If Philly Wants To Keep 'Cellicon Valley' Going, Developers Need To Take More Risks
Driven by the cell and gene therapy industry, the life sciences continue to be the main animating force for commercial real estate investment and development in Philadelphia. But a central tension has emerged between the future the city wants and the way it builds.
“There is not enough space for all the [life sciences] tenants chasing space in the market, and there’s the long-term challenge of investors in Philadelphia not being comfortable with speculative development, which is what life sciences needs,” said Longfellow Real Estate Partners Managing Director of Research Lauren Gilchrist at Bisnow’s Healthcare and Life Sciences Bonanza event at the Curtis building on Nov. 18.
Though several major developments have been completed in the city since the 10-year tax abatement ended its long drought for new construction, virtually all of them waited until an anchor tenant was lined up before construction began. As a result, the celebrated growth of cell and gene therapy has caught the development industry relatively flat-footed.
“Right now, if someone’s looking for a space, capacity is at zero,” Turner Construction General Manager Dave Kaminski said.
When a life sciences company graduates from the startup phase and needs new space for expansion, a 12-18 month timeline is too tight for a pre-leasing arrangement, panelists at the event agreed. That mismatch regarding the preferred method of development is a major reason why landlords of office properties in Center City are evaluating their buildings to see if conversion to life sciences usage is feasible.
“We get a phone call every couple of weeks to look at a potential conversion in Philly, and it can get complicated,” Ennead Architects Associate Principal Christopher Stoddard said. “Your typical office building isn’t designed for the loads required for a life sciences building. So industrial buildings are easier.”
Plymouth Group’s redevelopment of the former Budd Co. plant in North Philadelphia is betting the property’s past will overcome the fact it is not located near either the University City or Center City talent clusters. Keystone Investment + Development, formerly Keystone Property Group, has managed the feat at the Curtis building, which overlooks Washington Square, due to its history as a publishing plant before it was renovated into offices decades ago. As a result, it has filled multiple floors with both lab and biomanufacturing space.
“Right now, we’re two to three years ahead of everybody because we have the product and the infrastructure here already,” Keystone Chief Operating Officer Rich Gottlieb said at the event.
Beyond the Curtis building’s structural advantage, Keystone is reaping the reward of signing Imvax to a 10-year lease even though the latter was pre-revenue and had only enough funding for two and a half years of operations, said Scheer Partners principal Tim Conrey, whose company leads leasing at the Curtis. Less than two years later, Imvax is still pre-revenue, but has raised another $140M after positive results on some trials, expanding its lease at the building to include Current Good Manufacturing Practices space.
“You can’t lease office space yesterday and lease life sciences tomorrow,” Gottlieb said. “First, you need a lot of capital. You’ve got to put your big boy pants on and spend serious dollars before anyone shows up and starts paying rent. So while a lot of people are announcing they’re doing these projects, most of them are pretenders, and a few of them are actually putting the money up.”
As the industrial sector has demonstrated in the Philadelphia market and across the country, the mismatch between supply and demand sends rents skyward. Despite construction costs also rising, life sciences rents are reaching a level that justifies speculative development, CBRE Senior Vice President of Capital Markets Bruer Kershner said. That has been demonstrated to be true at least for the most expensive parts of the city.
Two flagship developments in University City have buildings under construction that were launched with speculative elements. One uCity Square, developed by a partnership of Wexford Science + Technology and Ventas for University City Science Center, has topped off with three leases signed after breaking ground with none. The West Tower at Brandywine Realty Trust’s Schuylkill Yards is on time for a delivery in the back half of 2023, according to the company’s most recent earnings call, with no tenants yet announced for the 200K SF life sciences portion. The building also will include 326 apartments, mitigating the risk of the speculative portion somewhat.
The two buildings, one of which won’t be ready for more than 18 months, will contain less than 600K SF of leasable space between them, with some of it having already been spoken for. A speculative lab building going up at the Philadelphia Navy Yard will contain less than 200K SF.
To prevent the raft of growing companies from heading to the suburbs, where King of Prussia’s Discovery Labs continues construction and is growing in scope, or to other markets, developers not in the midst of massive, multiphase complexes like the above need to ask themselves one question, Gilchrist said: “How do we get comfortable with the risk inherent to speculative development and not risk losing what is right now the most valuable job creation engine in the city’s economy?”