Clarion Partners Acquires Kendall Square Property for $311 Million

So many major commercial real estate transactions have been happening around Boston that it's getting tricky to keep up with them all. However, the recent acquisition of a prime piece of real estate in Kendall Square is a definite standout. The property, which is located at 245 First Street, was recently acquired by Clarion Partners, a New York based real estate investment management firm for $311.25 million. Like Boston, Cambridge has been experiencing a red-hot real estate market for some time. As always, Boston City Properties is keeping tabs on this new development and will keep you up to speed regarding its progress.

Before delving into the deal itself, it helps to understand the current real estate situation in Cambridge. As with Boston, it has been a seller's market for some time now. Prices keep steadily rising, and inventory levels are low. That's especially true about commercial space--office space and lab space in particular. Indeed, during the second quarter of 2016, the vacancy rate for lab space was just 2.6 percent, and the vacancy rate for office space was 2.5 percent. Clearly, office and lab space are at a major premium, so it makes sense that Clarion Partners would happily scoop up the property at 245 First Street.

Let's put this in perspective. In downtown Boston, the vacancy rate for office space has recently hovered around 15 to 20 percent--and that is nearly a historic low. Now, most new office developments are being built in Boston right now rather than Cambridge, so it makes sense that Cambridge has even less space available. Things have gotten so tight in Cambridge, in fact, that some companies are leasing office space and then converting it to lab space. Indeed, lab space is at an even higher premium.

Currently, Cambridge has around 10 million square feet of office space. More than 97 percent of it is occupied. Its approximate 9 million square feet of lab space is more occupied still. The property that was acquired by Clarion has a vacancy rate of just 3 percent, and most of the space that is occupied is being leased to medical research and biotech firms. Most of the current tenants have long leases and will be staying put for the foreseeable future, so Clarion can rest assured of generating excellent rental income for a long time to come.

More on the property itself: It is located in Kendall Square and was acquired from Jamestown Properties LP, an Atlanta-based real estate development firm that purchased the property for $192.6 million in 2013. The property includes a 10-story Class A office building offering 170,704 square feet of office space and a six-story life science building that offers 134,175 square feet of space. The buildings are linked by a four-story glass atrium that includes an on-site cafe and a common lobby. Additional amenities include lockers, a shower room and bike storage.

One downside of the building is that many tenants are currently locked into leases for rental rates that are well below the current average. Lab space in the building is currently leasing for about 31 percent less than the average asking rate while office space in the building is currently leasing for about 26 percent less than the average asking rate. At the moment, the average remaining lease term stands at 6.4 years, so it will be a while before Clarion can realize the full potential of the rental income that can be generated from this property. Of course, the company could just as easily be planning to sell the space in a few years.

Real estate market experts expected the property at 245 First Street to sell for around $295 million. The fact that it sold for more than $311 million highlights the fact that prices throughout the area have continued to soar. As with residential real estate deals, many buyers of commercial real estate have been making offers that are well above asking price. Not surprisingly, this has intensified the price-increase trend, making such space that much more expensive to acquire. Lease rates have steadily risen as well, but that hasn't stopped companies from snapping up as much office and lab space as possible.

At $1,044 per square foot, the property at 245 First Street in Kendall Square is among the priciest to change hands in East Cambridge in some time. However, it is hardly the only office or lab development to command such prices. As the market continues to evolve, we are sure to see many more deals like this one: Major real estate development and investment firms snagging premium office and lab space not only in Cambridge but throughout Greater Boston.

Clarion's acquisition is just the latest in a series of high-profile commercial real estate transactions in the area. Recently, Alexandria Real Estate, an REIT out of Pasadena, acquired One Kendall Square for $725 million. Experts had expected the property to sell for around $700 million. Once again, then, a major development changed hands for a much higher price than was expected. This is partly due to the general price-increase trend and partly due to the dearth of quality office and lab space in Cambridge. The property, which offers 645,000 square feet of lab, office and retail space, is sure to generate a lot of income for Clarion.

This is not the only real estate transaction that Clarion has engaged in recently. The firm sold off its property at 535-545 Boylston Street in the Back Bay to John Hancock Life Insurance Company not very long ago for a cool $160.5 million. The property features two adjacent 13-story office buildings that offer high-end amenities and features. Clearly, Clarion Partners has set its sights on Cambridge for the time being. It won't be surprising at all if we see another deal from them in this city before too long.

With vacancy rates as low as they are in Cambridge, something clearly has to give--and soon. Numerous projects are currently in the works, including several that have already commenced and many others that are still awaiting approval from the Boston Redevelopment Authority, or BRA. Boston City Properties keeps our finger on the pulse of these and other Boston real estate stories, and we will post updates to the progress of 245 First Street in Kendall Square as they become available. Given that it is located directly across the Charles River from Downtown Boston and offers a nice mix of office and lab space, there is no doubt that this property will be a winner for Clarion Partners.

Whether you enjoy keeping up on Boston real estate happenings out of curiosity or because you are an investor, agent or broker yourself, you can count on Boston City Properties for the latest and best information regarding 245 First Street and other commercial real estate projects. We also stay abreast of the latest developments regarding condo and apartment building projects, so if you are looking for a new home, stop back here regularly for the latest information. Remember too that we are here to assist you when you need us, so give us a call today for more information.