The 'Golden Era' Of Life Sciences Is Driving Demand, But CRE Must Be Nimble To Benefit
Unlike the current slumbering of traditional office and the downward spiral of retail, the life sciences sector has been surging in response to a high demand for scientific research. Investment capital has been flowing readily, driving performance that has been aided by the industry’s adaptability. The life sciences sector has been diversifying for years beyond its pharmaceutical-based roots, especially in the Bay Area, where the tech industry’s knowledge base emerged, making for an easy segue to biotech endeavors.
“This is really a golden era for life science in the Bay Area,” Cushman & Wakefield Managing Director Marc Ward said. “It’s just expanding tremendously. It’s a very exciting time.”
All kinds of life sciences companies, from pharmaceuticals to materials science and food tech, are thriving despite the general economic weakness today.
“Life science was strong pre-COVID,” Ward said. “It has been impacted on a much smaller basis than, say, the office and retail world.”
A key trend of the life sciences sector’s trajectory is adaptability. The sector itself is diversifying and there is investment capital to support new ideas and areas of research. In 2020, biotech far outpaced all other related sub-sectors like health care services and health care equipment, raising $20.19B in private equity and venture capital between Jan. 1 and Sept. 30, according to S&P Global Market Intelligence. That figure is much higher if it includes life sciences tools and services, pharmaceuticals and health care technology.
The full capital flow isn't just stimulating traditional medical research and drugmakers. It is also fueling new starts like the burgeoning food science revolution from companies like Berkeley-based Memphis Meats that is growing meat from cell cultures and Emeryville-based Perfect Day that has made milk proteins without animals. Then there are the companies harnessing computer science to further medicine, like ArsenalBio in South San Francisco that raised $85M in Series A financing to create programmable cell therapies by integrating machine learning with CRISPR-based genome engineering to fight cancer.
To meet this evolving industry, commercial real estate developers must respond with flexible spaces. Life sciences space requires the use of specialized construction materials, infrastructure and facility layouts that allow for the operation of advanced equipment. As these high-level needs can vary from company to company and space availability remains tight, developers are incentivized to meet demand through the construction or adaptive reuse of spaces that are generic enough to suit varying research needs.
“The major trends in terms of what users are requesting are flexible spaces that drive innovation and collaboration and also resilience and growth,” HGA Associate Vice President and Principal, Science & Technology Deepa Balgi said. “Basically future-ready the space so that they’re ready to adapt the spaces easily to accommodate future research, whatever that future research may be.”
Balgi, who joined HGA's S.F. office in late 2020, said the industry is being nimble and adaptable in its approach to space by utilizing modular utilities and modular furniture. Movable lab benches can accommodate different sizes of research teams and different configurations of spaces. Similarly, utility hookups embedded into ceilings in a modular way allow more flexible usage in open space labs.
HGA principal Mark Allen said this modular approach was vital in a recent South Bay project where a genomics company had specific requirements for the handling and directional flow of research samples. Built-in modular design enables the space to be more easily modified as needs change over time.
Another trend Allen observed is that the density of equipment, much of it increasingly automated, in labs is going up. With that also comes a need for emergency backup power to keep instruments running and research safe.
A recent deal highlights the sector’s embrace of change. Graymark Capital, represented by Cushman & Wakefield, acquired a vacant single-story R&D building at 3960-3980 Fabian Way in Palo Alto that had been used by a medical device company, according to a press release. The plan is for Graymark to reposition the 24K SF, two-building complex as a flexible life sciences asset suited for anything from auto tech to artificial intelligence and robotics.
“Graymark’s plans for this strategic location come at the right time and will fulfill a critical need for market-ready and flexible lab space deliverable very soon. Demand is now a four-legged table, and Graymark will meet that demand,” Graymark Executive Managing Director and Managing Principal Ben Paul said in the release. “The Life Sciences industry is performing well overall, with this submarket also displaying increased demand particularly from auto tech, food tech and AI companies. Furthermore, most of the significant leasing activity we have tracked in our region this year has stemmed from the Life Sciences sector.”
The flexibility provides options to both users and property owners. Pope said it dramatically reduces lease-up time if space built on speculation can meet a broader set of users' needs. For this reason, he said that each deal needn’t necessarily pencil out in terms of a profitable return on investment because the expectation is that the next user in line will find the space to be valuable to its needs. Ward added that nascent companies are often under pressure from investors to grow and expand and so seek space that’s immediately ready for occupancy. This puts a premium on second-generation lab space because the tenant doesn’t have to wait for the necessary improvements. This contrasts with office where new construction tends to carry a premium.
“Building out to 85-90% of market-ready completely accelerates the tenant's timeline,” Pope said. “You can move in faster. For smaller users, we’re seeing that this trend of spec construction has been a game-changer.”
With space constraints continuing to be high on the Peninsula, the East Bay has been growing as a life sciences hub in recent years, especially for companies seeking more affordable labs. Data from Cushman & Wakefield’s Q4 2020 life sciences report shows average East Bay rents at $3.18 per SF compared to $6.50 in S.F. With demand high and availability low, coupled with diminished demand for office and retail product, adaptive reuse into life sciences is accelerating.
“We’re going to see a lot more adaptive reuse because demand has been outpacing supply for lab spaces,” Balgi said. “Unfortunately, really tall office buildings may not work because of low floor-ceiling heights, but people are looking into shopping centers, movie theaters, gyms, even ice rinks to convert into lab spaces.”
Other life science markets around the country are also growing in parallel to the Bay Area’s ascent. Globally, the rates of many diseases are rising along with the technological and scientific advancements to fight them. The onset of the coronavirus pandemic triggered a race for vaccines, which bore fruit for commercial real estate demand in a matter of months. Such changes have boosted the life sciences sector with more work around the genome sequencing of the SARS-CoV-2 virus expected to continue as mutations occur and more treatments are needed. Over the course of this year and into next, more research around viral vectors for gene therapies as well as PCR testing will usher another wave of growth, Allen said, adding that the industry needs to maintain a flexible approach to be able to meet unexpected challenges such as COVID-19.
As no one region can meet the world’s needs for research, many of the emerging markets such as Houston and Pittsburgh serve to complement the more established markets like the Bay Area and Cambridge. Ward said there’s a lot of communication between companies in different markets and that the same scientific advancements can be applied by different companies, fostering collaboration. Life sciences companies can also span multiple markets, having headquarters in one city and manufacturing in another, for example.
“In general, the life sciences market grows around a really strong medical school or major medical center and we see a lot more big pharma on the East Coast, but in the Bay Area it’s unique in that we have a strong medical school at UCSF, which is ranked one of the top 10 in the world,” Balgi said. “There’s also a very strong tech industry that fosters a strong biotech industry.”
Despite evidence of the thriving sector, some data points in Cushman & Wakefield’s Q4 2020 report belie the growth. Total Bay Area net absorption came in at -709K SF with overall vacancy at 10.9%. However, asking rents have been inching up over the years with $3.03 per SF in 2016 and $4.46 in 2020.
“A big portion of that negative net absorption is really buildings getting reclassified or converted to life science,” Cushman & Wakefield Senior Research Analyst Keith Reichert said.
The firm only factors buildings that are occupied into net absorption numbers, and with 1.35M SF of new construction in 2020, there will likely be a lag time until buildings are occupied and subsequently show up in net absorption. The amount of new construction has risen considerably in the region over the last three years, from only 215K SF in 2017. Ward posited that the vacancy rates of infrastructure-ready life sciences product is probably around 5%.
"The pandemic has made it so it’s no longer an alternative asset class," Pope said. "People spent the last few years pissed off about drug prices and hating the pharmaceutical industry, and now they realize that they’re the only way their lives can go back to normal. I think it’s becoming much more of a mainstream product and everybody realizes the importance of it."
CORRECTION, FEB. 5, 3:18 P.M. PT: A previous version of this story stated that Deepa Balgi joined HGA in January but it was actually in late 2020. The story has been updated.