As Complexity Of Life Sciences Increases, Challenge Of Custom Builds Tests Developers
Labs and biomanufacturing facilities have always been complex machines that are challenging to build and operate, but recent developments in biotech have made building lab space more difficult, even relative to what was built five years ago, adding layers of complexity that favor deeper pockets and developers who can operate at scale.
Today’s facilities, influenced by the growth of mRNA and cell and gene therapy, a more challenging financial market and supply chain delays, require significant technical expertise, capital and an appetite for long-term risk.
This new generation of high-tech labs are “basically a new asset class for institutional real estate owners outside of Alexandria [Real Estate Equities],” Boston Properties Vice President Jon Lange said.
“If you look at the landscape out there, there's owner-users that have these high-end, very customized, very specific buildings, and equipment tied to the buildings and systems integrated in the buildings,” he said. “It’s asset by asset and use by use, which is hard to standardize.”
Technical expertise and the ability to read markets and predict the specific needs of growing lab tenants — specialized skills that have always been in short supply — are more valuable than ever. Every part of the industry, from startups to Big Pharma, and diagnostics to therapeutics, is impacted.
“It’s not just in life science, it’s even in base buildings,” DPR Life Sciences Core Market Leader Mike Marston said. The firm’s recent 10x Genomics project in Pleasanton, California, a 150K SF lab building, required extensive in-house engineering to meet ambitious timetables.
“Buildings are getting more complex," he said. "Your basic bricks-and-mortar, bricks-and-sticks, some of that hasn’t changed at all. But the systems that we now see going into buildings are getting more and more complex.”
Scale is an advantage for bigger players, Lange said, but there are a handful of smaller, more boutique regional developers that he feels are able to compete by being more responsive and focused. Building 40K SF to 80K SF lab spaces, instead of 500K SF campuses, means they can be quicker and more responsive, and get updated labs to market more quickly, as long as they continue to be responsive to client needs.
This new tech includes polymerase chain reaction machines, which manipulate DNA and RNA and can be as large as washing machines, and high-end instrumentation. And cell and gene therapy companies in particular want to be located adjacent to or within a facility that offers biomanufacturing capacity.
The amount of new equipment, along with increased investment in robotics, AI, and digital and computational power to aid research, have pushed developers to add much more electrical capacity on new sites.
There is a lot of nuance, Lee said. Many firms have well-worn blueprints for bringing generic labs online, but the real demand today is for more customized, sophisticated research facilities, which can meet research needs and attract top-tier talent.
“Experienced operators with a proven track record of delivering and maintaining environments for research and development probably have a slight advantage in an environment where growth is maybe slowing to a more sustainable level,” Lee said.
Optionality, functionality and flexibility are also in high demand for lab spaces. While there’s no specific analysis of how much lab space contains cutting-edge design and equipment, there’s a built-in push toward being accommodating. In the next two years, 29.1M SF of lab space is expected to be under construction nationwide, 26.2M SF of which will be speculative, allowing tenants to more easily call the shots when it comes to tenant improvements.
“There's been so many changes in technology shifting the way we do things,” said Dacon Director of Operations Jennifer Luoni, whose firm specializes in lab buildings. She personally hasn’t felt the process become more complicated, but it has evolved rapidly.
“How you thought you built the lab before, is now changing into something else.”
Lee also sees an increased desire to locate different facilities next to each other, such as research and manufacturing, as a means to speed up development and “get to profitability a little faster.”
The slowdown in venture capital funding has left many startups without a clear timeline for their next funding round, so many are stretching out their existing funding and trying to accelerate research as much as possible.
Newmark Research Director Liz Berthelette said these kinds of mixed spaces, especially those that maintain space for a quality standard known as good manufacturing process, such as the 100 Salt St. project in Boston, are likely in higher demand, especially in mature markets.
“There's a tension in the air,” Lee said. “And I think that a lot of companies are doing their best to prepare themselves for the current market.”
For developers, this subtle shift requires expertise across the board. Lee said there aren’t specific roles or positions in demand, rather expertise and experience, especially in operations and design.
Continuing supply chain issues mean materials and specialized equipment need to be ordered nearly a year before some spaces open, so developers need to have a good understanding of what a firm needs now and will need in the future. DPR’s Marston said the firm continually focuses on in-house training to keep up with changing technology.
Lange said there’s especially high demand for talent who specialize in operations and a low supply of such workers because of the tremendous growth in the space.
The complex analysis necessary to see what’s needed in an ecosystem, how a startup will grow and what space and gear they’ll need in the coming years, has long been touted by bigger developers and managers as a critical advantage. Alexandria Chairman Joel Marcus said earlier this year in an earnings call that the scale and ecosystem ARE have created give it the ability to see a few steps ahead and plan accordingly.
Lange agreed, and noted that firms of similar size, including his own, Healthpeak and BioMed, have that advantage over new entrants to the market, especially in a market where costs are rising, venture dollars are shrinking, valuations are dropping and biotech firms have switched to cash conservation mode.
“You get this bifurcation between what the user needs and what the owner can ultimately provide right now,” Lange said in reference to the evolving needs of potential tenants. “Especially in a world where, in the last several months, the cost of capital has gone up, it's really hard to spec something and guess what your future tenant will need.”