Maryland's Life Sciences Market Needs More Spec Development To Compete With Massachusetts

The efforts to develop a Covid-19 vaccine accelerated the already strong demand for life sciences real estate in Maryland, and tenants now want lab space faster than developers can build it. 

The market's vacancy rate has fallen so low that life sciences companies often can't find space that meets their time-sensitive needs, experts say, leading them to look to other markets. 

The D.C. region has risen to the No. 4 biopharma cluster in the country, according to the latest ranking from biotech magazine GEN in March, behind only Boston, San Fransisco and New York. But developers and local officials, speaking Thursday on Bisnow's Maryland Life Sciences Surge webinar, said Maryland needs to build more product for large move-in-ready tenants if it is going to compete with the top three. 

"When they come to see us, they’ve either gotten something approved or they need to get a vaccine out and they need a building tomorrow," Matan Cos. Managing Principal Mark Matan said. "There is no gray area, and if we can't deliver the building, they leave."

Matan is currently building 2M SF of spec life sciences product along the I-270 corridor to try to meet that demand. He said his company has completed about 500K SF so far, most of which is leased, and it expects to deliver another 500K SF by year-end. Last month, Australian Covid-19 testing company Ellume leased 180K SF across two buildings at Matan's project. 

JLL Executive Managing Director Pete Briskman said the I-270 life sciences market experienced 280K SF of positive absorption last year, while the office market experienced negative absorption throughout the region. He said Covid accelerated an already active market, and it led more large-scale tenants to seek space.

While the market previously was dominated by smaller, early stage companies, Briskman said many of the tenants today are looking for 35K SF and above, as they are working on Phase 3 drug trials or vaccines that require more manufacturing capabilities. 

"These companies that we're working with are getting to the inflection point of, 'Do we outsource manufacturing or do we in-house? Maybe it’s a hybrid,'" Briskman said. "And real estate comes into play because they look around and they’d prefer to keep it in-house, but if there’s nothing available, a lot of them will end up just outsourcing or going to another region."

The vacancy rate for I-270 life sciences space is 3%, Briskman said, compared to 16% for the area's office market. 

"That's not healthy for attracting companies," Briskman said of the 3% vacancy rate. "The tenants that I work with, they want different product types, they demand a broader search and more available opportunities."

Matan said the 3% vacancy rate reflects a lack of available product in the market that needs to be addressed. He said speed-to-market is a key factor for today's life sciences tenants, and he said the local government often slows down the process on the development side. He called on Montgomery County and Maryland to incentivize and fast-track life sciences development. 

"We need inventory," Matan said. "We need to incentivize not only the tenants, but also we need to incentivize the developers. When we go to a lot of these jurisdictions, there’s fast-tracking for tenants, that’s great, but there needs to be fast-tracking for developers to develop the buildings, because without the buildings, you’re not fast-tracking tenants."

Maryland Department of Commerce Secretary Kelly Schulz, in response to Matan's call for developer incentives, said her agency is restricted in what it can provide for new developments. But she said she sees the need for new development and is working to help facilitate it. 

"At the Department of Commerce, we’re not ultimately providing incentives and tax credits and those types of financial opportunities; it’s [our job] to be a clearinghouse, a resource for all of the different state agencies that may be needed in order to expedite some of the projects," Schulz said. "Because we all know time is money when it comes to the development industry."

Schulz said her goal is for Maryland to move into the top three in the biopharma cluster rankings by 2023, and to ultimately reach the No. 1 spot. The annual GEN ranking of biopharma clusters takes into account a region's federal funding, venture capital funding, patents, lab space and jobs. 

One of the advantages Maryland has over the higher-ranked markets, Briskman said, is its properties have lower rents. He said Maryland's life sciences rents have gone up about 6% during the coronavirus pandemic, but they are still roughly half that of Boston and San Francisco.  

"That's a reason why people want to come here, and we need to piggyback off that," Briskman said. 

Schulz said she has worked with tenants that have narrowed their space search to Maryland, Boston and San Francisco, and she said the rent prices do play a role. 

"What we typically hear is we’re one of three states they’re looking at to be competitive when RFPs come out, and those site selectors are looking at us," Schulz said. "I hope rents don’t come up to San Francisco and Massachusetts, because we have a real viable opportunity to be No. 1."

The pandemic has helped provide the funding and real estate demand to vault Maryland up in the rankings. BioHealth Innovation CEO Richard Bendis said 40% of the vaccine funding through Operation Warp Speed went to companies in Montgomery County. 

Bendis is now working to raise $2.5B to build a new research center that will help anticipate future pandemics. Dubbed the Global Pandemic Prevention & Biodefense Center, the facility aims to fund research on antibodies for the top 100 most likely future pandemics. 

He said the proximity of federal agencies such as the National Institutes of Health and the Food and Drug Administration make Montgomery County the most logical landing spot for this type of facility. 

"We’re really positioned to be creating this global pandemic center that can be proactive in the future, save a lot of lives for Americans as well as people around the world, and we have all the resources in our backyard to make this the global center for pandemic prevention as well as biodefense prevention," Bendis said. 

The federal agencies and life sciences companies in the region are also still fighting the battle against the coronavirus pandemic. While the majority of Americans have received a vaccine and many states have lifted their capacity restrictions, scientists are now working to address Covid-19 variants, said National Cancer Institute Scientific Programs Director James Cherry. 

"There are individuals that are not getting vaccinated," Cherry said. "Unfortunately, that allows the virus to change, and we hope with those changes or mutations that the vaccines are going to still be able to be responsive, but we can't just hope, we’ve got to prepare."