Presented By: CBRE
Why Life Sciences Is The Hottest Sector In CRE
The life sciences sector was the outlier while much of the business world suffered through 2020. According to CBRE, life sciences employment in July 2020 was actually higher than the year prior, and venture capital funding at that point was setting records. Commercial lab space, meanwhile, grew 12 percent in 2020, with a similar growth anticipated for 2021 in the form of new construction, and lab space rents have been rising unabated.
Cerise Marcela, senior vice president at CBRE Boston Consulting and the life science consulting group; Adam Milne, chief operating officer at BioLabs; and Brian Cohen, Senior Vice President, CBRE Boston Consulting Group, discussed how this crucial sector came to lead the commercial real estate revival and where it’s headed.
Commercial Observer: How has the pandemic impacted the life science sector?
Brian Cohen: In 2020, the [Food and Drug Administration] approved 53 new drugs, the second biggest year in over 20 years. In the first half of this year, we’re on track to outpace that. So, while much of the world took a breather, the lab world continued, largely supported by the recognition of the importance of science.
Cerise Marcela: A lot of organizations paused their operation last year, but in the life science sector, most of them only paused for two to three weeks. That factor instilled confidence from an investor perspective.
What are some industry factors that have driven recent life science real estate growth?
BC: Over the years, a lot of traditional “small molecule” pharmaceutical manufacturing was shifted offshore to locations with lower cost structures. But, with the growth of biotechnology, we have seen a significant trend toward onshore manufacturing, since companies developing complex biological products want to be close to their research and development teams.
Adam Milne: There’s a lot of anxiety about working more quickly, and supply chain issues caused companies to do as much as possible themselves. We’re looking at bringing sites online, and what we would have thought about doing in six months, we’re now planning out a year or more because of delays.
Talk about some of the key factors that are necessary for an area to emerge as a life science hub.
BC: The education pipeline is really important. In Greater Boston, you hear about Harvard and [Massachusetts Institute of Technology], but when you look across the institutions conferring graduates in biological sciences, MIT does not even make the top three in terms of biological sciences graduates and undergrads. So, there’s a breadth and depth of educational institutions that have helped to differentiate this market over time. The hospital systems and the clinical environment are another piece of it, and then, of course, private industry and funding sources (angel investors, venture capitalists and strategic investors, which become a function of a healthy, private industry base). Those three foundational elements – education, health care and funding – feed off one another.
CM: Life science companies also are forming partnerships with academia and gathering clinical data from health care. Having those affiliations is important for research. Some developing clusters are starting from these priorities, such as New York with NYU Langone Center. Another example is the developing Boston Fenway life science micro cluster with its proximity to the hospital network like Mass General Brigham.
AM: There needs to be an element of collaboration infused into the DNA of the ecosystem early on — the idea that an academic setting needs a clean and easy path toward commercialization.
Securing talent has become a big challenge for life science in the wake of the pandemic. Talk about how the industry is meeting this challenge.
AM: Companies are drawing talent from a much greater catchment area than before. With every major pharma firm landing in Cambridge’s Kendall Square, not much differentiates one company from the other. They all offer relatively the same pay scale and the same amenities, like gyms. Traditionally, people were like, ‘This is my career, I’m going to stay with Pfizer for 20 years and then retire.’ Now, people know they can take a risk, and if it doesn’t work out, they can go somewhere else. From the employer side, it’s a challenge. You need to articulate your story in a much more compelling way, lay out your vision, and show a path to key milestones.
CM: Every time we have a location decision, it goes back to labor and what’s available in the market. If we move our office five miles down, is that going to impact our ability to attract talent? Also, when we talk about emerging clusters, like Watertown and Seaport in Boston, all these companies go above and beyond to provide for shuttles, parking, showers, biking facilities to ease employee commutes.
How has the VC community reacted to everything happening in the life science sector?
BC: Crunchbase looks at company funding rounds of $100M+. They call them “supergiant funding rounds.” In the first half of 2016, there were 10 of these $100M+ funding rounds of life sciences-related companies. In the first half of 2020, there were 44. This may be a function of the spotlight that’s been placed on the life sciences, as well as the life stages of companies commercializing this science.
Additionally, in the real estate investment community, the number of capital sources interested in investing in life sciences real estate has expanded dramatically over the past year and a half.
CM: The VC stats are astronomical. Life science firms have received over $6.2 billion in funding in the first half of 2021, while receiving $6.3 billion in all of 2020. That shows the massive scale, even during COVID, of how much money has been poured into the life science industry. The Biden administration just announced the creation of ARPA-H [Advanced Research Projects Agency for Health] with an initial budget of $6.5 billion, which will translate to increased research partnerships and funding.
Finally, let’s address new lab construction versus office-to-lab conversions. What sort of activity are we seeing around both of those, and where do you see them going over the next few years?
CM: There are very specific requirements that come with lab buildings. New lab construction, technically, is probably easier to start from scratch, however they take longer to build. Within an urban setting or established clusters, new construction opportunities are very limited. So, we’ve seen developers make moves to emerging clusters to build an ecosystem by partnering with maturing startups that need space to grow, because if you’re in Cambridge, for example, you don’t really have that much space to grow.
Conversions from office to lab are complex projects because of the nature of lab buildings. Ideal lab buildings need to have large loading docks, 16 to 17 feet of ceiling space, and big floor plates, in addition to increased power demand and other technicalities. Urban buildings are not suitable for that. Suburban buildings that are low-rise and three to four stories are a much better fit for these conversions — but there are limitations.
There’s increasing demand from new developers who are interested in this space, and even with the bustling conversion activities, we are nowhere close to the demand of real estate in this sector. We would expect continued growth in active constructions, both in established and emerging markets in the next few years.