Vaccine Work Boosts Montgomery County Life Sciences Demand, Outpacing Available Space

The federal government has pumped billions of dollars into Montgomery County life sciences companies to work on a COVID-19 vaccine, and these investments are having major implications for the area's real estate market. 

The vaccine-related activity is creating more demand for lab space in an already tight market, further reducing vacancy rates and driving up rents. This dynamic is leading developers to consider breaking ground on spec and converting vacant office buildings to lab space, multiple experts said Thursday on Bisnow's Life Science Surge webinar.

The Department of Health and Human Services has distributed billions of dollars through its Operation Warp Speed program, with a goal of producing and delivering 300 million doses of effective vaccines starting in January. Four of the 10 companies that have received the most funding are based in Montgomery County, BioHealth Innovation CEO Richard Bendis said. 

Gaithersburg-based Novavax received $1.6B to manufacture a COVID-19 vaccine, HHS announced July 7.  Rockville-based Emergent BioSolutions received $628M in funding, HHS announced June 1. U.K.-based GlaxoSmithKline, which has a Global Vaccine Center in Rockville, was part of a partnership that received $2B in vaccine funding. AstraZenaca, a U.K.-based company with a major Gaithersburg facility, received $1.2B in vaccine funding in May. 

"It speaks to how important from a vaccine development and manufacturing perspective this region is to everybody in the world, because almost 40% of the funds from Operation Warp Speed are going into one small county in the U.S., which happens to be part of this region," Bendis said. 

This vaccine funding is not only benefiting the companies that have received it but also the broader market that supports them, EwingCole Managing Principal Bill Gaudreau said. 

"There are so many companies that are involved in supporting the manufacturing, testing, distribution, there's a huge benefit that has played out," Gaudreau said. "There's been an increased demand in the real estate market to try to accommodate those [companies], and it's been difficult with the shrinking availability of space in the market."

Venture capital investment has also been flowing into Maryland life sciences companies. JLL has tracked more than $500M in VC investment in the region's life sciences companies this year, compared to $100M in 2016, JLL Executive Managing Director Pete Briskman said.

"There is a direct correlation between VC and private equity and tenant demand, so in the future what we're going to have to do is keep up with that demand," Briskman said.

Life science tenants created 870K SF of leasing demand in suburban Maryland from January 2019 through June 2020, comprising nearly 25% of the area's commercial leasing activity during that period, according to JLL. The vacancy rate for suburban Maryland life sciences space is around 4%, Briskman said, compared to roughly 17% vacancy in the area's office market. 

This low vacancy rate has led rents to increase by nearly 50% over the last three years, Briskman said. Even with the increases, he said rents in suburban Maryland's life sciences market are still roughly half the rents in the Boston, New York and San Francisco markets. 

"There is certainly a value play in staying in Maryland even though the rents are increasing," Briskman said. 

Briskman said he expects the rising demand and rents in the life sciences sector will lead to more developers entering the market and to more speculative construction. 

"I think we're going to see more spec development," he said. "I think we're going to see institutional owners from outside our region enter the market and maybe buy land and entitle it."

In addition to new development, Briskman said he is seeing a growing trend of life sciences companies leasing spaces that developers have converted from other uses. 

"Because the market is so tight, tenants and landlords are being more flexible with their space needs," he said. "So if you're manufacturing you can go to warehouse buildings ... you can also convert an office building. Owners are looking at office product that's empty and saying 'here's an opportunity.'"

Alexandria Real Estate Equities and an affiliate of Scheer Partners converted an 80K SF office building in Gaithersburg into lab space, and in August the team announced it signed a lease with Novavax to bring the project to 100% leased. Rock Creek Property Group in 2018 signed a full-building lease with Supernus Pharmaceuticals for a 119K SF Gaithersburg office-to-lab conversion project. American Gene Technologies in July leased 27K SF of lab space in a converted office building in Rockville.  

Gaudreau, who works on strategic planning and design for initiatives for his architecture firm's science and technology tenants, also said he is seeing many property owners adapt vacant office buildings for science purposes. 

"We're in the middle of a very robust marketplace with inadequate real estate opportunities to support the life sciences community, so anything that the market can do to support the development of more space and more capability for these companies ... is really what's going to be key for this economy," Gaudreau said. 

LucasPye Bio founder and CEO Tia Lyles-Williams said that while the influx of vaccine funding has benefited the market, it has also created challenges for the manufacturing of other drugs not related to the coronavirus. 

"For all the space the COVID effort is going to take up, that's also a loss to different patients with different chronic diseases for which there may be a shortage of drugs," Lyles-Williams said. "Patients have already been turned away from receiving their regular dose, their standard of care has been interrupted because of what's going on with Operation Warp Speed."