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Kendall Square boom times squeeze out start-ups

As rents climb, tenor changes

After working out of shared space for three years, Raj Aggarwal’s mobile start-up is now successful enough to have its own address. But instead of staying in Kendall Square where it has thrived, Localytics is about to join the ranks of small tech companies moving out of the Cambridge hot spot.

“This has still got to be the single biggest concentration for technology companies. But that’s going to change,” Aggarwal said recently at Voltage Coffee & Art, a popular Kendall Square gathering spot.

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To be sure, Kendall Square remains a successful business district: Office space is hard to come by, rents are rising, and it boasts a roster of marquee companies, from Microsoft Corp. and Google Inc., to Biogen Idec Inc. that are expanding there. But for all its outward bustle, Kendall Square is in transition. And ironically, it has its own success to blame, as a kind of gentrification has made Kendall too expensive or too popular for the many, smaller, younger tech businesses that gave the area such cachet.

In addition to a dozen or so firms such as Localytics that have relocated within the past year, or are in the midst of moving, Kendall Square is at risk of losing two major technology incubators that have been responsible for providing much of the new business blood to the district. The potential drain of start-ups has so worried Cambridge officials they are busy canvassing the city’s tech circles to see what can be done to keep Kendall Square from losing any more of its luster.

Cambridge officials recently circulated a survey among the Kendall community to gauge what additional steps they want. Among the questions: Does Kendall need more networking events? Can the city itself help by testing some of the technologies coming from local companies?

Another possible solution: requiring commercial property owners to reserve space at affordable rents in their new or redeveloped buildings for start-ups.

“You can’t have everybody there, and probably most new start-ups aren’t going to fit into Kendall Square,” said architect David Dixon, whose firm, Goody Clancy, has prepared redevelopment options in Kendall for the City of Cambridge. “But we want to be able to maintain the full spectrum from the youngest and most innovative, to the mature and most productive companies. The most vibrant and healthy neighborhoods are most diverse.”

Kendall is bustling. Almost 3 million square feet of space is under construction or planned for the area. Many local venture capitals have relocated there, and it has a busy networking scene for entrepreneurs and tech workers to socialize.

But that success comes at a price: It’s expensive to rent in Kendall — if a company can even find space. Rents now average around $54 a square foot, and are expected to continue climbing; vacant space is a spare 4.7 percent.

Several young tech companies said they cannot afford to stay in Cambridge and are being lured by similar urban neighborhoods in greater Boston where rents are a fraction of those in Kendall, and landlords more willing to offer shorter-term leases.

After decamping Kendall in July, Yesware, a start-up that provides e-mail services to salespeople, is paying about $20 a square foot for space in Boston’s Leather District.

“There’s no real reason to be in Kendall Square really, except for the prestige. The prestige matters for Google and Microsoft, but it doesn’t matter for us,” said Yesware CEO Matthew Bellows, who noted the Leather District has similar attributes as Kendall, including a burgeoning start-up community and access to the Red Line.

“We’re all so close in Boston anyway, it’s not like you’re talking about the difference between San Francisco and Silicon Valley,” Bellows said.

Symbolically, maybe the most alarming development on the horizon for Kendall is the potential loss of as many as 40 start-up companies if the two technology incubators that house them, TechStars and Dogpatch Labs, have to move. Both are on the sixth floor of One Cambridge Center — which Microsoft took over September — and are hunting for new space in Cambridge and Boston. Microsoft declined to comment on the matter.

Kendall has been through this before, where once young companies get established, they depart for greener hills — historically the suburbs. Raytheon Co. did it in the 1920s and iRobot Corp. in the 1990s.

Now, Cambridge hopes the survey will help it figure out how to make Kendall “the kind of place that continues attracting start-ups,” said Brian Murphy, assistant city manager for community development. “We don’t want to be a place that is only there for the big guys.”

City officials are considering zoning changes to require commercial property owners to reserve 5 percent of space for start-ups in new and redeveloped properties.

Meanwhile others in Kendall are taking steps to preserve diversity within the tech ranks. One of the largest landowners in the area, the Massachusetts Institute of Technology, is developing about 40,000 square feet of office space on Memorial Drive just for start-ups, as part of a broader build-out underway at the school.

“We can’t live without the small start-up entrepreneurial dynamic going on in our market,” said Steve Marsh, managing director of real estate for the MIT Investment Management Company, who oversees the school’s commercial property holdings. Having lots of start-ups around, he said, “advances the productivity of innovation in general.”

MIT is finalizing its own rezoning plan to add about 1 million square feet of building capacity around campus. In the works for two years, the MIT plan still needs approval from Cambridge officials.

Another option to relieve the pressure for start-ups is converting a vacant foundry building into a center for small businesses. The building was included in property Alexandria Real Estate Equities gave to Cambridge in exchange for approving its own redevelopment plan. Cambridge has yet to decide what to do with the 52,000-square-foot building.

One of the most prominent advocates in Kendall for start-ups is Tim Rowe, executive director of the Cambridge Innovation Center, which provides shared work space for about 450 young companies. He worries that unless city and business officials act quickly, the next wave of promising graduates from MIT will go elsewhere to start their new Web or software company.

Not having start-up space for those grads, Rowe said, is “a threat to what built Kendall Square. There’s a real need if you are trying to capitalize on the innovative output in Kendall Square to have the ability to retain start-ups here.”

Michael B. Farrell can be reached at michael.farrell@
globe.com
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