Keep Austin Weird: How The Nascent Texas Life Sciences Market Could Grow With Fewer Labs
Joel Marcus, executive chairman and founder of Alexandra Real Estate Equities, had an unsparing take on the state of Austin’s life sciences real estate sector.
“The market doesn't exist today,” he told Bisnow. “It’s a tech market now, it’s not a life science market.”
So why did his firm purchase a 3.8-acre tract in downtown Austin for $108M in October, its first investment in Texas? It is about long-term planning, as well as demand. Marcus believes hip Austin, conducive to the recruitment and retainment of talent while benefiting from a low tax environment, offers long-term potential. ARE’s purchase of the site was meant to provide an option for firms within Alexandria’s portfolio looking to relocate to Austin; many tenants have been asking, unprompted, about making the move.
“Over the next decade, we think there's a nice opportunity,” Marcus added.
Marcus’ assessment about the city’s future mirrors that of other developers, analysts and biotech representatives who suggest the growth trajectory of this Texas city will likely be different, and more gradual, than other emerging life sciences markets.
The city’s heavy technology focus, and lack of a core academic institution with a nationally celebrated biotech program, like that found in cross-state rival Houston, will direct its evolution into a life sciences hub differently than its peers. Growth is likely to concentrate on the tech side of the industry first, with an expansion of lab real estate to come more gradually. Venture capital funding for life sciences firms jumped nearly 50% year-over-year during the first half of 2022, per Newmark data.
The local life sciences market has, in many ways, been shaped by the existing tech and startup market, said Jim Graham, head of investments at Research Bridge Partners Catalyst fund, which focuses on biomedical companies. He said aspects of tech that are increasingly applicable to life sciences, such as big data analysis and machine learning, present Austin with plenty of opportunities to help support consumer-facing, tech-enabled healthcare firms.
Examples include contract research operations, which handle drug discovery research work for biotech firms and clinical trial support. Both of these deal more with data analysis or management, making them good fits for Austin’s wheelhouse.
“I don't see a lot of new biotech companies being formed in Austin necessarily,” Graham said. “But if you’re having a conversation about where they would want to put a corporate presence, you might want to put a secondary location in Austin, a city very much in the conversation because of its entrepreneurial ecosystem.”
Austin has long been listed among the up-and-comers of the life sciences world, ranking 18th-best for talent by CBRE in 2022, while JLL recently highlighted it as an emerging market with a strong talent base, with a score that topped that of the booming Raleigh market.
Research from the brokerage Newmark noted Austin life sciences employment, which has grown 74% in the past three years, is expected to increase by 6.5% annually for the foreseeable future, with expansion expected in specialties like software tech and medical devices. The Austin Chamber of Commerce found the sector employs more than 18,000 workers across nearly 300 companies.
As an emerging market, Austin won’t be immune to the current downturn, Newmark Director of Research Liz Berthelette said. But its long-term prognosis is brighter; it’s a high-growth market with huge demographic tailwinds, and relatively affordable compared to places like the Bay Area, Boston and Seattle.
Mike Mencer is executive vice president and general manager of early phase at Worldwide Clinical Trials, a North Carolina-based contract research organization that just invested $10M in a new 15K SF bioanalytical lab in Austin, complementing an existing site in the city.
While there are practical reasons to stay in the area — many samples for the firm come from San Antonio — Mencer felt the city’s growth as a biotech hub sold the company on expansion, especially its growing population and nearby universities. He expects the firm, currently employing 100 workers, to add 50 more in the next year or so.
“It’s a very vibrant city, it's not a sterile place,” he said. “We don't have sterile workers.”
But that vibrancy hasn’t yet translated into significant regional lab real estate development. Newmark found the city has just 1.6M SF of lab or biotech space, slightly more than Chicago, with 176K SF in the pipeline, a fraction of what’s happening in other markets. The continued development of the Innovation District, which will be anchored by the Dell Medical School at the University of Texas at Austin, took a big step in August with the completion of the 16-story Innovation Tower, boasting 324K SF.
But it will primarily be office space in that flagship tower. Concurrent development of more lab space hasn’t yet taken place, Houston-based Newmark Research Analyst Kirsten Kempf said.
Austin Community College also just developed an incubator at the former Highland Mall site, and Parmer Labs, a section of the massive Karlin Real Estate-built corporate campus set to open in 2023, will bring approximately 100K SF of lab space to the market. But there aren’t many other significant developments in the works.
That’s not the end of the city’s real estate challenges. There’s also the persistent challenge of the region’s expensive housing market, ranked one of the nation’s most overpriced this past summer. Mencer said cost of living is a challenge, but the firm’s location at the south end of the city, near expanding suburbs between Austin and San Antonio where it’s more affordable, has helped with hiring.
But despite the slow pace of lab development, Austin’s role as a tech and data hub for life sciences may be approaching an inflection point, where existing growth in life sciences carries over to more lab construction. Kempf said Austin was the only market Newmark was tracking that had year-over-year growth.
“I’m not sure that kind of startup culture is necessarily being captured in real estate reports,” she said. “I honestly can’t say that Austin has missed the boat. But it also isn’t all of a sudden going to burst with more lab space.”