Taconic Talks NYC Life Sciences and the Firm’s Second Look at Boston and Philadelphia

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Taconic Partners has been one of the busiest investors the past year in the life sciences space — which itself has been one of commercial real estate’s busier asset classes.

Matthew Weir is Manhattan-based Taconic’s executive vice president in commercial asset management. He talked to Commercial Observer recently about the launch of its life sciences subsidiary Elevate Research Properties, why the firm is so bullish on lab space development, the Big Apple’s growing biotech hub (including via other Taconic projects), and how the sector navigated headwinds in 2022 and into 2023. 

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Taconic is also exploring moves into Boston and Philadelphia, Weir said. 

The interview has been edited for length and clarity.

Commercial Observer: Can you tell me the story of how Taconic developed its life sciences development arm? 

Matthew Weir: Taconic has been around since 1997. The initial investment thesis was focused on New York City primarily with office repositionings as well as creative opportunities.

One of those opportunities was 111 Eighth Avenue, which is a 3 million-square-foot building in the Chelsea submarket of Manhattan. One of the unique components of that building was it had a very large mission-critical data center. That was a unique business line that Taconic grew within that building. We grew the footprint of data centers, and then we ventured out into other markets and leveraged that expertise. 

We did similar buildings in Atlanta and Chicago, and so within the DNA of the firm are a few things from that particular investment thesis, which was an expertise in robust building mission-critical operations and infrastructure. Another component in those deals, in the late 1990s and early 2000s, when you had the dot-com and the telecom boom, was being able to see the trends, and being at the forefront of emerging industries. Those two components are very analogous.

When did that specific expansion in life sciences start, and what was the move?
In 2015, we had a tenant — the New York Stem Cell Foundation — come to one of our buildings, which is now the Hudson Research Center on West 54th. And they explained their unique real estate challenge or space challenge. It’s not unique to them. At the end of the day, it’s common for tenants in the sector. 

There’s a very robust real estate need, specialty mission-critical infrastructure, and obviously zoning challenges, building envelope, building structure. And they took us through what they were looking for, and we realized that building had all of those requirements.

When the deal was announced, it led to significant inbound from other tenants. That’s when we had a realization and we started to do a deeper dive into the demand and into other users and market drivers, which led us to the conclusion that you had a severely supply-constrained market, you had really high barriers to entry, and you had significantly high investment costs.

We saw what one particular user’s unique challenge was with respect to their real estate, and we eventually created our investment thesis in life sciences from that one deal, as well as a lot of work between now and then, and into New York City in particular. These spaces need to be flexible given the investment costs to build lab space. 

But the New York Stem Cell Foundation was sort of the first lightbulb moment. 

How is your portfolio growing in Manhattan?
We’ve since expanded that investment thesis, which now has culminated in the launch last year of Elevate Research Properties, our subsidiary company focused specifically on that sector. With New York Stem Cell Foundation as the anchor tenant, that’s 320,000 feet at the Hudson Research Center, and that’s in partnership with Silverstein Properties.

We have since acquired and are in the process of developing West End Labs 10 blocks north of the Hudson Research Center, very much catalyzing the West Side of Manhattan as a research cluster between those two properties.

West End Labs is going to open in June of this year. It’s 400,000 square feet and it’s a $600 million investment with Nuveen and LaSalle.

Our third acquisition is 309 East 94th Street, on the East Side of Manhattan. With that scale, between those three existing assets, that is when we launched Elevate Research Properties. We then have a pipeline deal also in Manhattan for a total current portfolio of 1.4 million square feet and $2 billion in investment.

Part of the intention with launching Elevate is the development, leasing and operation of those existing assets, as well as the growth of the portfolio, not only here in New York City, but in other strategic markets in which we’re currently seeking investments, such as Philadelphia and Boston.

Just exploring those markets now?
Nothing to announce, but our intention is to grow the portfolio outside of New York. 

The big issue throughout real estate is the big tech pullback right now. There’s obviously higher interest rates. How do you see the life sciences market faring, compared to last year when you launched, and how you see things now?
The year 2021, macro level nationally — if not globally — was a record year in almost all segments, meaning leasing, venture capital investment, etc. In 2022 for leasing in New York, it was at or even exceeding that leasing level. The venture capital investment, and this is where you start to see those macro forces you mentioned, it’s going to be below the record, but still very strong. In 2022, we saw the market continue to build momentum, to build and grow, and that’s in the face of the challenging macro environment.

I would categorize it as still very much a bullish environment. Rent levels increase given the already high barrier and high cost to entry. Interest rates and the like will increase those costs even more.

Tenants are still getting funding. It may not be the same valuations and the same proceeds as 2021. But quality science and quality companies are still being funded and still leasing space. So, big picture, this is still one of the hottest if not the hottest market segment when you compare it to office or tech, and even the cooling down of the industrial market.

We’re still very bullish, and even in our own portfolio we’re still doing leases and seeing record rent levels. The supply that does exist and that’s being built is getting leased, and the macro forces are likely to slow competition entering the market over the next couple of years.

Even if it’s not a record year, that doesn’t mean it wasn’t a good year and everything went away.
Coming out of the pandemic, seeing capital allocations out of traditional areas that were impacted, given the environment, much of that moved into biotech and life sciences. So 2021 was just off the charts. 2022 was still very, very strong, and it just so happens it’s coming off an even more exceptional year.

When the company started in life sciences you noted the lack of supply. Is that still what’s really driving this industry now?
If you look nationwide, the market is 170 million square feet. That’s really, really minuscule compared to other sectors. So, yes. The other hub markets have obviously seen development accelerate significantly, like in Boston, San Francisco, San Diego, etc. But, overall, and certainly in our market and other markets we’re looking at, there continues to be a supply-and-demand imbalance. And again, it’s a sector with high barriers to entry and high barriers to exit for the tenant base given the amount of investment that goes into these facilities.

You said you’re exploring other markets. But, in general, do you see New York as a hub expanding as maybe one of the newer secondary or tertiary markets in the nation? When you talk about the West Side being pieced together there, do you see a lot of other activity going on in New York City as well?
We do, and we’re bullish on New York. Our position would be that New York will not be a secondary market. It will be up on par with the primary markets. It has all of the same ingredients when you talk about the presence and concentration of academic and medical institutes and with National Institutes of Health funding. 

Probably most important is the talent pool that’s here in New York. It’s multifaceted, multidimensional, covering not only research and medical talent but, when you talk about the tech presence here, artificial intelligence and other verticles within life sciences, including bio manufacturing, ag tech, climate tech, food tech, etc. The talent pool is immense. And I think it will be very attractive to companies as you see technologies emerging. 

What’s been lacking is really the real estate, and firms such as ours and others are now addressing that. We see significant growth in the New York market that will put it on par with those other top markets. 

Anything you’d like to add going into 2023?
As we look to 2023, the entire market will obviously be keeping an eye on what the Fed does, what movement on interest rates will bring. And obviously we’ll continue to monitor the health of this sector.

Big picture — when you talk about aging populations, advancement of technologies, primarily in precision medicine, the public health crises that are facing the world — the demand drivers for the industry as a whole continue to remain strong. We take that as a positive harbinger of not only our market, but really the sector in general. And, as the macro forces improve over the next 12 to 18 months, we’re very bullish on this sector.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.