'They Don't Have The Funding': Philly Life Sciences Leaders Explain Why All That Demand Didn't Translate To Leasing

For over two years, Philly’s life sciences market had tenants on the hunt for millions of square feet but few places to put them.

Now, those potential tenants have all but disappeared from the market just as new space in a variety of forms and submarkets is coming online, panelists said at Bisnow’s International Life Sciences and Biotech Conference on Wednesday and Thursday at the Pennsylvania Convention Center. 

Yet to hear local landlords and brokers tell it, the dynamic is healthier now than it was when all those requirements were being tracked.

“A lot of companies were touring as they were thinking they had something with their science,” CBRE Executive Vice President Paul Touhey said at the event. “In the last six months, the prospects we’ve seen have certainly been much more real. They’ve taken the time and fine-tuned their science.”

Investors driving the growth of life sciences companies ahead of discoveries generating revenue were writing virtual blank checks in late 2020 and 2021, directing their portfolio companies to take as much space as would be needed if trials went smoothly, Ventas Life Sciences Managing Director Brian Newman said.

“Now, venture capitalists are telling their companies to wait to see what happens, not just with their product ramp-up but in the leasing market,” Newman said. “They’re hearing stories about new supply coming online that’s not leased up yet.”

As owners and brokers of some of Philly’s newest yet-to-be-filled life sciences buildings described their lack of faith in many of the prospective tenants that toured their spaces, it became clearer why so much trophy space sits vacant while the city’s startups largely remain in incubator and accelerator spaces. 

“We just had a conversation with a group that is a very good company. Everyone believes they have good science, and knock on wood, they’ll have success in Philly,” Brandywine Realty Trust Senior Managing Director Jeff DeVuono said. “But they’re pre-revenue, so if they get bad results tomorrow, they could blow up. … Now, they’re waiting for results before they ask you for 100K SF. They’re still not waiting for revenue, but at least they’re waiting for results.”

At the start of 2021, the Philly market had over 2M SF of tenant requirements for research and development space, DeVuono said. A year later, that was down to 1.6M SF. By January, it had fallen to 1.3M SF, and in September, it was all the way down to 960K SF. 

Even the September figure is likely inflated, DeVuono said.

“A lot of those companies think they’re going to take space, but they don’t have the funding,” he said. “They just don’t realize it yet.”

Investors haven’t just been telling their companies to slow down. Late last year and in the first half of this year, VC investment itself dried up dramatically as the cost of every form of capital rose, panelists said. But in the third quarter, a green shoot emerged in Philly’s venture capital market.

Startups of all types in the Philly market raised $750M in the third quarter, a 53% jump from Q2, according to Pitchbook data reported by the Philadelphia Business Journal. It still wasn’t as much as Philly startups raised in Q3 last year, and it was a far cry from the fundraising in the first years of the pandemic.

But to panelists, that’s a good thing.

“Companies are still receiving funding,” MassBio President and CEO Kendalle Burlin O’Connell said. “I think the landscape looks a lot more similar to pre-Covid: smaller rounds, longer time horizons, and investors are asking for more clinical data. That’s good. We want more good science.”

Local breakthroughs in cell therapy and gene therapy led to a historic amount of speculative life sciences construction in Philadelphia the past three years — though that was a low bar to clear for traditionally cautious Philly. But entire buildings on Market Street and the Philadelphia Navy Yard sit on the precipice of completion, awaiting tenants for their finishing touches. 

Brandywine’s West Tower at its Schuylkill Yards megaproject finally signed its first commercial tenant in September: a law firm. While the second ground-up component of the University City development district is under construction as a pure-play life sciences building, Brandywine won’t be starting any further buildings until it sees more, DeVuono said.

“We have 4M SF of potential life sciences [developments] in Philadelphia, and we’re not going to pull the trigger until some of this clears,” DeVuono said. “We wouldn’t want to be sitting there with all that space.”

But while the West Tower was going up, Brandywine was also converting over 50K SF within its Cira Centre office building to its B+labs incubator, expanding multiple times as resident companies sought more space, though not their own senior lease, DeVuono said.

With the broad suite of services incubators like B+labs offers, even growing in place is a challenge for companies fighting to hold on until more VC investment comes along, Colliers Executive Vice President Joseph Fetterman said. 

“The companies in the 5K to 10K SF range are struggling for solutions,” he said. “Even the incubator model — and credit to all the incubators and accelerators — but even that is getting tricky. It’s almost like they need the bare-bones [space] with some light support, maybe not the full levels of support, just so that the price can come down.”

As landlords such as University Place Associates look to fill space with more reliable tenants like cash-rich Big Pharma companies, few are willing to do a full tenant improvement package for pre-revenue startups. Even the startups raising capital now are doing so at more modest totals than before, panelists said. 

Philly-based speakers at the event spoke with conviction that the city's life sciences growth will pick up where it left off at some point, however. That gives landlords of new product the confidence to stay choosy.

“Investors have suggested to me that the floodgates will open up in the not-too-distant future,” Gattuso Development Partners CEO John Gattuso said. “And hopefully they’re right, and I believe they’ll be right.”

Gattuso broke ground in December 2021 on a 130K SF biomanufacturing facility on spec at the Navy Yard. Now, it is in the class of projects awaiting a tenant before finishing construction.

“When we talk about Philly not really launching or taking off, it’s on the launch pad,” Gattuso said. “There’s no question in my mind that it will get there, and some of us are placing very big bets that it will get there.”