Cities Where Life Science CRE is Flourishing

Despite the headwinds faced by the office sector and gateway markets, Boston’s new-supply pipeline for life sciences-based real estate remains robust, according to CommercialEdge’s business manager, Doug Ressler.

“Thanks in part to breakthroughs of mRNA and CRISPR technologies, billions of dollars of funding— both private and public—have been flowing into the life science sectors in recent years,” Ressler tells GlobeSt.com.

“Investors are paying top dollar for lab space, and developers are rushing to bring more to market. While there has been some concern in recent months that rising interest rates and general economic weakness could cause a slowdown in the sector, it has not yet manifested in the sales and supply data.”

Square Footage Rates 150% Higher

Life science properties command high sale prices. According to CommercialEdge, the average sale price of a life science facility in 2022 is $645 per square foot, 150% higher than the overall average of $258 for general office buildings.

Buildings that are candidates for conversion into lab space can command higher prices, too. DivcoWest bought the 138,400-square-foot 5000 Shoreline Court in South San Francisco for $164.5 million ($1,188 per foot) and immediately began converting the building into lab space.

Developers are rushing to build in life science markets, as supply of lab space lags demand. Including owner-occupied properties, 21.6 million square feet of lab space are underway nationally.

The largest projects under construction in Boston are towers that broke ground before COVID-19 upended the office industry, such as the 1.4 million square- foot mixed-use Winthrop Center or the 1 million-square-foot redevelopment of One Post Office Square.

Since the pandemic began, more than 40% of all new office square feet under construction there are in buildings designated as life science space.

Among projects that have broken ground since the start of 2021, that share jumps to 55%. This doesn’t include properties that will devote just a portion of their space to life sciences, like the 950,000-square-foot Fenway Center.

Heavy Demand for Lab Space in Boston

Bill Olson, Senior Director of Life Sciences at Columbia, a Mass.-based construction management firm, tells GlobeSt.com, “In Greater Boston’s crowded life sciences hubs, we continue to see heavy demand for lab space and manufacturing facilities for the Big Pharma and Institutional sector.

“This often means adapting nearby buildings that have served other functions to accommodate life sciences’ needs; a complex process but one that allows for greater efficiency and productivity and most importantly, adjacency.”

‘Dry Powder Needs to Be Deployed’

Dan Johnson, senior VP at Raise Commercial Real Estate, tells GlobeSt.com that several significant scientific breakthroughs will act as a tailwind for the entire life sciences industry and spur further demand for lab space.

“These companies need space to do scientific work and they will keep marching forward regardless of market conditions and deal with them as needed,” Johnson said.

“On the backs of these breakthroughs are enough requirements to carry the commercial real estate markets in key regions. These companies are getting creative, however, and scrutinizing their leases to obtain the right space and considerations.

“The biggest biotech markets are entrenched and growing. Certain secondary markets are positioned for this same kind of growth.”

Johnson said that any emerging life science market must have the right components in place for optimum growth such as one or more elite universities, research dollars to deploy, and extensive healthcare systems nearby.

“Recent scientific breakthroughs have also attracted the attention of non-traditional biotech investors,” he said. “The venture capital injected into biotech is increasing and has been for a while and there is more dry powder that needs to be deployed.”

Mike Lee, life science lead, workplace strategy and human experience, Newmark, tells GlobeSt.com, “There is a good deal of [investment dollars] coming from both venture capitalists and pharmaceutical companies, though — with some uncertain market conditions brought on by macroeconomic trends — that dry powder will likely be deployed with increased conservatism.

“Longer-term bets and new, exciting platform-based innovations like cell and gene therapy may find it more difficult to attract capital in this kind of climate — if so, government investment can play a vital role in de-risking new technologies and buying time for emerging firms to become more attractive for private investment.”

Lee said there’s been increased interest from secondary and tertiary markets to attract and grow life science business, and — although life sciences can be seen as a hedge against slower office demand — discussions regarding cost of living are a common thread and a high priority amidst heavy competition to attract and retain talent.

South Florida a Boom Town for Life Sciences

David Seifer, corporate and finance practice group leader at law firm Bilzin Sumberg, tells GlobeSt.com that on the real estate front, the life sciences industry has been booming in South Florida.

“As the FDA finally returned to approving products that are non-COVID related, we’ve seen a tremendous increase in the commercialization of products and the development of product pipelines and, as a result, the demand for the life sciences space,” Seifer said.

“In addition to working on commercialization transactions for life sciences companies, we continue to see strong demand for real estate as a result of the new capital in the market.”

He said there’s a mix of new-to-market and local companies investing in all categories of real estate, including life sciences space.

“These companies and the principals behind them are looking to set up private funds for real estate deals,” Seifer said. “I’ve been receiving at least one call each week about setting up new private real estate funds, whether blind pool or targeted asset deals, which shows that the market continues to be hot down here, notwithstanding the recent increases in interest rates.”

Luminous Capital Eyes San Fran, San Diego

Matt Stephenson, Principal of Irvine-based Luminous Capital Management, tells GlobeSt.com that he sees an emerging opportunity in the core biotech hubs of San Francisco and San Diego.

“With the bulk of investment allocated to lab-focused properties, relatively little attention is being paid to where these therapeutic discoveries will be produced,” Stephenson said.

“Broadly speaking, it’s not in a $9 per-square-foot tower in Torrey Pines, Calif. We believe biomanufacturing demand is a growing wave that will withstand short-term economic countercurrents.

“Luminous sees a pending under-supply of cGMP properties that can accommodate life sciences production, and we believe these advanced manufacturing activities will remain somewhat insulated from the current venture capital pullback.”

He said that there is plenty of money available to fund life sciences activities, it’s just “risk off” presently.

“However, moving a therapeutic from pre-clinical testing through clinical stage and ultimately commercialization is, comparatively, a less risky investment than the initial research and discovery phase.”

Rents Holding Firm, Or Increasing

Eric Bluestein, executive managing director, Newmark, tells GlobeSt.com that rents for quality life science projects and existing lab space have held firm and, in some cases, even increased.

In the Bay Area, demand has increased to 5.4M SF from 4.5M SF at the end of Q2, he said.

“Companies with experienced leadership teams and a proven track record continue to have success in raising sizable rounds of investment to help them reach their next milestone,” Bluestein said.