INDUSTRY VOICES
By Nicholas Leider
A HEALTHY SECTOR
As one may suspect during a global pandemic that is entering its third year , biotech and life sciences are two topics that have drawn a bit of interest . For their performance in terms of commercial real estate , it ’ s a case of a solid market getting stronger . Interest in development and investment in the biotech sector was already healthy leading up to COVID-19 — and it ’ s remained so heading into the summer of 2022 .
Kevin Perry
“ The world has changed so much since the start of the pandemic , but it ’ s fueled the biotech life science industry ,” says Kevin Perry , principal with HED , an architecture design , engineering , and planning firm . “ It still continues to scale up . There ’ s high investor confidence , and there ’ s rapid development of new innovations driving all kinds of product development .”
One unique aspect of the biotech / life sciences CRE sector is a set of requirements that restricts the viable markets that are capable of bringing large amounts of square footage to market .
“ There ’ s a strong reliance on the local ecosystem that can drive development for world-class facilities ,” Perry says . “ A lot of those key components are going to be tied to research institutions . You need access to great talent ; you need investment capital to source innovation . … It takes a lot of brain power to get these life science buildings up and delivered to a tenant . Really , these kinds of ecosystems are only found in a few locations — the top three being Boston , San Francisco , and San Diego .”
Roughly 75 percent of the 22 million sf under construction in 2021 were in those markets , with Boston accounting for nearly 40 percent of all construction . Considering the limited markets for life science development , vacancy rates dipped and rents rose in the past 12 months . Additionally , while obstacles to development outside key markets remain , other locations could get a second look in coming years .
“ There are second-tier locations , places like Raleigh-Durham , N . C ., that are supported by similar key clusters of components ,” Perry says . “ These places could be enhanced by broader migration trends because people
Investors are interested , and government agencies are trying to figure out how to speed processes up . These institutions are looking to proceed with new facilities .
are moving out of the primary markets . These top second-tier locations will probably grow at a faster pace than previous years .”
But for now , in the major development centers , competition is hardly showing signs of waning in the next five or 10 years .
“ Investors are interested , and government agencies are trying to figure out how to speed processes up ,” Perry says . “ These institutions are looking to proceed with new facilities . But at some point , there may be some saturation in the legacy markets . Speed to market is an important consideration now , because you don ’ t want to be that last development in this wave or be stuck on the sidelines . Perhaps time is of the essence , but the market still has a promising future .”
While mature locations like Boston and San Francisco face limitations in available sites for biotech / life sciences — considering urban density and existing supply — two approaches are helping developers meet new demand . First , new developments are looking vertically for more square footage . While many life science locations in the past were usually two or three stories , major developments are now extending those buildings to five stories and beyond .
Developers are also revamping older buildings into state-of-the-art bioscience labs . “ Some of these buildings have really good bones [ for conversion ],” Perry says . “ And it makes sense in a lot of ways when you ’ re discussing speed to market . You could be talking about two to four years for a ground-up development , while repositioning an older building can get you to market much more quickly .
“ But you ’ ve got to watch out because the conversions can be very expensive , where you end up with substandard results . You just have to be conscious and careful in how you select those assets .”
Nicholas Leider
Senior content editor of Commercial Investment Real Estate Contact him at nleider @ ccim . com .
Editor ’ s note : This article is an adapted excerpt from a full episode of Commercial Investment Real Estate podcast . To listen to the full episode , head to SoundCloud , iTunes , Spotify , or wherever you listen to your favorite podcasts .
4
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SPRING 2022