LA Life Sciences Developer Herd Expected To Thin

Life sciences is arguably the most popular kid in the CRE cafeteria right now: Developers have seen demand everywhere from an industry where workers largely can't work from home, and venture capital dollars gushed like a sheared fire hydrant earlier in the pandemic, with raises hitting record levels. 

But if attendees at Bisnow’s Los Angeles Life Sciences Summit thought they were going to hear only about all the opportunities in life sciences real estate, they might have been disappointed. 

“I think what we're going to see over the next couple of years is fewer developers focusing on this particular type of development,” Trammell Crow Co. principal Nancy Moses told a standing-room-only crowd at the Sofitel Los Angeles at Beverly Hills hotel. 

Moses recalled a slide she had seen in a presentation on the life sciences development landscape. 

“It was this beautiful image of 8,000 people jumping on top of each other, trying to climb a wall, and at the top of the wall, there's two or three people,” Moses said. 

The takeaway? Not everyone can be a life sciences developer, Moses said.

“There’s so many complexities to it,” she said. 

Panelists spoke about the challenge of upgrading space when one tenant leaves and another with a totally new set of very specific needs comes into it. Using modular construction for clean rooms, labs and other parts of these specialized facilities as often as possible was one way some of them attempted to keep costs down while maintaining high flexibility for a space. Life sciences projects are also subject to many of the same materials and infrastructure challenges that developments in other property types experience. 

The most frustrating setbacks are often the ones that are out of the hands of the developers and general contractors, panelists said. 

“I got a call on June 15, when I was trying to get my permanent power switched on, telling me that [the utility] had zero of my seven transformers that they'd been promising me since January, that they had no idea when I was going to get my transformers, and that it could be as late as November,” Breakthrough Properties Senior Director, Design and Construction Sarah Williams said about an under-construction project that she was planning to deliver in September.

The setback is expected to affect lease commencement dates, Williams said. 

“It's the things I can't control that I need to make sure I have contingency plans for — and extra money socked away — so that it's not going to completely disrupt our ability to turn a profit for investors,” Williams said. 

The market is also being impacted by a shift in funding. 

“I would love to tell everybody, ‘Yes, rental rates are continuing to grow and demand is far outpacing supply,’” Hatch Spaces co-founder Allan Glass said. “The reality is that the life science industry is experiencing the same difficulties as all the other industries are right now.” 

Venture capital funders, which showered the sector with cash in 2020 and 2021, have pulled back, and while some other funding sources are entering the fray, panelists said it is clearly belt-tightening time. 

“It's difficult for startup companies and, for that matter, more mature companies that are in Series B, Series C rounds to get that next capital raise at a valuation that's necessary for them to show that they're continuing to grow,” Glass said. 

Glass said that with funding flowing less freely, these companies are going to need less space or are going to try and keep costs low to stretch their last capital raise a bit further, and that is translating into more conservative decisions about where they take space and how much they occupy.