Biotech-Ville U.S.A.: The Story Behind America’s Fastest-Growing Life Sciences Hub

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“You know, I just got here in eight minutes from the South End,” he said. 

The South End is one of Boston’s central neighborhoods. Getting from it to most places in the metropolitan region of roughly 4.9 million souls can sap a driver’s faith in humanity. The ease of transit Davis’s guest had just enjoyed highlighted one of the advantages that has made the relatively tiny city of Watertown the fastest-growing life sciences real estate hub in the U.S. 

“It used to be ‘Where does the CEO live?’” Davis said later of corporate relocation decisions. “Today it’s all about ‘Where will the employees go?’ ”

When it comes to life sciences employees in the Boston area, one of the industry’s three major hubs nationally along with the San Francisco Bay Area and San Diego County, the answer appears to be Watertown — or as close to it as possible to ensure an easier commute. The life sciences industry’s footprint there has grown faster than anywhere else relative to a city’s size. 

That footprint as of October extended to nearly 3.79 million square feet in the city of just over 4 square miles, with a further 1.46 million planned or proposed, according to Watertown officials. Nearly all of that square-footage arrived after 2022. For comparison, the 302-square-mile New York City’s life sciences footprint covered 3.05 million square feet by 2024, according to brokerage CBRE.

It goes beyond the physical dimensions. At least 1 in 4 dollars of property tax revenue that Watertown collects annually now comes from life sciences, an industry that didn’t exist there substantially a few years ago. The industry’s property seems unlikely to ever replicate such a performance in a larger area such as New York or San Diego. That, of course, cuts both ways as Watertown’s cityscape now hosts so much life sciences square-footage.

“Considering it’s over 25 percent of the tax dollars raised, it is by far and away the most prevalent and most important industry in Watertown,” said Earl Smith, chairman of Watertown’s Board of Assessors. 

The fruits of this tax revenue have sprouted throughout Watertown. It helped seed a $200 million high school under construction on the site of the demolished old one, destined to be the nation’s first high school designated both LEED Platinum 4.0 and net-zero energy. Tax revenue also funded the construction of two new elementary schools, the renovation of a third, and the purchase and buildout of new office space for a City Hall that’s expanding to meet the needs of a growing municipality. (Watertown has added a few thousand residents since 2010, including — full disclosure — this reporter.) 

All of this was paid for without having to boost the limit for property tax increases, said Mark Sideris, a member of the Watertown City Council since 1997. Sideris currently is the council’s president, making him the highest-ranking elected official in the mayor-less city. 

There appears to be nothing like it in living memory in Watertown, either. The only real parallel, Sideris said, might be the Hood Rubber Company, a longtime B.F. Goodrich subsidiary that made Watertown its manufacturing and corporate base for much of the 20th century before closing in 1969. 

“I can’t compare what’s going on here with life sciences to anything else,” Sideris said. 

How’d this happen in a city where the five biggest employers today include a Home Depot, a Target and UPS? (The other two are a civil engineering firm and a mechanical construction company.) 

Let’s go a few miles down the road and back to at least 2020.

It’s there at the start of the COVID-19 pandemic that we’ll find a booming Cambridge, Mass., home of Harvard University and the Massachusetts Institute of Technology — and already host to the corporate headquarters of Moderna and a research and development hub of Pfizer. 

The city of roughly 118,000 boasted more than 12.7 million square feet of life sciences space by the end of 2020, most of it clustered in Cambridge’s eastern end around the Kendall Square neighborhood and MIT, according to research from brokerage Colliers (CIGI). That was more than twice the volume in the much larger Boston across the Charles River, and it accounted for more than one-third of life sciences space in the entire region. Cambridge’s life sciences footprint was also up nearly 250,000 square feet from just 24 months before. 

Remarkably enough, too, this 2020 supply — new and existing — was almost entirely spoken for: Cambridge’s life sciences vacancy rate was 1.6 percent at the end of 2020, a fraction of Boston’s 8.3 percent as well as below the vacancy rates in 2018 (2.2 percent) and 2019 (2.4 percent).

Predictably, Cambridge life sciences rents by the end of that first pandemic year were likely the highest in the U.S. Taking rents in the city ranged from $75 to $100 per square foot for triple-net leases (wherein the tenants pay real estate taxes, insurance and operating expenses), according to brokerage Newmark (NMRK). That was ahead of the overall Boston range of $55 to $100 — and well ahead of the $66 to $71 range in the Bay Area and the $44 to $58 in
triple-net taking rents in San Diego. 

The reasons for this Cambridge demand were both micro and macro. For one, venture capital and governmental funding of life sciences companies was only ever rising. VC investment volume in life sciences hit a record high in 2020’s third quarter, according to a J.P. Morgan Chase report for that year. The same report noted that all sorts of capital sources were getting in on the investment action, including family offices, angel investors and “even hedge funds.” 

Life sciences investment would continue to scale through 2021 and into 2022. It wasn’t just the pandemic, either. Yes, companies such as those Cambridge heavies Pfizer and Moderna were chasing vaccines and other ways to mitigate a novel coronavirus that was killing hundreds of Americans each week. Newer gene and cell therapy discoveries as well as the rise of artificial intelligence were helping lead to new pharmaceuticals and devices, too. The COVID-19 vaccines themselves would arise largely from innovations in messenger ribonucleic acid (mRNA) to speed the body’s immune response. 

Also driving the demand: the passage of time. Americans were turning 65 to the tune of 10,000 a day by 2019, and these aging baby boomers wanted their meds. 

And, then, office, one of commercial real estate’s major food groups, took a beating at the start of the pandemic. Vacancy rates soared nationwide amid remote and hybrid work shifts, and they stayed high. Meanwhile, loans on office buildings came due regardless. “Distress” and “conversion” became the etymological coin of the realm in office — suddenly not as sure a bet as before the pandemic, unless it was newer, amenitized space or an easy candidate for changeover to residential.   

Investment, then, poured into life sciences construction and ownership, chasing the growth of companies in the sector. In Cambridge, that meant space was spoken for as fast it became available, even at elevated rents. Some 384,183 square feet was rented or bought as it came available in 2020 and another 316,011 in 2021, according to Colliers — a year, too, when the brokerage recorded zero percent vacancy in the city and across much of the Boston region. 

“Vacant space around the whole market went down to just a couple of hundred thousand square feet,” Colliers’ Boston research director, Jeffrey Myers, said of the early pandemic. “Rents were screaming through the roof, and there was not enough space to accommodate all those life science lab tenants that wanted to be here.”

Enter Watertown.

Alexandria Real Estate Equities (ARE) is a Pasadena, Calif.-based real estate investment trust that pioneered the very idea of a real estate developer dedicated largely if not solely to life sciences space. Shortly after it went public in May 1997, Alexandria began building and investing in the more exurban areas of Boston. Then, at the turn of the century, it made its first two forays into Watertown for what would turn out to be 234,260 square feet of lab space. But the focus was always breaking into Cambridge. 

“Our thinking was we wanted to be in a number of suburbs where we could really catalyze the growth of life science,” said Joel Marcus, Alexandria’s founder and executive chairman. “We always knew we were going to be Cambridge-centric, but we always felt that the industry would have opportunities in some of the good submarkets that would thrive over a period of time.”

That period of time ended up taking nearly two decades. Before 2018, Watertown’s life sciences footprint was due almost entirely to those two Alexandria properties and to a smaller 37,000-square-foot building now owned by Blackstone subsidiary BioMed Realty. And all three had been existing properties — the BioMed building dated from 1962, for instance. 

A $525 million Alexandria purchase in December 2019 would mark a turning point. It came at an auspicious time, unbeknownst to Marcus’s company. Funding for life sciences companies had been rising since 2014 and was clearly headed toward some sort of peak. Everyone who developed in the space could see that. 

“There was a period of time — a decade, maybe a little longer — when building a life science building was an almost guaranteed ticket to outsized returns,” Davis said. 

So it wasn’t that, necessarily. Unknown in December 2019 to Davis, Marcus and other builders — in fact, to just about everyone — was that COVID-19 was already circulating in the U.S. Demand for life sciences products and the space to develop those products started to go through the roof, especially in existing hubs. The vacancy rate for life sciences space in Cambridge dropped from an already low 2.4 percent in 2019 to 1.6 percent in 2020 on its way to zero, per Colliers. 

That 2019 Alexandria purchase was for a 29-acre campus along the Charles River called Arsenal on the Charles. Originally, the U.S. military owned it as part of a weapons arsenal, some of which became an Army research facility in the mid-1900s. In fact, “Reveille” and “Taps” could be heard in much of Watertown mornings and evenings into the late 20th century. The site was later owned by Harvard, and then Athenahealth.

Alexandria repurposed the Arsenal property and folded it into other projects to create in Watertown what Marcus called “mega-
campus cluster locations.” It was the beginning of the rise of life sciences in Watertown. The number of tenants crept into the double digits, and then toward the present-day count of around 50. 

Newly built space began sprouting by the hundreds of thousands of square feet, transforming swaths of the city, particularly along its Arsenal Street heading toward both Boston and Cambridge. 2023 was a particularly busy annum with 580,125 square feet coming online, the vast majority of it new. Rents remained lower than in Cambridge, but that wasn’t necessarily the biggest factor driving demand. 

“I would say price was not the main reason that these companies moved to Watertown,” said Duncan Gratton, an executive managing director at Cushman & Wakefield (CWK) who has been doing Boston-area life sciences and office deals since the 1990s. “They moved for availability of space, number one. And, then, for quality of life — the restaurants, the retail, the free parking, the access to the river, the Watertown greenway bike [path]. It was a lot more fun to go to Watertown than it was to go to Kendall.”

The local government was also amenable to new development, according to developers who worked with Watertown officialdom. A commitment to meeting a 2021 state mandate for housing construction near public transit spots underscores this. Watertown is trying to incentivize the construction, as of right, of more than 4,000 units.  

The lower rents than in Cambridge didn’t hurt, though — deals were getting done in Watertown in those busy early pandemic days at around $95 to $100 a square foot versus $135 in Cambridge, Gratton said — and land was generally cheaper, too. But, really, as one source put it, “Lab people want to be around lab people” — and Alexandria had seeded a cluster of life sciences space in Watertown that now began to feed on available property and the industry’s need for a nearby Cambridge alternative.

“There are a cohort of companies that could not afford or chose not to afford the higher rents in Cambridge, or didn’t necessarily need to be near MIT, etc., and they would look for a great subcluster where they could come together,” Marcus said. 

The parking was a real thing, too — cheaper, if not free, in much of Watertown versus strictly enforced permits as well as lot and garage fees in Cambridge. (Both cities share bus lines, though Cambridge has its own subway stops while Watertown has none.) Quality of life probably mattered, too. Watertown was and remains generally less expensive than Cambridge with lots of green space and those brand-new schools. The median Watertown home cost about $300,000 less than the $1.2 million median in Cambridge by the start of 2022, according to search site Redfin.

So the companies came, and the life sciences vacancy rate for Watertown — despite all the new development — drifted below 1 percent in 2021, according to estimates based on brokerage reports that lump Watertown in with Boston’s “inner suburbs.” 

Then, stuff happened, not least supply dramatically outpacing demand.  

“It was a healthy niche,” Marcus said. “And then a lot of dumb developers who simply were financial players who got either bank money or private equity money came in, and added a lot of stupid supply that just wasn’t appropriate.”

Also hurting the market was the 40-year inflationary high that struck the U.S. economy in 2021, followed by rapid interest rate hikes. Borrowing money to build grew remarkably more expensive as did the capital that fertilized so much life sciences research and development. Venture capital funding for life sciences firms dropped 34 percent in 2022, per CBRE. The development pipeline kept creating product regardless, including that 580,000-plus square feet in Watertown in 2023. The industry’s leasing volume of newly available space nationally had already peaked, as it turned out, by late 2021. The rush was over. 

“The industry began a bull run in about 2014, which kind of concluded in the rocketship of COVID,” Marcus said, “and then started to turn around in 2021. That had been the longest bull run in biotech in my memory.”

In Watertown, where the physical footprint for the industry grew faster than in perhaps any single U.S. municipality over the previous few years, the availability rate went from barely calculable to 42 percent, according to figures Colliers shared with Commercial Observer last week. Some 1.445 million square feet of life sciences projects were still pending or planned as of October, according to the city. Those new sites would only exacerbate that availability. 

Some of those projects are likely to stay on the drawing board until there are clearer signs of an industry turnaround (which itself involves clearer signs of lower interest rates and inflation). Alexandria, for instance, is slowing its spread in Watertown as it awaits some market clarity, Marcus said. That includes plans for turning the Watertown Mall — a shopping center dating from malls’ 1980s glory days and down the street from Alexandria’s Arsenal on the Charles — into a life sciences cluster. Though the developer this year sold other life sciences assets in Boston proper and in Newton, another neighboring city, to focus on Watertown.  

Seems like a tidy arc, right? From boom to bust in a few years. Except it’s not quite busted.

There’s the most obvious thing going for it: Developers have pulled back or paused plans for new space, so oversupply won’t be quite as voluminous. Also, initial public offering volume of life sciences firms with a Massachusetts presence was $1.6 billion for 2024 by October through nine IPOs, well ahead of last year’s five for $564 million, according to figures provided by the Davis Companies. Merger and acquisition activity among the same firms was $48.2 billion in 2024 so far, two and a half times greater than the $13.8 billion last year and higher even than that auspicious 2021. VC funding is picking up in life sciences, too. 

In other words, there’s activity among the firms, even if it’s not translating into leasing — though there are signs of that, too. 

The May visitor to the Davis Companies’ 66 Galen — the one who made it from Boston’s core in eight minutes — ended up steering two major leases to the then-empty project this fall. The approximately 120,000 square feet in deals could end up accounting for more than one-fifth of life sciences leasing in the Boston region for 2024 and would be the largest in Watertown, according to the company. One tenant will move into the space in August 2025, and the other next October.

The LEED Gold-certified building with 25,000 square feet of rooftop solar panels, five private terraces, true floor-to-ceiling windows, and spec suites on the second floor is the perfect microcosm for how life sciences real estate has changed Watertown. The building replaced fire-damaged houses and an old Buick dealership. When Davis’s firm and co-developer Boston Development Group set about the project in 2021, so much capital wanted in that the team held a competition. A syndicate led by Citizens Bank won. 

It’s different now. Davis acknowledged the marketplace challenges during a tour of 66 Galen last month that included a trip to the expansive roof deck where rambunctiously colorful autumn foliage played on the horizon.

“There is a true war going on for tenants,” Davis said. “It’s affecting rents and tenant improvement allowances and concessions.” 

It’s also a war that Watertown developers and owners are fighting on unfamiliar terrain. No longer is the city a black swan in the industry, the well-located and cheaper alternative to Cambridge. There are several new projects in Somerville on the other side of Cambridge, plus projects in parts of Boston where there weren’t ones before. Besides, everyone still wants to be in Cambridge, where Colliers noted there were more than 3.64 million square feet of space available directly or through sublease by midyear. 

“I think the challenge for all of the non-Cambridge markets right now is that for the first time in a long time there is a lot of space available in Cambridge,” Cushman & Wakefield’s Gratton said. “That space needs to move first. There’s lots of competition now that Watertown didn’t have seven or eight years ago.”

Tom Acitelli can be reached at tacitelli@commercialobserver.com.