such as Forrester Research, out looking for 200,000sf.

Flaherty was joined at the Cambridge overview by CM&G investment chief Lisa Campoli and former company staffer Daniel O’Connell, now the state’s Secretary of Housing and Economic Development in Governor Deval Patrick’s administration. The guest speaker noted that he grew up a few blocks from the event in a three-decker, back when Kendall Square was a blighted industrial district bereft of the global pharmaceutical and technology companies there today–a “super-cluster” O’Connell cited as a key reason that the new economy “augers well for Cambridge.”

The city, he said, “has gone through the transition and is looking very strong going forward.” O’Connell also predicted passage this week of Patrick’s $1 billion bond bill to support the life sciences sector, a measure the secretary said would be especially beneficial to his hometown. The bill would provide $750 million for biotech-related capital expenditures and infrastructure. Another $250 million would be used to offset anticipated cutbacks in National Institutes of Health funding, providing a financing source to keep emerging firms from fleeing to rivals such as California and North Carolina. The initiatives “give us better tools to work with” than competing markets, O’Connell offered.

While O’Connell was especially upbeat about near-term prospects, Flaherty and Campoli also delivered a message that Cambridge might be better prepared to weather the economic storm than other communities. Acceding that sales have tailed off this year, Campoli said Boston and Cambridge still are considered to be safe havens, core markets that are not seeing capital availability dry up completely. All product types in the city are being coveted, she said, from laboratory and office space to multifamily and retail. “It’s cruising on all cylinders,” she said. A resilient tenant base, lack of developable land, and Cambridge’s complex permitting process “makes for an extremely healthy investment environment, and that is only going to continue over time,” according to Campoli.

Cambridge has, however, seen less than $150 million of properties change hands thus far in 2008, most of it in a deal brokered by CM&G when the Massachusetts Institute of Technology paid $90.5 million for a 148,000-sf portfolio of buildings in CambridgePort, a sale reported by GlobeSt.com. The next highest transaction was 39 JFK St., an aging 25,000-sf building that fetched more than $1,000 per sf ($25.7 million), due largely to its proximity in Harvard Square. The New Boston Fund paid $24.5 million for the Abt Associates headquarters in Cambridge’s Alewife market, a 10-year sale/leaseback viewed by many, including Campoli, as a long-term development play in one of the city’s most promising districts.

For office space, Alewife still has the highest vacancy rate among Cambridge submarkets at 10.1%, but that is a substantial drop from the peak of 21.9% reached in 2003. That was the same year Cambridge overall hit its peak of 23% for office and laboratory space combined, a figure that has now fallen to 11.6%. Encompassing just over 10 million sf, Cambridge’s office market has posted YTD positive net absorption of 53,000 sf, tepid yet still better than the negative net absorption of 70,000 sf for the lab sector. Even so, Flaherty concurs that office leasing has tailed off sharply since last summer, with Cambridge absorbing more than one million sf between 2004 and 2006 before dropping to 143,000 sf in 2007 when nearly all of the velocity occurred in the first six months.

CM&G says the 12 office leases done YTD account for just over 210,000 sf, the largest being just Cambridge Interactive’s 54,000 sf pact at 150 Cambridge Park Dr. in Alewife That was followed by leases of 22,000 sf each by Next Jump at One Kendall Sq. and JumpTap at 10 Canal Pk. There were three sizeable renewals that totaled 234,000 sf, headlined by a key victory for the city when CDM opted to remain at 205 Broadway in an 11th hour reversal of plans to relocate to suburban Boston, as detailed by GlobeSt.com. According to Flaherty, landlord MetLife “got religion” and struck a deal when CDM called its bluff on a bid to push rents aggressively. Also, CambridgeSoft renewed for 33,000 sf at 100 CambridgePark Dr., and KingStubbins is remaining in 21,000 sf at 1030 Massachusetts Ave.

Laboratory leasing has also been unremarkable this year, as the negative beginning has driven vacancy rates up to 14.9% from 13.8% at year-end 2007. Completed deals were even more modest than on the office side, with Acceleron Pharmaceuticals leading the activity in its 38,000-sf lease at 128 Sidney St., one of the buildings acquired by MIT. Ascent Therapeutics secured 24,000 sf at 65-75 Rogers St., and Ore Pharmaceuticals renewed for 19,000 at 38 Sidney St.

Flaherty commented that a major block of existing laboratory space is showing its age, including some 320,000 sf so obsolete that he considers it unusable, suggesting instead that the owners “blow it up” and start over. Concentrated in two buildings at 301 Binney St. and 200 Tech Sq., there is less than 600,000 sf of shell or existing class A laboratory space, said Flaherty, keeping the owners of that inventory pushing rents as high as $80 per sf. The rate and Cambridge’s reputation, is spurring national life sciences developers–such as Alexandria Real Estate and BioMed–to propose major new construction. On Binney Street, for example, Alexandria has assembled a 16-acre parcel covering seven and a half city blocks through eight separate purchases totaling nearly $400 million. “It bodes well on the supply side,” Flaherty said.

In concluding his discussion, Flaherty said he is generally upbeat about Cambridge, noting that givebacks of space have been limited and observing that another “big pharma”, such as Novartis AG, could be looming on the horizon with dreams of taking the city by storm. Since its arrival out of the blue earlier this decade, Novartis has taken down 1.3 million sf in Cambridge, and Flaherty maintains the city’s global allure could make for a repeat. Even if that does not occur, “I’m very positive,” said Flaherty. “We’ve been in lulls before, and this time, the fundamentals have held together great.”

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