Drug Manufacturing Demand Surges Amid Supply Shortage

Demand for cGMP manufacturing space—or pharmaceutical drug manufacturing space—is growing, thanks to new drug applications and FDA drug approvals. In San Diego, which is a significant hub for cGMP users—the new demand is causing a supply shortage in an already very tight industrial market. While industrial users in general are finding the market challenging, the specialized requirements and large capital investment needed for cGMP spaces put additional pressure on this niche of users. We sat down with Doug Lozier, SVP at CBRE and an expert in this space, for an exclusive interview to talk about the demand for cGMP space and how users are coping with the supply.

GlobesSt.com: What is driving this increase in demand for cGMP space?

Doug Lozier: In the last few years, we have seen a whole new class of gene therapy drugs that have hit the market. This class of drugs has increased dramatically, and therefore the need for manufacturing space capacity has increased. The second factor is that there has been a market increase in new drug applications in general with the FDA, and that is typically a precursor to a downstream need for manufacturing space. Lastly, there was an executive order signed by our president to instruct the FDA to expedite drug approvals for certain life-threatening conditions. Again, that will create more manufacturing capacity needed to produce those drugs, in whatever class they may be.

GlobeSt.com: What do users look for in a cGMP compatible industrial space?

Lozier: A cGMP manufacturing facility would be housed in a single-story industrial building with 18 to 22-foot clearance that can be retrofitted to add a substantial amount of power, HVAC capacity and process piping and plumbing. It is really an MEP play and a structural play to the buildings.

GlobeSt.com: There is already a shortage of industrial space in San Diego and throughout Southern California. What is the supply like for cGMP space, and what are the challenges for users looking for space?

Lozier: The increased demand has decreased the supply inherently, because there is already a shortage of existing cGMP space. Typically, these facilities are very capital intensive to build. They can range anywhere from $400 per square foot to $1,200 per square foot. The timeline to build-out these facilities are typically 30 to 36 months to plan, design, build and validate. If you combine those two factors with the shortage of supply… The third challenge is that landlords are somewhat reluctant to fund these improvements because they are very specialized, even from cGMP tenant to cGMP tenant. There is really very little residual value of manufacturing space to a landlord once the lease is expired or the tenant’s use of the building is complete. Because of that, there is no cGMP space being built on a speculative basis and the user funds most of the projects with small amounts of contributions funded by the landlords. That said, there has been a competition for industrial space for conversion opportunities. Typically, a user that is contemplating a cGMP manufacturing use in a building would pay on the margin a bit more in terms of rent. That is also driving, overall, industrial rental rates up.

GlobeSt.com: What is you advice to cGMP users looking for a manufacturing facility?

Lozier: First, determine if your company will be outsourcing to a third-party CDMO or if your plan is to self-perform and build your own facility. That would be step one. If you decide to self-perform and build your own facility, then you, need to really plan ahead and hire good consultants. Most importantly, you need to understand your budget and the protracted nature of the construction schedules. Because of the shortage of manufacturing space and the timeline to build it, there is a huge group of companies called CDMOs that are acting as third-party manufacturers for companies that need to bring products to market quickly. They run the gamut of specializations, and they are filling the void because of the shortage of manufacturing space in the market. Some companies want to control the process and the facility to minimize risk. Other weigh the risk-control factor with speed to market. It is a balance in whether you go third-party CDMO or decide to build-out a facility.

GlobeSt.com: When should cGMP users consider a CDMO?

Lozier: CDMOs are very expensive. A lot of companies will use third-party manufactures for their clinical trials in cases where they only need small-batch production. When they get into a long-range commercialization strategy and they need large quantities, they will look into building out their own facility. CDMOs have the manufacturing facilities and capacity in place, so they can scale quickly. As I said, it takes 30 to 36 months to build out these facilities, and if you are entering phase two of clinical trials, you don’t have three-years to wait. It doesn’t make sense. That is where these CDMOs really come in.

GlobeSt.com: What is your outlook for the cGMP niche in the next one to three years?

Lozier: We are in the second inning of a nine-inning ball game. In this new class of gene therapy drugs, there is so much happening with that science, and we are seeing more and more of these drugs hitting the market or getting into clinical trials. So, I really see a shortage of cGMP manufacturing space in the near and mid term and possibly in the long term. We are just beginning.