Cambridge, Massachusetts' Kendall Square was once one of the tightest lab and office markets in the country, with top research institutions spurring startups and drawing corporate giants that competed for a limited amount of available real estate. 

But after the pandemic, Kendall Square’s office market was hit by work-from-home trends, and its lab market was left reeling from the life sciences slowdown, leaving millions of square feet of space vacant.

Over the last month, a trio of new leases from artificial intelligence companies — including a growing local startup and industry leader Anthropic — have provided a positive sign for landlords in need of new leasing demand to fill that space. Local leaders and brokers tell Bisnow the activity feels like the beginning of a new era for the neighborhood.

"This will really be an inflection point where I expect you will see average rents across the board come back up in Kendall Square," said Ashley Messina, New England director of sales and relationship management at Cambridge Innovation Center.  

As a coworking space for startups, CIC’s demand can provide an early indicator for future growth in the market: Its two spaces in the heart of Kendall Square are experiencing their highest foot traffic numbers since 2019, with more than 90% occupancy, she said. And the spaces now have 120 AI companies, 40 of which have moved in over the last year. 

If those companies grow out of the space, they will have plenty of options for buildings to lease: The East Cambridge submarket, including Kendall Square, has more than 11M SF of lab inventory and 9M SF of office inventory, and according to Cushman & Wakefield, both sit above 20% vacancy. 

That rate has risen dramatically in recent years. 

The submarket’s life sciences sector had 0% vacancy in mid-2022, according to Cushman. And its office market had 3.6% vacancy in late 2019, well below the nationwide vacancy rate of 13% at the time. 

The market has long benefited from the presence of the Massachusetts Institute of Technology and Harvard University, both from the startup companies that emerge from those institutions and the Big Tech and pharmaceutical companies that want to recruit their graduates. Kendall Square is home to offices for tech giants Google, Meta and Microsoft, and pharma giant Moderna is headquartered in the neighborhood. 

But as the pandemic upended the way people work, the neighborhood's office market was decimated as tech tenants began to vacate. 

"A lot of those types of companies started shedding space," Cushman & Wakefield Executive Director David Thomann said. "There weren't a ton of tech companies expanding in Kendall or looking to expand in Kendall."

The lab market remained strong through 2022 as the money poured into the biotech market during the pandemic. But that sector fell off a cliff in 2023 as new demand disappeared and many biotech startups gave back space they had previously leased. 

Since then, the market has been eyed as a potential home for rapidly expanding artificial intelligence companies, the hottest tech sector over the last few years. But the Boston area has lagged behind San Francisco and New York, which have seen waves of AI leasing enter their markets.

That now appears to be changing.

"I was a little surprised that AI didn't kind of fill the big gap of Kendall Square office," Thomann said. "Now, with a couple larger leases, I think it was inevitable that it was going to start happening, which is very exciting." 

In the third quarter, AI companies made up 63% of the leasing activity in Cambridge, according to JLL. 

On Sept. 9, Anthropic, the tech company behind chatbot Claude, said it had signed a 24K SF lease at Alexandria Real Estate Equities' 1.2M SF Technology Square in Kendall Square. The lease doubled the AI company's presence in the neighborhood. 

On Sept. 24, autonomous software company Blitzy announced it signed a 52K SF lease at Technology Square, the largest signed in Cambridge this year. The company is home to more than 200 employees, with the new space allowing it to grow up to 300. The company raised $200M in May, bringing its valuation up to $1.4B.

On Oct. 1, AI robotics company Walden Robotics announced it signed a 50K SF lease at BioMed Realty's 20 Sidney St. at University Park near MIT. The robotics firm is a spinout from the Toyota Research Institute. In July, the firm publicly launched along with a $300M fundraising round, valuing it at $1.1B.

"It's been a dynamic time, and the fact that folks are coming here now is a testament to the fact that Kendall Square has long been recognized as a place where people come to advance science and technology and to make a positive impact on the world," Kendall Square Association Executive Director Beth O’Neill Maloney said.

Brokers have seen an uptick in tenant activity in the neighborhood, but there is still a significant amount of supply left to fill.

"It feels more active now than it was two years ago," Thomann said. "It's all relative, because in 2020 and 2021, it was at a peak all time. A lot of people kind of got used to that, and then obviously a lot of buildings were delivered to accommodate the demand, and the demand dropped."

Not only is Kendall Square benefiting from the presence of new AI companies, but the biotech sector is also becoming more active in the space, and developer confidence seems to be growing. 

In August, lab real estate giant Alexandria filed a zoning petition to unlock development rights for a 250K SF expansion to its Technology Square, the Boston Business Journal reported. The REIT owns more than 4.5M SF in Cambridge, concentrated in Kendall Square, but it sold off a series of properties during the biotech downturn.

"You're just seeing a high degree of confidence with developers right now from the construction of the office space and also just all the wraparound services like investing in restaurants, investing in retail, investing in public space," Messinia said. "Developers are betting on Kendall Square."

The neighborhood is also set to benefit from a surge of foot traffic from pharma companies that signed deals several years ago for projects that are now reaching completion.

Earlier this week, AstraZeneca opened its 570K SF life sciences hub at 290 Binney St. It plans to invest $1B or more and increase its local workforce by 50% over the next couple of years, totaling roughly 1,000 net workers.

Other massive headquarters are in the works, including Biogen's 585K SF global headquarters at 75 Broadway and Takeda's 600K SF at 585 Kendall St. Both are being developed by BioMed Realty, a Blackstone subsidiary with a large Kendall Square portfolio.

BioMed has lined up a $915M loan on the property from several large financial institutions: Wells Fargo, Citi Real Estate Funding, Goldman Sachs, JPMorgan Chase and Royal Bank of Canada, according to a Fitch Ratings presale report. The loan is expected to close next week.

"If you have a Blackstone deal that's fully leased and credited tenancy, that's a lender's prayer right now," Colliers Managing Director Frank Petz said. "If you have a deal with vacancy or a lease turnover or one with no credit, it's still difficult for lenders to lend anywhere close to where they did in the late teens, early '20s."

BioMed didn't respond to Bisnow's request for comment on its 585 Kendall refinancing deal.

Last month, Petz and his team sold a 93K SF office property at 955 Massachusetts Ave., in between Kendall and Harvard squares, to Seattle-based Tourbineau Real Estate Partners for $25M. He said the deal was significant, demonstrating investor interest as the market benefits from a surge in AI activity.

"There is a Cambridge premium, and that's all based on expectations of continued [tech] demand," Petz said. "Even though we've had a slowdown in technology overall, and specifically on the real estate side, they continue to innovate."

He said that before the property sold, it saw some leasing interest from AI-adjacent tech companies looking to be close to Kendall Square. 

JLL Research Manager Bryan Montgomery said he expects to see more AI leases signed in the coming months that could help bring down Kendall Square's high office and lab vacancy.

"Kendall Square is always going to be Kendall Square. Folks are always going to want to be there," Montgomery said. "You need high-growth industries to go and soak up space there. There's not going to be a faster-growing industry from a leasing perspective than AI leasing over the next 18 to 20 months."