The Sleeping Giant Of New York's Lab Market Could Be About To Wake Up

Across most sectors of commercial real estate in New York City, be it offices, apartments and condos, retail spaces or hotels, landlords are grappling with a citywide supply influx, one that is pushing down asking prices and pushing up concessions. Yet, there is one sector that is 100% occupied, commands high rents and has startlingly low supply.

In New York City, finding a place for a research laboratory is not like finding a needle in a haystack: There is no stack of hay, and there are no needles. The city has about 1.7M SF of life science lab space, a tiny chunk of its 450M SF office supply. Those labs are 100% occupied, according to Transwestern, and the active pipeline is thin.

"This has historically has been one of the most supply-constrained markets in New York City," Transwestern Research Manager Danny Mangru said. "New York City possesses all the necessary pieces for the life science industry. All it's missing is the supply."

An asset class with 100% occupancy that lends itself to high rent and high-paying jobs may seem like a no-brainer for a developer to build. But there are just two developments in Manhattan that include labs in the plans: Alexandria Real Estate's Alexandria Center for Life Science campus along FDR Drive and Taconic Investment Partners and Silverstein Properties' conversion of the Movie Lab building at 619 West 54th St. to the Hudson Research Center, which will bring 150K SF of labs to the market.

On paper, there is no reason for New York's lab space to fall so far behind. According to Transwestern, the Tri-State area has 42% more life science employees than New England and 59% more than San Francisco. Institutions like Columbia University, Weil Cornell Medical College and the Icahn School of Medicine at Mount Sinai can be engines for life science research and employment.

The city and state government see the opportunity, too. Last December, Mayor Bill de Blasio and Gov. Andrew Cuomo announced major life science funding programs, which include tax incentives for life science companies and plans for a new, major life science development in the city. Combined, the programs plan to allocate more than $1.1B toward the industry.

Also in December, the city government clarified zoning rules that had prevented lab space from being built in commercial districts, keeping the space on the margins of Manhattan, with the city actively pushing firms to locate far from regional transit hubs in Brooklyn's Industry City.

The clarification could push landlords of obsolete Midtown office buildings to redevelop their properties into lab space, especially as those buildings face a crush of competition from both new office supply and other renovated postwar buildings. But there is no indication anyone is taking the bait.

"We haven't seen a developer utilize this new clarification," Transwestern Senior Vice President Jonathan Schifrin said. "I think it's going to take a first mover."

Alexandria is a major life science developer active in major markets around the country, most notably in Greater Boston, which has 12M SF of life science lab space, dwarfing New York's total supply, and is building more at a blistering pace.

Taconic's entrance into the nascent market, with the building it acquired in 2012, should not surprise watchers of New York commercial real estate: The firm led the charge in New York City's tech boom when it built Google's landmark headquarters at 111 Eighth Ave. The company is always looking to zig when a market zags, and with the new lab space coming on the heels of the New York Stem Cell Center's deal for 42K SF in the building, it believes it is doing just that.

"We did a deep dive as part of all this, and [life science is] an area we’ve been focused on the last several years," Taconic Vice President Matthew Weir said. "When we negotiated [the Stem Cell Center] deal, we started to understand the plight of wet lab and research tenants. It was an intriguing industry, and Taconic has been at the forefront of some emerging industries."

As for why other developers have not yet followed his firm's lead, Weir said the risk-reward for building lab space does not make sense for the average New York City landlord or developer.

"It is capital intensive. I’m not going to throw out numbers, but it is significantly more robust than office space to create the environment," Weir said. "You look at the cost of land and construction and where market rents and condo pricing is — it’s very hard to make a life science project pencil out."

Part of what has made it hard to pencil out is the status quo: When a sector has been 100% occupied for so long, it is next to impossible to gauge possible demand, Mangru said. And he tried.

"This is something very new. In terms of having stats, we haven’t had much of it at the moment," he said. "We for sure know there’s demand here, but to say we have 5M SF of new lab space, would that be enough? It’s kind of really hard to say."