Developers Preparing For Surge In BioTech, Converting Buildings To Lab Space

Developers, ready for a surge in biotech demand, are busy converting existing industrial and office space into lab space, according to our speakers at Bisnow's Healthcare Leadership and Life Sciences Forum last week.

Pacific Building Group director/division manager Hollis Gentry, moderator for our life sciences panel, asked members about current trends in the life sciences industry.

Pictured left is Bisnow's Kyle Nicholes, who kicked off the life sciences session with panelists Hollis Gentry, Douglas Lozier and Grant Schoneman.

CBRE SVP for life sciences Douglas Lozier cited two major trends in biotech real estate: repurposing existing office and industrial buildings and redevelopment of existing biotech space. “That’s evidenced by a handful of projects we’re seeing, whether it’s Phase 3 properties on Campus Pointe, or R&D and industrial buildings that are being repurposed for lab use.”

He said there is a tightening of space on Sorrento Mesa and Torrey Pines Mesa biotech markets, which is driving infill development in the Campus Pointe market and starting to spill over into Sorrento Mesa. Douglas said current redevelopment is similar to what occurred in 2000, when the area experienced a tech boom.

JLL SVP for life sciences Grant Schoneman said University Towne Center is experiencing a huge surge in redevelopment to meet demand. More than 800k SF of office and industrial buildings have been re-positioned for life sciences tenants and about half of this new space is already leased.

Nanomedical Diagnostics CEO Ross Bundy (pictured), whose company is in a converted space in Sorrento Mesa, said there is a lot of value in those spaces for early stage companies. “When you’re just getting going, you’re thinking about where your capital is coming from and those spaces tend to be a little bit cheaper (than new biotech space). It allows you to put more of your money into advancing to get to the place where you can raise more capital,” he said. This year has been challenging for raising venture capital, which he said has put his company’s expansion plans temporarily on hold.

While there’s still high demand for biotech space, Grant said the decrease in VC has caused a shift to slower leasing activity in 2016, compared to 2014 and 2015, which were robust, stellar years for the life sciences industry. He said life sciences companies are pausing and taking a more conservative approach to growth now. Over the two previous years, companies projected growth and signed leases based on anticipated space requirements, but now they are waiting on data to confirm the need for more space, he said.

Ross attributed the slowdown to the current election cycle and some recent big biotech failures that have made some investors skittish, but expects VC activity to pick up after the election. “Everyone’s waiting to see how the politics go,” Ross said. He anticipates funding after November will enable his company to move forward with plans to expand into a larger space, but said the challenge ahead is to find lab space that’s ready to go. “If I go and raise a lot of money, my investors won’t want to wait nine months for me to get a lab built out and add more people.”

Grant said smart developers are preparing for a surge in VC funding by building generic, flexible biotech space that's ready to go. “This allows companies to come in and make some improvements and move in within three to four months, not build it from scratch,” he said. There are still a lot of transactions and a lot of things happening in the sciences sector, it's just not up to the volume of the previous two years, he said.

DPR Construction project executive Carlos Crabtree (far right with Ross Bundy and Grant Schoneman to the left) said while there’s some some volatility in the biotech sector, big projects for companies like Illumina and Eli Lily are underway. "The fact that activity has slowed down is only by comparison to 2014 and 2015, which were extremely busy," he said. “The question is: Is it going to continue growing, are we going to have a boom after the election, or will it slow down again?

“I do think that in San Diego we have a lot of great stuff going for us as it relates to life sciences, we’ve great research institutes—TSRI (TechReg Services Inc), the Venter Institute, Novaris, Salk, UCSD, and a lot of great people—some of them here in this room who know how to work on life sciences projects." Carlos said some companies may migrate elsewhere, but others will move to San Diego. From a real estate point of view, he said the industry’s part in this is to create spaces where biotech companies can thrive.

Hollis asked the panel to discuss the term “bench-to-bed,” and how that affects the real estate side of life sciences. Grant said translational medicine is at the forefront of life sciences research and healthcare, which seeks to advance genomics and personalized medicine, diagnosing and treat individuals based on their health profiles. “Research is taking place in the laboratory with the goal of getting that to the consumer in the form a medicine or therapy, and we’re seeing that happen quicker," he said.

According to the European Society for Translational Medicine, this is an interdisciplinary branch of the biomed field supported by three main pillars: benchside, bedside and community. The goal is to combine disciplines, resources, expertise and techniques within these pillars to promote enhancements in prevention, diagnosis and therapies. 

"What’s driving this is the need for quick answers," Grant said. He said this is already happening in the oncology space, because people diagnosed with cancer want the ability to try different therapies, which means getting new drugs to clinical trials quickly.

Hollis (left, with Douglas Lozier, Grant Schonema and Ross Bundy) asked Ross if amenities matter to medical device people in these converted buildings as much as people working in laboratories and up on The Mesa.

Ross said people like the campus environment, but suggested it’s not nearly as common here as in the Bay Area or Boston. If there are places close by to go eat, it’s good for morale, he said, but not necessary for his company's 12 employees, who are in their mid-30s, have small children at home and want a work/life balance. He said amenities are important to attract talent if a company is building its workforce on young professionals. 

What is necessary is efficient use of resources or space and an environment conducive to his specific operations. Ross said the space he’s in right now doesn’t have the electrical infrastructure to provide the power his operations need, so this has been an issue. Ross also said that while his company is in the biotech/life sciences sector and needs lab space—it operates more like an electronic company and needs truck access. “So Torrey Pines, I’ll never go there because you can’t get a truck into any of those buildings."

Carlos said the reality is that lots of amenities are going into life sciences facilities and even the smaller firms want to add some spice. "We do a lot of work with Illumina, and they’re putting in soccer fields, a fitness center, redoing their cafeteria." He mentioned Alexander's Campus Pointe campus, which has lots of amenities, including a Grand Malarkey restaurant and a fitness facility. As a result, Carlos said,“They’re able to get the tenants and added on 150k SF. I think a lot of this is about Millennials and a strategy to keep employees engaged and not go elsewhere."

Douglas, who is a tenant rep, said, “The dirty little secret about all these amenities is somebody’s paying for them, and it’s the tenants. It’s being paid for out of their operating expenses. We advise our tenants to take a good, hard look at what’s important culturally, from an operations and employee perspective, then look at amenities offered and what you’re paying for them in your CAM charges."

Discussing competition for life sciences tenants, Carlos said researchers want to stay close to major research institutions like UCSD and Scripps, so it’s tough to compete with Torrey Pines and UTC markets for this sector. But for companies more focused on logistics than research, there are advantages to the North and East County markets, including infrastructure, lower cost, speed to market and good road access.

His company recently completed an aggressive project in Oceanside, where plan checks and permits were approved in six weeks. “The city’s inspector checked in with us every day, even if we didn’t call him, to see if there were any inspections we needed him to do,” Carlos said. The city enabled delivering the space in record time, he said.

“So I think there are some differences, and that could be a competitive factor for some companies going to certain cities, where ‘they get it,’” he said. Carlos said entitlements take a long, long time to get done in the City of San Diego. Hopefully developers will stay within SD County, he said, “but I think there are some opportunities for building new life sciences facilities outside the City of San Diego.”

For a company that needs a big manufacturing facility, it makes sense for them to go out to Sorrento Mesa, Poway, the I-15 Corridor, Carlsbad or Oceanside, as real estate is cheaper, Grant said. He said smaller R&D companies of 10k SF to 20k SF will stay in the biotech cluster because they can get good-quality, Class-A lab space that gets lots of light into the a lab and the type of space they need “on somebody else’s dime.”

Doug said CBRE worked on the Vertex account for a 180k SF build-to-suit in Torrey Pines. Despite the long entitlement process, he said Vertex principals want to stay on The Mesa because it’s prestigious and helps them recruit talent and retain key employees.

Grant said owners are redeveloping old lab space on The Mesa, gutting it and putting in modern lab facilities. He suggested the only new trend coming down the pike is redevelopment of buildings to vertical lab space, like Phase 3 did with a seven-story building at Campus Pointe. “I think this will happen as occupancy gets tighter and land and redevelopment properties more scarce,” Grant said.