Why ‘You Can’t Fake It’ In The Fast-Growing Life Sciences Sector

The fast-growing life sciences market is attracting new players from all corners of the commercial real estate sector, but a biologics CRE veteran warns that they need to understand the nuances and history of the industry before they dive in.

Revenues and investments in the life sciences sector have nearly doubled since 2020 even as many other industries struggled during the pandemic. JLL has forecast that biologics industry sales will continue to grow by more than 10% annually through 2026, driven by the development of vaccines and personalized medicine.

“Institutional capital is trying to get into the life sciences sector today more so than ever before,” said Bill Hunter, principal and co-founder of Outshine Properties. “What was once a very niche vertical has now become much more mainstream.” 

With its high barriers to entry and complex fundamentals, Hunter said it is a challenge for many groups to break into the space — “and you can’t fake it” if you don’t understand it, he added.

Hunter, whose firm specializes in building and delivering speculative, move-in-ready lab spaces, has “lived it” for more than two decades. He and his fellow principals at Outshine have completed transactions valued at more than $4B on more than 35 properties across the country. 

To succeed in life sciences real estate, Hunter said, it helps to understand how the industry got to where it is today, what its tenant base needs and where those needs are heading. 

“The highest barrier to entry in life sciences real estate is the lack of qualified operators, compounded by the lack of track record and experience among industry professionals,” he said. 

Hunter’s experience in life sciences began when he joined BioMed Realty Trust almost 20 years ago. At the time, BioMed was focused on seven major life sciences markets in the United States. 

But over the years, investors began associating certain urban clusters — and only those urban clusters — as sustainable life sciences markets.

“Investors who are new to this vertical immediately associate ‘life sciences clusters’ with three super-clusters: Boston, San Francisco and San Diego,” Hunter said. 

Hunter said many institutional investors fail to realize that the foundation of the life sciences industries began in the mid-Atlantic region. Today, that market has more owner-occupied lab and GMP space than Boston, San Francisco and San Diego combined.

That is why, to this day, many global research and manufacturing organizations choose to locate in what has become referred to as “secondary markets” in corridors of or near Philadelphia, Washington, D.C., and New Jersey.

Hunter said these secondary markets have all of the necessary pieces of the puzzle: qualified human capital, abundant venture capital and sponsored research from the public and private sectors.”  

Boston and San Francisco, with their concentration of leading research institutions, are typically at the top of any ranking of primary life sciences clusters in the United States. However, driven by rapidly rising costs and the desperate need to scale up into commercial operations, new firms have set up shop along the Route 128 Boston beltway.

Hunter said that this outward migration is playing out in many metro areas across the country, and these newly emerging life sciences hubs are among Outshine’s sweet spots.

“Cities like Cambridge are very crowded marketplaces,” Hunter said. “They are dominated by a handful of very large, institutionally driven developers competing for a limited number of projects. This has driven cap rates down to an all-time low while the competition has never been more robust. This is why Outshine focuses on secondary locations within primary markets and primary locations within secondary markets.”

One thing that has not changed is the need for nearby existing research institutions to supply a reliable pool of highly qualified professionals. Hunter said this is known in the sector as the “eds and meds” factor. It explains the emergence of evolving life sciences markets in areas like Boulder, Pittsburgh, Minneapolis and Cleveland.

Biologic companies also can move fast. Unlike traditional pharma companies that have historically relied on large R&D and manufacturing campuses to conduct their chemistry-related activities, biologics companies can set up in a much smaller place seemingly overnight. 

“Life sciences companies are generally not able to reliably predict growth to a degree of certainty, and further complicating the issue is that labs and GMP space take a long time to design and build,” Turner said. “The unfortunate result is a severe imbalance of supply and demand with new and expanding research companies needing lab space immediately.”

This accelerated pace has helped to create what Hunter called “hyper-demand for lab space globally.” Among the first CRE professionals to recognize this trend were Alan Gold and Gary Kreitzer, co-founders of Alexandria Real Estate Equities and BioMed Realty Trust, the original pioneers in providing lab space to biotech startups.

“They realized tenants were investing huge amounts of money into leased industrial facilities,” he said. “They also realized that these industrial landlords leased this second-generation space faster and at a premium without investing a dime of landlord work.”  

This led to the birth of the modern-day phenomenon of the third-party leased lab and manufacturing spaces. 

Fast-forward more than 20 years and life sciences tenants are still clamoring for space and willing to pay for it. Only now, Outshine, which Hunter co-founded in 2020 with his partner Jonathan Scheinberg, meets their needs with move-in-ready speculatively designed and built labs.  

“We understand what the tenants are looking for and we deliver it with the fastest time to occupancy at the lowest possible total cost of occupancy,” Hunter said. “It’s simple supply-and-demand dynamics with a life sciences flair.”

This article was produced in collaboration between Studio B and Outshine Properties. Bisnow news staff was not involved in the production of this content.

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