'You Can Certainly Miss': Developers Launching Into Life Sciences Finding Labs Aren't Easy Money
Developer Michael Darby plans to break ground next month on the first life sciences project for his firm, Monument Realty, which has a long history of developing apartment buildings in the D.C. region.
At the 135K SF Monument Innovation Center, which Darby is building speculatively along the I-270 life sciences corridor in Maryland, Darby said he’s being a lot more cautious than in his area of expertise, where his track record gives him confidence to get ahead of market trends.
“It’s so easy to overestimate the demand,” he said of making the leap to life sciences. “It’s already inspired people to make bad mistakes and expand into the wrong markets.”
The life sciences real estate boom has convinced many developers to try their hand at expanding into the lucrative, and complicated, world of wet labs, fume hoods and biomanufacturing. CBRE research found $21.4B was invested in new biotech and lab real estate last year, a 62% increase.
But the specialized knowledge needed to not just build these facilities, but read and anticipate the needs of complex life sciences startups with decade-long development cycles and precise equipment and space needs, means many firms that have recently jumped into the space may not know what they’re doing.
“Lab real estate is more complicated and volatile, and you can certainly miss,” Colliers Director of Research Aaron Jodka said. “This is more than operating an office. Labs are where mission-critical work happens.”
Life sciences real estate is concentrated among a handful of experienced firms due to the complexities of construction, operation and risk forecasting. A 2021 Newmark report found the top 10 lab developers own a combined 100M SF nationally, but two-thirds of this is held by just three firms: Alexandria Real Estate Equities (40.1M SF), BioMed Realty (16M SF) and Healthpeak Properties (11.3M SF).
Their scale gives them access to an extensive range of tenants and in-house research that helps them grasp how fast startups are growing and when they will need extra space, proprietary insights any other developer would have a hard time replicating.
Understanding the size, location and equipment needs of startups exploring breakthrough medical advancements, and translating that into a long-term leasing and development plan, is extremely challenging.
“Alexandria understands the complexities of this industry in ways everyday developers do not,” Jodka said. “You can hire the exact same builder and architect who worked with Alexandria, but there’s still a level of expertise on top of that that’s important to understand.”
Many new players think it’s just about building a wet lab, and researchers will come knocking, said RJ Panzo, a principal at T3 Advisors who helps life sciences companies find space.
Especially in core markets like San Francisco, new developers are looking to enter the market, and it’s forcing him and his clients to do much more due diligence before choosing a space, he said. The decline in investor confidence in high-risk tech companies is reinforcing that caution, which also may start catching up to inexperienced developers.
“The bend in funding means companies will be smarter, knowing future fundraising won’t be as large, so they’ll be more mindful, have more layoffs and less hiring, and won’t be taking extra space to grow into,” he said.
Even with the current slowdown in funding, life sciences is still near record highs in terms of capital raising, which will likely tempt more new developers into the market to meet high demand. Tenants are still being advised to take any space they can find, Jodka said, and even to grab more room than they need at the moment, because available space is at a premium.
But the long-term supply situation may work against new builders, Jodka said. CBRE found that 29.5M SF was under construction at the end of 2021, a record-shattering figure increase. In a few years, when the under-construction product comes online, especially in the established markets of Boston, San Diego and the Bay Area, tenants will be more choosy and will likely lean toward owners and operators with a more established track record.
“When there’s more product, and it’s more balanced towards purpose-built space, the history performance of properties will become a much bigger differentiating factor, and really matter to startups,” he said.
But many first-time developers say their experience and expertise in other sectors is enough.
“I'm OK with being first, but I'm not a cowboy,” Darby said.
An Australian native who founded D.C.-based Monument Realty in 1998 and developed offices and apartments in up-and-coming areas, such as in Northern Virginia in the early 2000s and around Nationals Park a decade later, Darby said he has done extensive research and spoken with tenant brokers to better understand the specific need in the regional market before breaking ground on his four-story Gaithersburg project.
“I can see, organically, how this 135K SF will be leased and will be able to discern creditworthy tenants,” he said. “If you’re not smart enough to drill down and understand the regional market, you’re not really good at what you do.”
Greystar, a nearly 30-year-old multifamily specialist based in Charleston, South Carolina, is making its first move into life sciences with a project outside Boston. After launching a $1.2B joint venture with the Canada Pension Plan Investment Board last year to develop life sciences, Greystar has a 465K SF lab building, 74M, under development in Somerville.
Senior Director of Life Science Investment Kerry Hawkins, a former JLL Capital Markets broker who was brought on in March to co-lead Greystar's life sciences platform, said the firm’s focus on creating great spaces for apartment renters will give it an advantage and insight into life sciences projects.
“If there’s a flight to quality in this space, we want to be in that quality bucket,” Hawkins said.
New York City’s Taystee Lab Building, a long-delayed project in West Harlem that was Janus Development Co.'s first lab development, is still looking for tenants, said CBRE broker David Stockel, who’s helping lease the space. The $700M project held a ribbon-cutting in March attended by Gov. Kathy Hochul.
Stockel said increased caution from startups today means pre-leasing, common for projects years in advance in more developed markets, isn’t typical in New York City. Researchers want to touch and feel and experience new lab space, especially from a new player in the market.
“There’s a very healthy amount of interest,” he said. “There’s a handful of very interested tenants we feel confident will be future tenants.”
Entering the life sciences sector has always been a high-risk, high-reward endeavor, requiring extensive capital and patience for a payoff. Newmark Associate Director of Capital Markets Research Daniel Littman told Bisnow last year office-to-lab conversions often come in at $100-$150 per SF for base building costs, with an additional $250-$300 per SF for a tenant retrofit, with lots of money chasing a small number of available assets in competitive markets.
“If you’re a smaller group, you need to put a lot of your capital into a small number of high-cost opportunities,” Littman said. “That level of conviction is pretty high, which is risky if you’re smaller. To be more than a regional player, you really need either experience or a bankroll, or both.”
This high cost to compete, and added institutional interest, means larger teams from new investment firms can invest in the talent and expertise smaller developers lack, Colliers’ Jodka said.
“There is lots of talent moving to these new firms, allowing them to have life sciences divisions with expertise,” he said.
And even if smaller firms have the budget and foresight to hire experienced operators and talent, it can be hard to come by. Breakthrough Properties Executive Vice President of Business Operations Susie Harborth said that, even with firms casting their net outside of traditional real estate pools, recruiting skilled workers is a challenge.
These hurdles can trip up many new builders, Panzo said. It’s easy to overbuild, adding more machinery and equipment than local demands and talent need. It’s also easy to do the opposite, and install fewer fume hoods or loading docks, limiting usability and utility for growing startups. Analyzing local startups and research specialties requires advanced technical understanding, and that’s before getting into the amenities that top-tier tenants look for in their workspaces.
“It’s like fishing,” Panzo said. “At the end of the day, you can’t catch everything. How do you maximize your ability to catch the broadest range of fish?”
The crest in venture capital the sector experienced last year may actually play against new entrants to the field. With a lot more supply funded and coming down the pipeline to be delivered, there may be a danger of oversupply in some markets, Panzo said.
Ultimately, that means choosy tenants, and some developers left with unwanted buildings.
“It’s been tough for these companies, they’ve had to bend to developers and spend capital they should have used for talent and research on real estate,” Panzo said. “Now they’ll have a lot more power to negotiate.”