Still-Maturing Life Sciences Hub In Mid-Atlantic Navigates Rapid Changes

The mid-Atlantic has emerged as one of the most prominent hubs for the life sciences industry. Yet industry experts say the region — which stretches from the Baltimore metro area to the Washington, D.C., area and south to Richmond — is not fully mature.

There is still substantial runway remaining for the industry to grow locally, given some of the region's advantages compared to other hubs nationwide, experts said Wednesday at Bisnow's Mid-Atlantic Life Sciences & Biotech Summit.

"It's much cheaper to live here, to have your employees live here, and have a higher quality of life than it would be in some of these other more expensive markets. I think that makes the DMV very attractive when comparing it to San Francisco, Boston, Cambridge and other markets," Stonebridge Development Manager Christopher Smith said at the event, held at the Progress Labs at Riverside 1 property in Frederick.

Experts said the level of investment in life sciences properties in the D.C. and Baltimore metro areas has slowed recently amid wider uncertainty in the economy and the capital markets. But at the same time, the investment philosophy toward life sciences assets in the mid-Atlantic is evolving, drawing more interest from backers venturing into the region for the first time.  

One significant change centers on how backers view the properties, panelists said. Investors — particularly institutional investors — previously regarded investing in life sciences properties as an alternative investment to boost portfolio yield. Now investors consider these assets as a significant part of their broader diversification strategy, especially as they shift away from office properties and, to a lesser extent, retail holdings.

"Obviously, in the past three years, there's been a need for increased institutional exposure besides the major food groups, and that's led people to learn more about life sciences. And that's fed the investment [locally]," Warren Avenue Investors Chief Investment Officer Eli Gurwitz said.

Monday Properties Senior Vice President of Acquisitions and Capital Transactions Cliff Cummings said his firm purchased Rockville's Park Plaza I and Park Plaza II last September to increase its portfolio diversity instead of trying to juice its portfolio's income. Monday Properties has a large office portfolio that has faced financial challenges in recent months.  

"It was a diversification play in a way, a defensive play that had a strong cash flow and was financeable because of that cash flow," Cummings said. "Otherwise, I think it would have been a real challenge to get that particular investment off the ground ... So, we saw that as an opportunity to play on both sides of the ball from a commercial standpoint."

Investors who had previously been uninterested in the region's life sciences assets are increasingly aware of the region's potential and are competing for properties, panelists said. 

"In the last handful of years, people are realizing that there is opportunity and scalability here," Longfellow Real Estate Partners Managing Director Greg Capps said. "The market has predominantly been cornered by just a few bigger players historically."

While it has garnered more attention from investors, the region does face headwinds, ranging from limited supply to rising interest rates, that represent hurdles to increased growth in its life sciences real estate market.

"The limiting factor that I see for our market is the total quantum of the space here," MetLife Investment Management Regional Head of Acquisitions Aaron Kutner said. "I mean, we're talking about rough numbers — 12.5M SF of lab office space, maybe another two to three of GMP [manufacturing] space. Not all that is going to be available for investment at any one time."

Given economic uncertainty caused by rising interest rates and other factors, Warren Avenue's Gurwitz said it has become increasingly difficult to close deals in recent months.  

"Environments like this one where it is hard to get a deal done, no one's sure what that stabilized yield needs to be and what the appropriate exit cap is, whether it's the credit and quality of the tenant or the quality of the building. It's a moving target at this point," Gurwitz said.

Despite the struggles, panelists said they are generally optimistic about the future of mid-Atlantic life sciences assets and the industry's ability to attract investment and spur more development as economic conditions improve. Most said they expect interest rates to stabilize by the end of the year and any lingering effects to dissipate in the next two years.

"Right now, we are a lot closer to the end of a tightening cycle than when this slowdown started," MetLife's Kutner said.

DPR Construction’s Abhishek Dhawan said the life sciences industry is on the verge of massive growth. The evidence of that pending eruption, he said, is the 40,000 clinical trials of various drugs underway in the U.S.

He expects these companies' ever-changing demands to cause an explosion in the types of space they will need, along with a surge in other requirements. As a result, the number of obstacles that designers, developers and construction firms must navigate to deliver these spaces will surge.

"It further creates a need and demand for innovation space, manufacturing spaces, including spaces that are move-in ready, cell and gene therapy, manufacturing infrastructure, all of those are currently in demand. So by and large, when you look at this region, actually, it's seeing everything, you know, idle acid conversions, it's seen new groundouts, manufacturing expansions, warehousing and all of these trends only continue to go in the right direction," Dhawan said.

Brad Stewart, Montgomery County Economic Development Corp.'s senior vice president of business development, said he has had sporadic frustration with the pace of the life sciences sector's growth in the region during his 27 years working in Maryland.

Still, if he takes a step back to examine the industry objectively, there's significant progress, he said. Among the most apparent areas of advancement are job security and career advancement opportunities in the local sector. 

"I know that long ago, if I tried to hire someone here as a VP of marketing, it was impossible," Stewart said. "People weren't willing to come from somewhere else and move to a place like this just because there weren't future job opportunities. And one of the things that we face is just the inherent challenge of being in a high-risk business, right? No matter what you do, there's a possibility of failure. So, I think that's changed."

In JLL's most recent Life Science Outlook report, released in September, the Greater DC and Baltimore market ranked No. 4 among the nation’s top life sciences clusters. The region trailed only Boston, San Francisco and San Diego. However, that ranking stemmed from the amount of funding in the area, primarily due to its proximity to federal institutions.

While the region’s life sciences industry rakes in a ton of federal funding, Travis McCready, JLL's U.S. head of life sciences industries, said that hasn’t translated into a thriving environment for entrepreneurship.

"For 33 years running, Johns Hopkins has been the single-largest NIH-funded institution in the United States ... up until nine years ago, however, only four companies translated in the life sciences out of Johns Hopkins ... So, there's no correlation between federal funding and company creation in the life sciences. And that's a mistake," he said.

Regarding available talent, the Greater DC and Baltimore region ranked No. 6 behind North Carolina's Research Triangle, centered around the Raleigh-Durham area, and New Jersey. While one of the region's strengths as a life sciences hub is its talent pool, panelists said the region needs to improve the available talent for specific jobs. 

The region, panelists said, has excelled at developing the highly educated workforce that firms in the research and development sector of the industry need. However, there's room for improvement in providing workers needed in sectors of the life sciences industry like manufacturing.

Those firms offer jobs that are most accessible to the broadest swath of workers in the region because, in many cases, they at most require an associate's degree. Yet, that's the thinnest section of the region's workforce.

The relative absence of workers available to fill those roles shows the need to improve outreach and provide training to prepare workers to fill those positions, panelists said. 

Panelists also said they believe in educating students about those jobs as they enter high school, particularly students uninterested in pursuing an advanced degree. Stewart suggested recruiting military veterans to improve the pipeline of workers. While those roles require some skills, they don't need the time and financial commitment of earning a bachelor's degree. 

"A job in life sciences could be your first job. It doesn't have to be McDonald's," Maryland Department of Commerce Director of BioHealth and Life Sciences  Ulyana Desiderio said.