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Space Crunch Lures Firms To Residential Locations

November 1, 2000
Wall Street Journal
By Sara Kehaulani Goo

With office rents high and supply short in Boston and Cambridge, companies are turning to a risky alternative: residential space.

That’s what Carin and B. Randall Willis did when their young business, Hunt & Gather Inc., outgrew the couple’s South End home office in Boston. The Willises gave up on commercial office space after looking for three months, finding office rents were too high, office landlords demanded high cash deposits and brokers brushed them off.

“We got discouraged,” Ms. Willis says. So she called her residential real-estate broker and asked him to find a condo loft that she could convert into a home for her interactive media design firm, now with six employees.

In August 1999, the couple bought a 1,200-square-foot South End loft for $256,000 and moved in. Instead of $40,800 a year for leasing a comparable office space, Hunt & Gather saves 70%on its $24,000 annual mortgage payments. “It doesn’t take a business major to figure this out,” Ms. Willis says. Plus, she says, “The full kitchen is fabulous.”

Indeed, with office rents exploding, and vacancy rates dropping, many start-ups without much cash say the residential market fits their needs: Space is easier to find and it’s much cheaper. There’s just one downside: Using residential space for commercial use isn’t always legal. Some businesses are setting up in areas zoned strictly for residential use, which violates both the zoning code and home-office rules.

Such measures are being fueled by the region’s booming economy, as well as the area’s entrepreneurial and high-tech work force. In Cambridge, the Massachusetts Institute of Technology and Harvard University churn out dozens of entrepreneurs and business ideas each year, putting far more pressure on the need for office space than the city’s dwindling available supply.

“There’s such desperation” out there for space, says Don Hause, who works with many young start-up clients for Spaulding & Slye Colliers International, a Boston commercial real-estate firm. “Companies say, ‘We’ll look at anything.’”

But firm’ gains could be individuals’ losses: As businesses encroach on residential space, some in the real-estate market fear that this trend could make an already-tight market even tighter for residential customers. Ed Shanahan, president of the Greater Boston Real Estate Board, says the housing market is also under increasing pressure—with dwindling supply for the area’s many college students and low-income families who can’t afford to live nearby.

“The last thing we need is companies eating into the housing market,” he says.

Since 1997, office rents have taken off in Boston and Cambridge as the two cities are running neck and neck for the region’s highest office prices. In the third quarter, Cambridge rents rose 54% to $58 per square foot from $38 per square foot a year earlier, according to Spaulding & Slye Colliers. In Boston, the average asking price rose 30% to $55 per square foot during the same period.

With vacancy rates at 1.5% in Boston and 0.4% in Cambridge, office brokers scouring for space these days are scraping the bottom of the barrel. “There’s no space” left in Cambridge, says Jayson Rhuda, a tenant representative at CRF Partners Inc., an office real-estate firm based in Wakefield.

But that doesn’t stop companies from hunting. “Some companies just have to be in Cambridge, because of the mystique or the access to the young labor pool,” he says.

Companies that can’t find office space often turn to the classifieds to rent a townhouse or a condo and jam pack the house with employees. But if the residence is located in a residential-zoned area, it can violate city ordinances in two ways, with fines of $1,000 per day.

First, businesses generally may not move into areas zoned strictly for residential use. Jeff Hampton, Boston’s zoning planner, says some areas, such as Newbury Street and some parts of the Leather District, are zoned for mixed uses, allowing for both businesses and residences.

To complicate matters, each neighborhood of Boston, such as Roxbury or Beacon Hill, has its own complementary zoning rules. Explaining it, Mr. Hampton says, “can’t be answered easily.”

Some businesses try to get around this rule by allowing one employee to move into the residence, thereby technically making the use of the building a residence. Still, city laws restrict what defines a home office, which is recognized by Boston and Cambridge as an “accessory use.”

To qualify as a home office in Cambridge, a person must live in the residence, the business may only occupy 25% of the unit and no more than three persons may be employed and working at the site at any time.

Bob Bersani, commissioner of the city of Cambridge’s inspectional services, says he doesn’t know of any companies violating the zoning code. “I’d have to look at it on a case-by-case basis,” he says.

In Boston, similar rules apply for home offices under item No. 73, which allows for an “accountant, architect, attorney, dentist, physician or other professional person” to conduct business in a residence. The law limits residences to one employee in a single-family home, two employees in a multi-family home and three employees in an apartment.

Ted Pietras, Ms. Willis’s broker at Prudential Gibson Real Estate in Boston, says Hunt & Gather’s condo isn’t illegal because it’s a loft, which the city allows for both working and living space. (The Boston Redevelopment Authority confirms this is generally true for lofts.)

However complicated, most companies that rent know whether their space is illegal. Byron White, president of advice Web site lifetips.com Inc. and Webfish.com Inc., a Boston-based online supplier of seafood for restaurants, treads carefully around the city rules and those of his residential neighbors. To satisfy the “residency” requirement of home-office uses, Mr. White sleeps at his 2,100-square-foot office loft in the Leather District during the week. On weekends, he drives to his three-bedroom home in Newbury. To keep neighbors happy, he agreed to meet all visitors at the front door downstairs, instead of hitting the buzzer to let them in.

Mr. White says the arrangement works well for his lifestyle. He doesn’t have to commute to work every day and he can easily oversee his two young companies and three employees.

“The Internet life is really a work-around-the-clock life,” Mr. White says. He briefly considered other commercial space nearby for $6,000 a month, compared with the $3,900 a month he currently pays, but decided against it. “It’s not nearly as nice,” he says, pointing out his enormous windows and spiral staircase. “Why would I want to do that?”

Several companies that have moved into residential areas say it’s not always the preferable place to work. Some say they only did it as a temporary measure until they could find office space or until they outgrow their residential space. “It’s really a step in the evolution of their company,” says Mr. Rhuda, of CRF Partners. After a while, he says, “You just can’t fit any more in there.”

Philip Greenspun, chairman of ArsDigita Corp., a Cambridge-based software developer, says he sought out residential space because he wanted a comfortable, dog-friendly environment. And, he says, he was only able to find “dribs and drabs” of available office space at the time.

For one year, the company ran its business out of a four-bedroom townhouse on a residential street. To satisfy the zoning laws, one employee lived in one room. But the company filled the rest of the place with computers, desks and eventually 30 employees – which was in violation of Cambridge’s limits on the number of employees in a home office.

“It wasn’t strictly legal,” Mr. Greenspun says. “It was stretching the work-at-home” limits. But Mr. Greenspun insists he didn’t deceive anyone.

Employees worked in shifts because there wasn’t enough space and eventually, the firm leased the townhouse next door when the tenant moved out. Of course, there were some technical issues to overcome and some awkward moments.

Mr. Greenspun says ArDigita paid $15,000 a month to house the company’s servers in Waltham and he had a T1 high-speed Internet connection installed. He says saving money wasn’t the reason he moved the company there. He says he couldn’t find 3,000 square feet of office space at the time that would allow him to bring his dog, Alex, to the office.

These days, ArsDigita has more legitimate digs. It pays $500,000 a year to lease a three-story office building in Cambridge, next to a coffee shop. The firm has $38 million in venture funding.

Since ArsDigita moved out, the landlord, photographer Elsa Dorfman, says she’s gone back to renting it to students and she wouldn’t rent it out to another company. “It was very hard on the house,” she says. “Can you imagine 23 kids going up and down the stairs?”

Indeed, the neighbors don’t always enjoy having companies next door. “We weren’t being very responsible to our neighbors,” says Rajeeb Batra, vice president of InMeeting Inc., a Cambridge-based wireless……………. parking spaces taken up, after six months the company’s neighbors in the townhouse told the company’s14 employees to move out.

Mr. Batra recalls,” They said, ‘Look, guys, this is our neighborhood…Please find something quickly.”

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