Life Science Sector Rents Up, But Lack Of Supply Problematic

The life science real estate market is hopping. Rent is increasing. Millions of square feet are under construction. Venture capital funding reached $10B last year. Demand for space is high, but a lack of available space could prove challenging, according to JLL’s recent US and Local Market Life Science Outlook.

JLL research analyst Wes Simon, above left with a friend during a recent Cubs game, tells us top life science markets such as Boston and the San Francisco Bay Area “benefit from self-sustaining ecosystems.” They have top universities with world-class medical facilities and research institutions. This provides companies direct access to a desirable talent pool.

Rapid M&A activity in the sector is affecting real estate.  Pharmaceutical and biotech M&A activity resulted in a record high of $520B in transactions last year, according to the JLL report, and is not expected to slow down anytime soon.

As an example, Wes says when Merck acquired Cubist Pharmaceuticals in Boston, Merck spun out the real estate owned by Cubist. This activity can benefit companies looking to grow in markets with limited space available.

“In highly competitive clusters this also presents a unique opportunity for investors because many of these properties already have usable infrastructure in place, which limits the need for capital improvements,” Wes says.

On the downside, M&A activity could drive up vacancy rates in less established markets. Tenants in these markets are finding new ways to use space, Wes says. In Denver, much of the product is first-generation conversion lab space and flex/office-to-lab conversion space.

Here's how some of these national trends are affecting the top life science markets.

BOSTON

Supply: 19M SF
Under Construction: Over 2M SF
Vacancy: 5.9%
Average Rent: $75/SF (Boston CBD – Longwood Medical Lab); $70.12/SF (Cambridge); $25.42 (suburbs)
Venture Capital Funding: $2.5B
NIH Funding: $2B

JLL EVP Matthew Powers tells us Boston has vertical integration and increased M&A activity, and both are leading to a nearly 300% increase in demand for large blocks over 100k SF. Demand for small blocks of less than 20k SF is also rising. This has resulted in a demand-to-supply ratio of 4:1.

“Left unabated, this lack of supply could choke the success of the overall cluster,” Matthew says.

Matthew says there are “relief valves” in the form of several developments. The biggest opportunity is the redevelopment of Volpe Site, but this is a long-term project, according to Matthew. The top short-term opportunities include development on Binney Street, two development parcels in West Cambridge (one is already entitled), Seaport including Innovation Square and a potential opportunity at 27 DryDock and North Point.

What makes Boston the top cluster is the uniqueness and maturity of the market, an abundance of innovation, a mature venture capital community, serial life science entrepreneurs, and mature and sophisticated life science REITs and property owners such as Alexandria Real Estate Equities, BioMed Realty, Longfellow and King Street, according to Matthew.

SAN FRANCISCO BAY AREA

Supply: 19M SF
Under Construction: Over 3.5M SF
Vacancy: 2.9%
Average Rent: $60/SF (Mission Bay); $57.84/SF (North County); $45.72/SF (South County); $42/SF (Oakland/East Bay major lab)
Venture Capital Funding: $1.5B
NIH Funding: $891M

JLL research manager Christan Basconcillo, above, tells Bisnow the needs of young researchers and scientists are creating a demand for modern-looking lab space, which many top companies use as a recruiting tool.

Favorable venture capital funding, which has contributed to life science startup growth, makes the Bay Area an ideal place. The Bay Area also boasts a plethora of companies, such as Genentech, AstraZeneca, Roche, Gilead, Amgen and Merck, and several well-known top universities with strong life science programs, such as Stanford, UC Berkeley and UCSF.

“When coupled with Silicon Valley’s strong roots in modern-day technology, firms have the ability to be located near companies, not just life science, who are constantly seeking next-generation solutions for the future,” Christan says.

Startups are using technology to create the next generation of biotech and life science projects and are attractive acquisitions for large firms, Christan says. Google is stepping into the sector with Verily and Calico. Along with its roots in technology, Google is “pushing the envelope for other established companies to follow in order to remain competitive,” Christan says.

Demand for lab space has risen over the last four years without a significant increase in supply. Recent developments, such as The Cove in South San Francisco, are resulting in large, speculative lab space breaking ground for the first time in five years. Pre-leasing of the new spaces is robust, Christan says. Many companies will still have trouble securing quality space.

SAN DIEGO

Supply: 11.9M
Under Construction: Over 1M SF
Vacancy: 33.3%
Average Rent: $47.40/SF (Torrey Pines); $46.20/SF (UTC); $36/SF (Sorrento Mesa); $35.40/SF (Sorrento Valley)
Venture Capital Funding: $485M
NIH Funding: $780M

JLL SVP Grant Schoneman, above, says San Diego has a base of large research institutions, is the nation’s premier genomics cluster and houses prominent companies like Illumina and Human Longevity. Major pharmaceuticals such as Eli Lilly, Celgene and Takeda also have significant R&D presence.

San Diego has a “breadth of talent and entrepreneurism combined with a uniquely collaborative environment,” Grant says.

Alexandria, BioMed Realty and HCP control 70% of the leasable lab space in the region and are investing more, Grant says. These landlords can fund turnkey tenant improvements, which has helped attract young biotech firms able to use their funding toward R&D instead of facility improvements.

While leasing activity in 2014 and 2015 produced single-digit availability and double-digit rent increases, landlords are creating significant amounts of space. Over the past 18 months, over 800k SF in University Towne Center has been purchased and is being converted to lab space. Over 400k SF has been leased, with another 150k SF pending activity. Torrey Pines Mesa has about 250k SF of future ground-up development available along with another 500k of redevelopment of antiquated lab buildings. UTC/Campus Point has over 1M SF of future development and 700k SF redevelopment, according to Grant.

The only problem with all this space is demand has curtailed in recent months due to problems with public markets and venture capital fundraising. The biotech index fell by 25% during the first half of this year, causing several publicly traded biotech firms to lose on average 50% of their market caps, according to Grant.

Companies have become more conservative with their real estate needs since the end of 2015 and into this year. It’s also taking startups longer to get Series A and Series B funding from venture capitalists, who are becoming more careful about where they provide capital. While the index is recovering, many firms are waiting for market cap rates to rise before moving forward on their facilities, Grant says.

SEATTLE-BELLEVUE

Supply: 4.6M SF
Under Construction: 300k SF
Vacancy: 5.1%
Average Rent: $43.87/SF (Seattle – Lake Union); $42.20/SF (Seattle – Capitol Hill)
Venture Capital Funding: $310M
NIH Funding: $829.1M

JLL SVP Danny Seger, above, says life science is the fifth-largest industry in the Seattle region and accounts for over $12.5B of the state’s GDP. Major funding from the Gates Foundation, venture capital and NIH funding make Seattle the sixth-most-funded life science region. This has supported the growth of small and midsized life science ventures populating the region.

A lack of space is among the biggest challenges. While South Lake Union has been the heart of the Puget Sound life science industry, vacancy rates are under 3% and average full service asking rents are firmly in the mid-$40s/SF with some deals reaching above $50/SF. The entire 300k SF under construction for the region is all within this expensive submarket. The area’s newest building, Vue Research Center, pre-leased 140k SF and filled up the rest as soon as the center opened. Capitol Hill, aka “Pill Hill,” is an emerging lab market housing several major medical centers, but has no vacancy and no new projects planned.

Low vacancy is pushing companies east to Bothell and Redmond, where there is more space and affordable rent creating “de facto manufacturing locations” for pharma, biotech and medical device and instrument industries, Danny says. There’s also 10% vacancy in these markets. Small and midsized firms can find opportunities here, but only one block of space over 50k SF is available.