Kendall Squared: Rising Rents Squeezing Startups

Healy Jones has got a dog problem. Two of them, actually. There’s the chihuahua, Scooter. Copper’s the mutt. They’re office dogs. Which is fine, except that Jones is now looking for a new office to lease in Kendall Square. And he’s not getting a straight answer.

"Is the building dog friendly?" Jones asks.

"Dog friendly? I’m not sure," the building representative responds. "That’s something I would have to check on."

Same story at the next office space Jones checks out.

"That’s a good question, I haven’t had that one yet. Get back to you on that one."

It’s dawning on Jones: The dogs are going to be a problem.

Jones is the co-founder of an Internet startup called OfficeDrop. It provides online storage services for some really big companies. And he's got a dilemma.

"So, the big companies like the idea that we’re small and nimble," Jones says on his way over to look at a third empty office space. "They like the fact that we’re different like that. Just different from them. It’s pretty standard for startups to have dogs or something a little quirky in them. I think they appreciate that quite a bit."

What they don’t appreciate, though, is the shabby building that OfficeDrop currently calls home. It’s on a dirt road tucked behind the Alewife T stop and it doesn’t exactly impress the suits who stop in to hash out deals. That’s why this startup wants a Kendall Square address.

It’s at the third space to rent, the one closest to the Kendall T stop, that Healy Jones and his agent, Jon Frisch of T3 Advisors, finally get a straight answer.

"Do you know if they’re dog friendly in this building?" Frisch asks.

The answer? Definitely not.

The reason is simple. No landlord needs to accommodate any pooches. Because if OfficeDrop doesn’t sign a lease, somebody else will.

"What’s happening in Kendall Square today is that the inn is full," said Tim Rowe, the president of the Kendall Square Association. He also runs the Cambridge Innovation Center, a startup incubator at Kendall.

From his office on the 14th floor, Rowe can look out on the new corporate campuses that biotech drug companies are building. He can see all the office space that Microsoft and Google and Amazon are gobbling up. Kendall, he says, is known for its entrepreneurial energy. Now, it’s evolving into a center for corporate innovation.

"We will see more and more global company presence here," Rowe said. "What does that mean for startups? Startups are going to have to compete with very well-heeled demand for the space around us."

Don Domoretsky, vice president at the Boston commercial real estate brokerage Jones Lang LaSalle, says Kendall rents are rising fast. Lab space is up more than 10 percent from a year ago.

"The supply is really marginal," Domoretsky said. "These tenants are fighting over the same space."

Case in point: 150 Second St. The developer Skanska is putting up 123,000 square feet of brand new lab space.

"This is the location of our new speculative lab project," said Shawn Hurley, an executive at Skanska Commercial Development in Boston. "Speculative means we didn’t have any tenants when we started."

That’s rare in today’s tight credit market. Skanska is spending $70 million to build this facility without any tenants lined up to move in. And it’s supposed to be complete in October. But Hurley is not worried.

"Even with the high cost of real estate in this area, you know all these firms still find it necessary to be here," Hurley said. "And so that’s why we built the building."

Yet the rising demand for space is forcing some companies to move out of the innovation cluster that is Kendall Square.

The mobile payment company SCVNGR is leaving in style as its lease runs out — by holding a paintball tournament.

Pink splats plaster the whiteboards that used to show sales targets and concepts for new smartphone applications. It’s a fun way to go out, but it’s also bittersweet.

"Kendall was great to us," says company COO Michael Hagan. He wanted to keep SCVNGR in Kendall. Instead, the growing company is moving down the Red Line to Downtown Boston.

"Unfortunately, just our needs for space, and what we could find in the time we needed it, there was just nothing here that could accommodate us," Hagan said of Kendall Square. "So we got a great deal in Boston. The space is amazing, the views are amazing. It’s gonna be conducive to grow from the 130 [employees] we have now to 1,000. So it’s gonna be great."

While SVNGR is moving out of Kendall Square, OfficeDrop was able to land a place to move into next month. That third space in Kendall they looked at. The one that said definitely no dogs in the office. Even so, OfficeDrop ended up paying 20 percent more than the landlord had been asking.

"Pretty crazy," co-founder Healy Jones said of the bidding war with another startup over the lease. "The price, if we had been a few weeks earlier, we probably would have gotten the space and saved maybe $30,000-40,000 a year on rent. Right? That’s a lot of money.

As you might imagine, there wasn’t a lot of room to negotiate to bring the company dogs. But Jones and his fellow employees are holding out hope.

"We do think that Scooter and Copper will eventually be allowed in the building," Jones said, laughing. "It could just be a pipe dream, but that’s what we were thinking."

Entrepreneurs are known for their optimism.

"Hey buddy, how’s it going?" Jones says, petting Copper at the company's old office. "Yeah, he’s friendly."