NYC's Tiny Life Sciences Market Will Take Years To Make A Dent In Its Vacancy Problem
Leasing activity for lab space in the city reached an all-time high of 156K SF last year, while Manhattan's struggling office market, gripped with uncertainty and fears of an exodus, saw its lowest leasing volume since the start of the century last year, with 20.5M SF leased.
The lab market's banner volume was just 0.7% of the city's depressed office demand, showing just how far away the sector is from being a major factor in Manhattan's moribund real estate market.
“I think a lot of people are looking at [life sciences] in terms of, it's going to pick up the slack from office,” said Matthew Weir, who is overseeing some of the biggest life sciences developments in the city as executive vice president at Taconic Partners.
“Frankly, we don't look at it that way," Weir said. "We believe the office market will bounce back. We believe that the emergence of life sciences is a key moment for the diversification of New York City's economy.”
Taconic is developing the 322K SF Hudson Research Center at 619 West 54th St. with Silverstein Properties. Its 400K SF West End Campus, which it is co-developing with Nuveen at 125 West End Ave., secured $600M in financing to launch speculative construction earlier this month.
It's big bets like Taconic's that will help the nascent life sciences market evolve into something more. Market experts say that New York is still an immature life sciences market and that meaningful growth will come from biotech startups, which need specialized space quickly — which, in commercial real estate, means spec development.
“I think we’re right on the precipice right now of things changing,” said CBRE Senior Vice President Jonathan Schifrin, who has represented life sciences landlords throughout the city. “I think [the sector] is going to accelerate rapidly … We’re at the turning point right now.”
But some believe the acceleration of the industry's growth is not a guarantee: Governments need to incentivize more speculative building, banks need to continue to back construction and landlords must pass those incentives on to future tenants, said Thomas Ahn, vice president for real estate for Mount Sinai Health System and Icahn School of Medicine, which just signed a 165K SF lease, which included nearly 83K SF of lab space, at The Georgetown Co.’s 787 11th Ave. life sciences building.
“I think that over the next five years [things] are going to be very interesting to watch from the sidelines,” Ahn said. It could take off, he added, or it could stagnate.
New York’s market is growing, but at 1.68M SF of lab space, it is dwarfed by more mature markets: Boston has just over 35M SF in lab inventory, San Francisco has 30M SF. Even neighboring New Jersey has over 15M SF of lab space, according to CBRE.
During the early days of the pandemic’s hold on New York last spring, experts told Bisnow a targeted, private-public emphasis on stimulating the life sciences sector would be key to the city’s economic and real estate recovery, in the way that tech was after the Great Financial Crisis.
The sector has grown, in part because of a result of the renewed interest in science as a result of the pandemic, and in part because of wheels that were already in motion.
The health crisis has lifted the lid on life sciences financing: the sector saw $907M from venture capital investments, the National Institute of Health provided a record $2.28B in grants and New York City invested $38M in biotech centers in January.
This happened as many other commercial real estate asset classes were contracting, Weir said. Now, 15% of Manhattan office space sits vacant, multifamily rents have plummeted, retailers have sued to get out of their leases and the valuation of some of the borough’s priciest real estate has taken an enormous hit.
The recovery is far out — jobs in the city might not reach their pre-pandemic level until 2025, its budget office estimates, and with work-from-home at least in-part here to stay, the office market’s recovery is uncertain.
The life sciences market's availability is higher than office overall at 25%, though all lab space that has already been delivered is occupied.
While this rate of availability in the traditional office market would indicate a downturn, space in young life sciences clusters is typically signed as it comes onto the market, because its tenants — biotech startups or those looking to graduate from accelerators or universities — typically transact more immediately than office tenants, Schifrin said.
“With respect to life science in New York City, we saw significant momentum pre-Covid,” Weir said. “But life sciences [is] a sector that is largely not susceptible to the same issues that the office market is facing, which by and large is that you can't perform this work at home, you need commercial real estate space to do this.”
The youthful nature of the burgeoning life sciences sector in New York is unusual for a city with so many mature markets such as finance and commercial real estate, said Susie Harborth, executive vice president of business operations for Breakthrough Properties, a Tishman Speyer spinoff that invests in life sciences properties across the country.
That relative youth means its lease volume will slowly accelerate its share of the overall office market’s lease volume, Schifrin said.
“We’re not going to be the financial service industry in New York,” he said. “I don’t know if you’re going to see leases with hundreds of thousands in space."
Several of the country’s preeminent medical institutions are based in New York, Mount Sinai’s Ahn said, giving it an advantage for growth.
“Manhattan has probably the best talent in the world,” he said. “In terms of scientists, researchers and medical professionals, between Mount Sinai, NYU, Columbia, Lenox Hill, Rockefeller, Memorial Sloan Kettering, you have the brightest minds in the world right here. This is where the science begins. The world is your oyster here, right?”
New York City's life sciences has the opportunity to differentiate itself here because of its geographical advantages: It is the financial capital of the country, it still has high-level talent and it is an international gateway market.
“[Pre-Covid], we were seeing a lot of great momentum from international firms come over to the U.S. and establish international startups,” Harboth said. “I think New York is well-positioned for this because it's so accessible internationally to both Asia and Europe.”
Still, with those advantages, New York City's 10-year lab space pipeline is at 10M SF, Schifrin said, less than the New Jersey, San Francisco and Boston markets. There are still unknowns and challenges that the young sector will have to face on the road to growth.
“I think at the end of the day, people are going to [say], 'Well, if I could spend $10 to $20 a month per SF less in New Jersey, or North Carolina or Boston, why would I do it here in New York City?'” Ahn said. “That's the problem.”
Because of its lack of size, available space and present demand, it will take years before the life sciences market is truly a "beacon of hope" for the city's commercial real estate market.
“I think that there still needs to be more incentives from landlords in the city before we see it as a bright spot,” he said. “I think there is potential.”