Life Sciences Real Estate Sees Hot Demand

March 31, 2021 • Patricia Kirk

The mapping of the human genome and subsequent advances in biotechnology, along with a push to cure costly diseases, have driven hot demand for life science real estate for more than a decade. But the push for COVID-19 vaccine development and medications to treat COVID-19 patients has heated up this real estate subsector even more, boosting public and private funding for biomedical research and increasing research activity and demand for lab space.

Money to Spend

Venture capital investment in U.S. life science companies hit a new $17.8 billion record for fiscal year ending Q2 2020, reports CBRE. Additionally, Congress increased the 2021 National Institutes of Health (NIH) budget by 3 percent to $42.9 billion, up from $41.7 billion in 2020. More than 90 percent the NIH budget funds medical research, both internally and externally.

The top markets in the U.S. life science ecosystem remain Boston, San Francisco and San Diego, according to JLL’s mid-2020 life science report, so it comes as no surprise that 70 percent of all venture capital goes to projects in these markets.

Hot Markets

Research funding follows talent and infrastructure, and, historically, about half of all NIH funding—47 percent—has gone to life science markets in the Northeast Corridor, including Boston-Cambridge and Washington, D.C.-Baltimore, or California, according to CBRE. In recent years, however, an increasing amount of venture capital and NIH funding has gone to emerging life science clusters, where academic medical institutions are catalysts for research activity.

New York-based Audrey Symes, JLL director of research for Life Sciences and Healthcare, notes, for example, that the University of Pittsburgh Medical Center (UPMC) has been among the top five institutional NIH funding recipients twice in the past five years and continues to attract funding.

With the pandemic accelerating medical discovery and innovation, all traditional life science markets, including Boston-Cambridge, San Francisco, San Diego, Washington, D.C.-Baltimore, Raleigh-Durham, North Carolina, and New Jersey, are experiencing record demand for lab space and development, according to JLL.

The suburban Maryland submarket adjacent to Washington, D.C., is among established life science markets seeing increased demand for lab space due to federally funded COVID-19-related research. Gaithersburg, Maryland-based biotech company Novavax, for example, received a $60 million contract from the U.S. Defense Health Program to manufacture its COVID-19 vaccine candidate, NVX CoV2373.

Ian Anderson, CBRE senior director in the Philadelphia office and head of office research in the Americas, notes life sciences development also is happening in markets where it has never occurred before.

He says that Houston’s Texas Medical Center has long been a hotbed for medical research, but not for life science real estate development. Now, a partnership between two Houston-based developers, Hines and 2ML Real Estate Interests, has announced plans to create a 52-acre life science cluster adjacent to the Medical Center. This mixed-use development, called Levit Green, will include lab and office space, along with retail services and other amenities expected in modern research clusters.

Over the last 24 months, Phoenix also has seen $3 billion invested in developing 4.5 million square feet of life sciences and health services real estate projects, notes Symes. Among the projects are two lab-office buildings that will house Caris Life Sciences' Molecular Intelligence Folfox, an artificial intelligence oncology treatment that has received a Federal Drug Administration breakthrough therapy designation.

But the top three life science markets are seeing the tightest vacancy and greatest amount of biolab construction. According to the CBRE report, wet lab vacancy at the end of Q2 2020 was 4.9 percent in Boston, 1.5 percent in San Francisco and 8.9 percent in San Diego.

Boston-based Robert Richards, executive vice president at Cushman & Wakefield who leads the Cambridge/Urban team and heads the Life Science and Healthcare Practice Groups nationally, says that demand for lab space in the Boston metro is insatiable right now, and vacancy is expected to remain tight until all new product underway is delivered.

About 5 million square feet of lab space is underway in the Greater Boston area, with delivery expected by the end of 2022, reports the Boston Business Journal, which notes that about 50 percent of all space underway is preleased. In addition, 94 percent of space delivered in 2020 is leased, and 81 percent of deliveries expected in 2021 are already committed.

Making Space

Long timelines for delivery of ground-up lab projects and a flight-to-quality trending among office users are influencing a surge in office-to-lab conversions, especially for older Class A and Class B buildings, in both traditional and emerging life sciences markets. A total of 3.1 million square feet of office-to-lab conversions were announced in the Boston metro in 2020, according to JLL. Richards says that demand is strong in the Boston metro, and office-to-lab conversions are expanding outside traditional life sciences boundaries and are now common in several suburban submarkets.

Additionally, a Q3 2020 CBRE report also noted that one-fourth of the Bay Area’s 4.2 million square feet of lab space in pipeline was office-to-lab conversions, and conversion projects accounted for over half of San Diego’s 1.5 million square feet of lab space under construction.

“Developers and office owners see strong value and stable long-term demand for this product,” says Richards, noting that life sciences companies commit to long-term leases, commonly 10-15 years. In addition, lab rents are in excess of $100 per square foot in the Boston metro, and conversion projects are trading in the $1,700 to $1,800 per square foot, he adds.

With such positive metrics, investor interest in life sciences real estate has never been greater, with many investors entering this sector recently for the first time. Richard predicts that capital investment for lab conversion projects will be robust over the next 24 to 36 months, and notes that all investor segments are in play, from pension funds and REITs to private funds and foreign investors.

But not all office buildings are candidates for lab conversions, according to a report from design firm Gensler. “Science buildings are different than office buildings and need to fit into the context of surrounding uses,” says architect David Bendet, practice leader, Life Science+Technology at Gensler and co-author of the report. Bendet explains that planning and zoning codes must allow the research use and additional servicing, loading and utility-yard space.

Before tackling a conversion project, landlords and building managers need to understand the differences between office and life science users. The key challenge is marrying characteristics of an existing building with the unique specifications of science facilities and needs of different user organizations that may be housed there, says Bendet.

“Don’t underestimate the challenge,” he emphasizes. “While most people-oriented office and collaboration spaces are similar, science programs vary widely in complexity, and the room environments must respond directly to these programs,” Bendet adds, noting that the process to adapt a building to laboratory space can be costly.

This is why a detailed “facilities assessment” of the existing building and “basis of design” for the programmatic space, indoor environmental conditions and equipment needs, is a critical first step in the process. Bendet explains that it provides a gap analysis needed to determine both a building’s suitability for conversion and identity the “set of requirements” to be achieved in order for the facility to support the new use.

Lab Space Considerations

First, the building’s structure must have the proper dimensions, floor-to-ceiling height and column spacing, as well as provide stable vibration performance and load-carrying capacity to meet the higher demand of equipment in science buildings, he continues. 

Operational requirements, including robust ventilation and HVAC systems, have implications for both building managers and maintenance staff, as this equipment protects the health and safety of occupants from chemical and biological materials used in research and must work properly, Bendet stresses.

A larger main power service, with twice the capacity of a typical office building also is required to support research activities and equipment, as well as a standby power generator to protect critical infrastructure systems, ongoing research and sensitive products, he continues. Backup power equipment must be ready to go online immediately should a power outage occur.

Similar to tech campuses, life science clusters are communities unto themselves. But unlike office users, life scientists spend everyday—all day—on site, so spaces should provide an appealing array of hospitality-style amenities, services and programming to recruit and retain talent.

Life scientists desire adjacency to other science organizations to provide opportunities to collaborate and socialize with life scientists from a range of experiences and expect the space to support these activities, Bendet notes. The space, therefore, must provide multiple meeting and gathering spaces for collaboration and socializing, including access to outdoor spaces and onsite dining options and recreational amenities, such as a fitness center, yoga studio or basketball court.

Roger Humphrey, JLL executive managing director and leader of the Life Sciences Group, also notes a need to build flexibility into research space so scientists can easily reconfigure workspaces to accommodate different types of research and facilitate collaboration with colleagues.

Mobile benches and unassigned workspaces, for example, allow for fast changes in personnel and type of work performed, he notes. In addition, hanging retractable electrical cords from the ceiling provides flexibility in locating equipment, so users aren’t limited to placing it against walls, and hiding technical infrastructure behind facades aids in moving people and equipment easily through the space.

Over the last decade, advances in technology have changed how life scientists work, first modeling their theories or ideas on computers before taking them to the bench, notes Steve Purpura, CBRE vice chairman of the Boston consulting practice and lead/director of the life sciences practice group. This has resulted in a decrease in space allocation to lab space, from a 50:50 office to lab ratio a few years ago to 60:40 today, he says.

This trend is likely to continue and requires a shift toward greater agility in research space design, according to a JLL report, titled “Journey to the Next Gen Lab.” The report discusses the trend to shrinking wet lab space and expanding flex and office space for computational science to accommodate needs of scientists who are spending more of their time analyzing data. And, it reiterates how flexibility in lab space design and location can accommodate sudden shifts in research priorities and access to talent.

As the sector continues to evolve, property professionals face yet another opportunity to do what they do best—provide tenants with the quality spaces and services they need to innovate, build, discover and advance the communities that surround them.

ABOUT THE AUTHOR: Patricia Kirk is a freelance journalist whose work has appeared in the National Real Estate Investor, Urban Land Magazine and Bisnow.