As investments poured into the biotech sector during the COVID-19 pandemic, companies flooded the real estate market looking for space to develop the next big drugs, which ratcheted up demand and triggered a surge in life sciences focused construction.
But as capital markets have dried up — forcing many in the industry to rethink growth plans — and interest rates have soared, building developers and biotechs alike have begun pumping the brakes.
“There was a frenzy of trying to find bio space to a point where it was hard to keep up with what was happening,” Kathy Gigac, a principal and managing director at Avison Young said. “That has definitely slowed and people are being a little bit more thoughtful about it (now).”
A slew of construction projects that commenced during the pandemic hey-days are expected to hit the market in the coming months, but what will come after is more uncertain.
“Everything that's underway and the stuff going into permitting right now — that's moving forward. But (what’s) maybe a little bit more tentative is starting new projects and opportunities,” Zachary Richards, a senior project manager at the land development consulting firm Bohler said, noting that many builders are beginning to rethink their strategy for life sciences projects.
A recent report published by CBRE found that lab space inventory increased by nearly 50% over the last five years, and lab vacancy rates rose across the top 13 U.S. life sciences hubs in the first quarter of 2023, with availability in some areas up fivefold from just a year ago. And last month, Alexandria Real Estate Equities, one of the largest biotech property groups, announced it was postponing some projects and reducing its construction spending this year due to increasing costs and persistent supply chain delays.
“(The) thought is — let's spend most of 2023 getting things permitted, get ready to go in for a building permit maybe at the end of the year, and start building in the spring,” Richards said. “By then maybe interest rates (will) have righted and it won't be as bad trying to find financing to get these things constructed.”
Despite the turmoil, many major pharma and biotech players are still looking to expand their lab space. Here are the major trends they’ll need to navigate in the real estate market.
A power shift
With the deluge of new construction and cooling demand, life sciences tenants now have more room to negotiate with landlords and developers who want to fill their spaces. The power dynamics have completely changed, Matthew Powers, CEO of Nan Fung Life Sciences Real Estate, said.
“The companies that are continuing to grow and looking for additional real estate in this market are the high-quality companies that are passing the high level of scrutiny from private investors,” he contended. “There's a flight to quality, and so they're demanding more of their landlords.”
Rather than choosing landlords and developers with properties across sectors, he suggested that more drugmakers now look for partners who can “be an extension of their organization and have an intimate understanding of their science,” which can go a long way toward ensuring that an office and lab space is outfitted with all the tools needed for the company’s specific technology or indication area.
Gigac echoed the same sentiment, adding that “it comes down to making sure you have the right partner with you to guide you through the process properly.”
However, because of the COVID-19 demand surge, more developers have entered the life sciences facilities space, making the process of choosing a partner more arduous for biotechs.
“I think tenants should put a lot of time and energy into essentially a (know your customer) process. Right now, know who your developer is. Highly scrutinize them, then find out how much leverage is on a project,” Powers advised. “Because you don't want to be six months into a process and thinking you're going to hire people to advance your science platform and then find out the landlord can't finish the project or doesn't have the funds or is going to try and pass through increased interest rates to you.”
Longer timelines
Supply chain difficulties and worker shortages that plagued construction work during the pandemic have also persisted, leading to longer move-in timelines.
The permitting process for new buildings, which in Raleigh, North Carolina, used to take between “30 to 45 days” now can be as long as “four to five months,” Gigac said, suggesting it’s a result of reduced staffing in local government. One of her clients has been waiting almost two years for a tech component they need to finish their space.
“Timing is really important. People need to think way more ahead than they ever did before,” she said, noting the frank conversations she’s had to have with clients about timetable expectations. “They're thinking, we can probably get into a building in 12 months. I’m like, ‘You'll be lucky to have your permit done.’”
If companies don’t have the flexibility to plan several years in advance, one option is spec space, she said, which tends to “be a little bit smaller (in the) 15,000-square-foot and less” range. These spaces are built based on the infrastructure and amenities an average life sciences company is looking for, with some room for modifications.
Powers, whose company exclusively builds spec space, said he’s found that this approach “generally allows tenants to get in much sooner, because essentially what we're doing is overlapping the time period that a tenant takes to negotiate a lease with the construction development process.”
For these “turnkey” spaces, Powers said tenants should lease “anywhere between 12 to 18 months in advance of what their need is.”
New amenities
The “flight to quality” in the life sciences real estate market also has impacted the types of worker amenities developers are adding to newly constructed units.
"You don't want to be six months into a process and thinking you're going to hire people to advance your science platform and then find out the landlord can't finish the project."
Matthew Powers
CEO, Nan Fung Life Sciences Real Estate
“In the past lab space was stark. There weren’t a lot of amenities,” Gigac said. “Developers now have changed this, so it's become very similar to the office campuses where there's a gym, there's outdoor amenities. I mean, some places have pickleball courts.”
For instance, Richards said Bohler has been trying to incorporate more outdoor amenity space “for employees to be able to go outside and have lunch or hang out,” even on projects where they may be “hard pressed for space.”
Drug developers should carefully weigh how these added building perks could impact worker happiness and output before choosing a space. The amenities could act as recruitment and retention drivers for lab staff who often can’t work from home, Gigac suggested, saying they “make it a place where people want to come to work.”
Space conversions
Over a third of recent R&D construction projects have been conversions of former office and retail space, according to CBRE data. And these units have unique considerations for companies.
On the positive side, conversions are likely better for the environment, said Powers, whose company only outfits conversions.
“Tearing down buildings to build new buildings is very wasteful,” he added. “On our average project, we save 27,000 tons of embodied carbon by keeping the building that we're converting.”
The space constraints with conversions also may not be all that different from “ground-up” projects where permitting, titling, parking and wetlands considerations limit the building footprint, he said. And they could help some companies find lab space in previously occupied prime downtown locations.
However, Richards recommended that biotechs looking into converted units talk to developers about their utility requirements. Often, these projects require pH neutralization pits that take bio and chemical waste “and neutralize it right before it gets discharged out to the site, and ultimately into the town infrastructure,” he said.
Depending on the tenant, gas, electrical and water lines in converted buildings also may need to be “upsized” to accommodate the demands of scientific research.
