Biden's Science Budget To Further Juice Lab Development
Real estate has its eye on Washington. With 1031 exchange rules on the chopping block, opportunity zones facing new rules and regulations, and a host of infrastructure proposals and spending plans in the works, there are numerous reasons to focus on the policy shifts that might impact future development.
But in the fast-growing life sciences real estate industry, there is also significant interest in a bump in government research investment and grants that may presage an even bigger boom for new lab space.
On the heels of a pandemic and the successful Operation Warp Speed, the vaccine-making initiative authorized to pump $18B into life sciences last year, President Joe Biden’s administration has proposed significant increases in spending on medical and life sciences research for the 2022 budget, asking for $51B for the National Institutes of Health, a 21.4% boost.
The potential windfall for research was called out in the Q1 earnings call from Alexandria Real Estate Equities, which noted the “whopping” 20% increase proposed for the budgets of the NIH, the Centers for Disease Control and Prevention, and the Department of Health and Human Services. There are a number of funds capable and looking to deploy capital, and industry analysts are keeping their eyes on final budget figures for the next fiscal year, said Brad Tisdahl, CEO of Tenant Risk Assessment, which has many life sciences clients.
“If the government announces grants to certain life sciences companies, private capital would be very agile,” he said.
The Biden administration’s request includes $6.5B for a new initiative meant to help supercharge specific areas of medical research. The Advanced Research Projects Agency-Health is a program modeled after DARPA, a Defense Department research initiative.
The Biden’s administration’s ask fits a general upward trajectory. The NIH budget has grown annually for the past five fiscal years, including a 3% increase for the current fiscal year, a $1.25B boost from 2020 for a total of $42.9B. United for Medical Research expects that upswing to continue and, in turn, continue to strengthen the research community.
In fiscal year 2020, the NIH awarded nearly $37B in grants, which supported an estimated 536,338 jobs and $91.35B in economic activity. The group doesn’t track spending on new labs. United For Medical Research estimates that for every $1 in life sciences investment, there is $2.43 in business activity.
Chol Pak, the president of United for Medical Research, an industry coalition advocating for more NIH funding, said the industry is waiting for further details. This additional concentrated funding could be a boon to certain research institutions and their respective markets.
There’s some disagreement as to how increased funding might influence the geographic spread of life sciences development. Tisdahl said he believes that it will fuel still more concentration in the agglomerated big three markets of Boston, San Diego and the Bay Area; life sciences infrastructure is expensive to build, and with so much human capital already in those markets, that is likely where the funding will go.
CBRE Senior Director of Research Ian Anderson said he sees the potential for growth in secondary and tertiary markets, especially areas like Madison, Wisconsin, and Houston, which also have top research universities.
There is also a large onshoring push for manufacturing, which may bring additional job opportunities and development back to regions outside the typical coastal markets. If the government pushes for more creation of products with mass-market appeal, such as vaccines, there will be a need for lots of additional production and research space, Tisdahl said.
It’s difficult to overstate the role that the NIH in particular plays when it comes to the funding of research, and therefore the demand for lab space and life sciences real estate. Its annual grants make it the largest single institutional funder of life sciences in the world, with some estimates suggesting a full 90% of new and commonly prescribed drugs on the market have some ties to NIH-funded research.
Tisdahl said that private capital and NIH funding is very “synergistic.” He compares NIH funding to federal support of defense or the automotive industry; money from Uncle Sam is a rising tide that lifts all boats.
But Anderson said NIH funding is more akin to an oil tanker: It’s big and hard to turn around quickly. It may be more instructive to look at how private capital reacts to NIH funding and the fluctuations of private capital, then simply base a response on the amount of funding itself.
Most life sciences firms, from startups to diversified firms, accept grant money. An enlarged and more diverse pool of grants takes some of the weight off firms trying to innovate, allowing them to expand and potentially fund additional lab or office space.
Tisdahl pointed to Novavax to highlight the power and potential of federal investment. In just the last year, this recipient of $1.6B in Operation Warp Speed funding was able to expand into a large production facility in Maryland on the heels of its acceptance into the program.
Even more important to the long-term health and stability of the industry, the NIH takes on the most risk, funding early experiments and gestating the ideas that will require years of applied effort and hundreds of millions in venture capital before reaching a patient, JLL Executive Managing Director and National Practice Leader for Life Sciences Travis McCready said.
Often, academic discoveries and the work of smaller startups, often buoyed by NIH funds, later get acquired and commercialized by larger firms. Federal funding is a lagging indicator of the volume of activity one can expect to see downstream in the market, McCready said.
“It is no surprise, then, that the industry regards the amount and percentage growth of the NIH budget as key performance indicators for the life sciences industry,” McCready said. “As far as development and company creation goes, there is simply no substitute for both the timing and amount of funding the NIH contributes in the life sciences every year.”
The annual Congressional appropriations process, which starts with committee hearings next month, seeks to pass spending bills before the August recess, and funding for medical research and the NIH has strong bipartisan, bicameral support in Congress, Pak said.
Typically, the NIH provides funding via a constellation of related institutions that tend to flow to institution core facilities, mostly within higher education and research institutions. The money provided to these sites then spurs additional private investment and capital, leading to the development of more wet lab incubators and commercial lab space, McCready said.
This funding flow explains in large part why the Bay Area, Greater Boston and San Diego, with proximity to top-tier academic and research facilities, have become nexuses of research and development.
“When you look at the critical role the NIH has played and continues to play in addressing the Covid-19 pandemic, it’s clear that a strong NIH is absolutely necessary to drive medical science to address not just our known needs but also to be able to respond the way it has to Covid-19, to new and emerging urgent public health issues,” Pak said.