Industry Voices

A Healthy Sector

For biotech and life sciences in commercial real estate, it’s a case of a solid market getting stronger.

Perry

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.

“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.”

Listen to this full-length Commercial Investment Real Estate podcast with Kevin Perry.

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 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.  

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.

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.”


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.

Nicholas Leider

Nicholas Leider is senior content editor for Commercial Investment Real Estate. Contact him at nleider@ccim.com.

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