2021 Was The Hottest Year Ever For Life Sciences Real Estate. In 2022, Biotech May Boil Over
Amid commercial real estate’s uneven year of setbacks and recovery, at least one thing was made clear: Life sciences real estate emerged as a force in the market across the country.
In 2021, the sector exploded, with scores of massive developments, successful Covid-19 vaccine rollouts showcasing the potential of new technologies, record-setting public and private investments, and interest from new developers and property owners trying to ride a market upswing. While predictions for 2022 suggest a similar all-gas-no-brakes style of growth, both in the U.S. and overseas, the story isn’t as simple as unbridled expansion and opportunity.
The industry’s success has led to significant growing pains — especially around the challenges of quickly delivering new lab space in top-tier markets such as Boston, San Diego and the Bay Area — felt even in newer, expanding markets. A CBRE report this week put the space crunch into perspective: The amount of lab space under speculative development nationwide, 21M SF, isn’t keeping pace with the overall demand, estimated at 23.8M SF and growing.
The big story of success that marked 2021 somewhat masks the underlying challenge of meeting demand, one that will be a central theme next year as the entire industry tries to overcome the physical limitation threatening to dampen its incredible momentum. But over the past year, these were the storylines that defined the life sciences real estate market.
Creative Solutions To The Space Crunch Multiply
For emerging markets, like those in Texas, there’s a chicken-and-egg dilemma: New startups can’t grow without lab space, but many developers won’t speculatively build new lab space without tenants. The response in many cases has been massive, multiuse public-private plans to create incubator and lab space, including the 23-acre Pegasus Park in Dallas or the 37-acre TMC3 project in Houston, which will eventually help fill the gap, but require years of construction.
In more established markets, the solution has been conversions, with a run of increasingly costly property acquisitions underscoring the high demand for space. Deals include a $364M property sale in Seattle’s South Lake Union, and Alexandria Real Estate Equities’ $815M Cambridge acquisitions. Conversions have also become more and more creative; a Bay Area JCPenney’s sold this year to be converted into lab space.
In Boston especially, firms are doing whatever it takes to keep a foothold near Kendall Square and the region’s unrivaled talent pool: established firms are opening up satellite manufacturing sites, while startups will “run virtual,” conducting research in the cloud for months as they wait for space to open.
Biomanufacturing Becomes Highly Sought-After Sector
The rapid and successful development and deployment of Covid-19 vaccines, and the billions of dollars the federal government invested in expanding manufacturing capacity proved a powerful boost to an already expanding biomanufacturing industry.
With significant concentrations in Maryland and North Carolina’s Research Triangle, biomanufacturing’s boom currently has multiple underlying factors: vaccinations and a push to rebuild and reshore manufacturing and supply chain capacity; the need for more therapeutic and testing material for new technology, such as cell-and-gene therapy, which is driving big demand for such spaces in Boston; the growth of contract manufacturing organizations, which companies increasingly turn to for outsourcing their manufacturing needs. These biotech assembly lines are likely to ramp up even further in coming years. The promise of mRNA, realized with new vaccines, will lead to numerous new drug trials and startups, and federal investment is poised to pump up the sector significantly.
The Spigot of VC Cash Just Won’t Stop
The space shortage animating so many aspects of life sciences right now wouldn’t be nearly as pressing if it wasn’t facing a firehouse of new funding. The record-setting amounts of venture capital funding in 2021 were gobsmacking; $26B was raised in the first half of the year, nearly as much as the $33.1B raised through the entirety of 2020.
While it’s challenging to directly connect funding dollars to square footage needed by startups — although Healthpeak Chief Investment Officer Scott Brinker estimated earlier this year that every $1M of venture capital and money raised in initial public offerings translates into about 400 SF of needed space — when companies raise money, much of what they spend it on is real estate.
The Race To Become The Next Top-Tier Life Sciences Market
The domination of the big three biotech markets — Boston and Cambridge, San Francisco and San Diego, which just saw its top research institutions pledge $800M for expansion — was reinforced throughout the pandemic, with a number of big deals serving as reminders of just how valuable talent access can be (mRNA pioneer Moderna is building a nearly 500K SF new HQ in Cambridge, for instance). Many cities are angling to become a part of this top tier, but all face a variety of hurdles, including attracting developer interest, building out the right talent pipelines and creating an ecosystem of different spaces and entrepreneurial talent.
New York City, which has sunk nearly a billion dollars into underwriting the growth of new lab spaces, is growing but struggles to attract out-of-town firms and overcome expensive development costs. Seattle’s expansive growth, and the expansion of clusters like Bothell, has been steady, but the competition for downtown space with tech firms can make new developments costly. North Carolina has a big lead in biomanufacturing capacity, and it is just beginning to develop a robust supply of lab space. Texas, especially Houston, has expansive visions and numerous megaprojects in the works, as well as top-tier medical facilities and talent, but needs to rapidly increase square footage.
Lab Tech Is Evolving, And So Must Its Space
Traditional visions of test tube-laden lab spaces have long ago given way to a more high-tech, digitized version of biotech research and development. Along with the advent of promising new therapeutic pathways via mRNA and cell and gene therapy, labs themselves have evolved, outfitted with cutting-edge computers, robotics and AI. These tech systems and platforms make space and talent more efficient: large troves of research data can be quickly analyzed for possible connections and cures, machines can streamline lab operations and run tests 24 hours a day, and robotic lab operations mean tests and experiments can be quickly replicated.
All of this means shrinking lab space, faster pathways to cures and an expanding market for contract manufacturing and research to augment smaller, more nimble startups.
Community Backlash Could Be Brewing
Life sciences developments, physical manifestations of a high-tech and job-heavy industry, have mostly been welcomed with open arms. But amid the clamoring for new lab space, some tension between biotech buildings and their neighbors signal more such battles may be ahead.
In Boston, a string of new conversion and lab projects have alarmed some community groups, concerned about the speed of development and the potential downsides of living next to labs (security and biohazard fears, the loud noises generated by oversized HVAC systems). In New York City, various neighborhood groups and even the local city council member unsuccessfully fought an expansion plan by the New York Blood Center, which earned zoning approval to vertically expand its facilities with new lab space for startups.
While the main battle turned on height, building shadows and the typical reasons neighborhoods push back on new development, leading players told Bisnow that fears of new lab spaces were an underlying concern. As demand pushes more firms to try urban conversions, it’s likely many more battles like this will break out between lab builders and their potential neighbors.
Can Government Dollars Make Biotech Bloom?
As if record-setting amounts of infrastructure spending isn’t sparking enough demand, proposed federal spending may trigger even more growth. President Joe Biden’s administration has promoted numerous initiatives to juice research and lab building budgets, including historic raises in funding for the National Institutes of Health, the primary means of supporting the basic research that often gets spun off into new startups; ARPA-H, a high-tech research initiative modeled after DARPA; as well as an array of place-based policies, including funding in the Build Back Better plan to support local economic development plans (the $1B Build Back Better Challenge) and create an array of tech hubs across the nation, including those focused on life sciences.
“[It's] a generational moment, for any institution or collaborator building an innovation ecosystem,” JLL Executive Managing Director and National Practice Leader for Life Sciences Travis McCready told Bisnow.
Cities and states including Maryland have, with varying degrees of success, also tried to subsidize the industry’s growth. New York City’s LifeSci NYC initiative, a pool of $1B being used to help fund development costs, has helped launch projects, but still hasn’t created the momentum needed to launch projects without incentives. A more successful example can be found in North Carolina, where state investments in workforce development have helped make it a center for biomanufacturing development and growth.