New Demand for Life Sciences Properties Offers Investor Opportunity

The Race For a Coronavirus Vaccine is Catalyzing Opportunity in this Already-Healthy Sector
(Getty)
(Getty)

In Gainesville, Florida, home to the University of Florida and its affiliated bioscience research institutions, brokering deals for life sciences properties isn’t new to Nick Banks, principal and managing director of Avison Young in North Florida. But now, the COVID-19 pandemic has biotechnology, pharmaceutical and other life sciences businesses in a mad dash to find research and development space as they work on a vaccine.

While other commercial real estate sectors — notably retail, restaurants and hotels — are being hit hard by the pandemic, Banks is seeing heightened interest in specialized properties with lab space or medical facilities, that can accommodate this type of work. And as the growth of pharmaceutical manufacturing is expected increase by 16% through 2025, according to research from JLL, life sciences real estate in hubs across the nation will play a pivotal role in vaccine research and development, drug manufacturing and future innovations in post-pandemic health and wellness.

“What [Avison Young] is seeing now as a result of COVID-19, not just here in Gainesville but in other markets throughout the country as well, is an increased focus of attention on life sciences space,” says Banks. “Many companies are working towards developing a vaccine, and then will be focusing on manufacturing one, once it’s created. Many existing companies [in Gainesville] are looking to expand their footprint because business is just exploding.”

It makes sense that the industry has seen an influx of funding after the coronavirus appeared in the U.S. earlier this year. According to the latest figures from the National Venture Capital Association and data firm PitchBook, U.S. life sciences firms saw an influx of $14.8 billion in venture capital during the first half of 2020, putting the industry on pace to beat the total of $23 billion in venture deal volume posted in 2019. It is also on pace to exceed the sector’s record $24.6 billion venture capital haul of 2018, reported by CoStar News this past July.

Leasing activity for the nation’s largest biotech property owner, Pasadena, California-based Alexandria Real Estate Equities, has demonstrated the unprecedented growth of companies carrying out coronavirus-related work. The company saw a 17% revenue gain and collected 99.5% of accounts payable receipts last quarter at a time when many owners of other real estate assets are struggling to collect rent payments.

Its current holdings are not only resilient, but robust. The company leased more than 700,000 rentable square feet during the period, topping its first-quarter total. The company’s overall portfolio is 94.8% leased and its percentage of early lease renewals — a sign that companies are expecting to stay in place and not reduce space needs — was 78% during the quarter, well above the 69% it posted pre-pandemic, reported CoStar news.

From Innovation Incubator to Real Estate Ecosystem

Home to one of the nation’s top bioscience incubators, the University of Florida Sid Martin Biotech Center, and several others, Gainesville already offers an attractive hub of life sciences businesses and the lab space to accommodate them, says Banks. Ample funding from federal grants and generation of about 300 patents per year from the university incubators meant the industry in Gainesville was already strong prior to the pandemic.

“What we have experienced over time here in Gainesville is that the whole sector has grown from these small incubated companies into an ecosystem that now represents thousands of jobs and about 750,000 square feet of biotech and life sciences space,” says Banks. His firm works locally with owners of these types of companies to find space, developers looking to build medical-technology workspaces, and owners/landlords looking to lease out lab space.

Banks recently brokered the sale of a 42,000-square-foot property, primarily occupied by biotechnology company AGTC, in a deal he says exemplifies the current strength of the sector.
Foundation Park at 14193 NW 119th Terrace, Alachua, FL 32615, occupied by AGTC (Avison Young).

“We ended up attracting buyers from major metros like New York and Boston, with the buyer ultimately being from California,” he explains. “I think it speaks to the health of the life sciences sector here in Gainesville that we would be able to attract capital from the west coast and from investors that usually wouldn’t look at a market as small as ours or one that far away. Typically, a deal like that would have involved a more local or regional investor group.”

The suburban Florida market offers an attractive alternative to expensive top-tier coastal cities for its low cost of living and easy commute, especially in a time when employees are reevaluating the value of living in the city during coronavirus. Plus, rents for lab spaces are lower too.

Race to Market Begets a Race for Space

While the demand for life sciences space has been a boon for owners of such properties, it’s in turn created a supply problem for tenants who need space quickly.

Banks is currently working with two different companies looking to lease 120,000 square feet of space in Gainesville. “For a market of our size, that’s a significant requirement,” he says. In fact, it doesn’t exist in the marketplace right now, and will likely have to be built-to-suit for those companies.

With low space availability for certain life sciences real estate in Gainesville, Banks has seen deals lost to other markets with more vacancies before.

“It’s such a fast-paced environment and lab space is so hard to build and create that often there is a disconnect. Unfortunately, what’s happened here several times is a company has been established and happy with the amount of space they have, and then awarded a huge new contract. They need to expand in a very tight time frame and be operational within 90 days, and there is just no way to build and design lab space that quickly.”

The result is that these companies often relocate all or a portion of their operations to other markets with a supply of lab space on hand. But building lab space on speculation can be expensive and risky so developers are reluctant to build out space that is highly specialized hoping it will be absorbed later.

“It’s a quandary of needing some supply of readily available space to accommodate growth without creating undue risk on the developer’s behalf,” he says.

Banks sees opportunity in developing what he calls “intermediate space” for companies moving beyond their infancy stage. It is a time when they are ready to move from incubator space to an expanded research and development facility, but they are not yet profitable so they are unable to sign a long-term lease.

“I’ve had some discussions with local developers who are interested in creating space that’s flexible enough to have the infrastructure for labs and can be delivered very quickly, without making it so specific that they’ve missed the mark,” says Banks. “Not all labs are created equal, and depending on what a company is doing, they may need different equipment, HVAC systems or power capacities and you don’t want to guess wrong on those things. But there is a way to design a building that could be flexible enough that it could accommodate a variety of different lab users and their specific needs on short notice. This comes at a time when most other sectors are struggling to gain traction with any type of new development.”

Markets Show Sector Strength

Other markets are seeing the uptick in life sciences leasing as well, offering opportunities for investors. A May 2020 report from Newmark Knight Frank noted a sustained, elevated demand for specialized lab space, with vacancy rates continuing to compress as companies try to quickly expand.

“At the end of the first quarter, Boston’s life sciences market had an availability rate of 7.3% and within the market, Cambridge, Massachusetts was even tighter at 3.2%. San Francisco Bay Area’s market had an overall availability rate of 5.7% with the Bay Area’s mid-peninsula region at just 2.5%,” according to the report. “Anticipated 2020 deliveries of 4.5 million square feet are more than double the prior five-year average.”

A recent 2020 U.S. Life Sciences Outlook report from JLL also cited Boston, San Francisco and San Diego as the top metro areas with “life sciences cluster hubs” capturing most of the nation’s venture capital investment for the sector, high industry employment rates and supply of available lab space in the market, among other factors.

“As speed-to-market accelerates for many pharmaceuticals, proximity to incubators at major research institutions has also supported developing clusters such as Raleigh-Durham, North Carolina, Houston, Texas and locations in Maryland, which have attracted recent interest from developers. Additionally, the race for development of COVID-19-related vaccines is already beginning to energize demand in pharma-heavy New Jersey, a trend that should spread to more markets as 2020 progresses,” said the report.

Investors are Betting on Biotech

Experts are bullish on the strength of the life sciences sector beyond short-term vaccine development and manufacturing, too. Life sciences properties remain an attractive opportunity for investors and developers alike looking to respond to the growing demand for these spaces in the long term.

“Meaningful advances within the life sciences industry, such as machine learning, are creating new sources of workflow and thus real estate demand,” said Audrey Symes, research director, JLL Healthcare and Life Sciences, in a news release. “This combination of simulative factors sets up the life sciences industry to expand at an unprecedented pace, both in terms of manufacturing and patient demand.”

Banks agrees that at least from what he’s seen in Gainesville, the demand for life sciences properties won’t diminish any time soon.

“There is such a focus and emphasis on health and wellness, and the innovation of technology is having such an impact in finding new ways to address, treat, prevent and cure diseases. I think the long-term outlook for that sector is incredibly strong,” he explains. “One of the big advantages in Gainesville is the proximity to the university, where there is an existing workforce and campuses of every major discipline — you can bring together people with computer science, biotech and business experience to collaborate which creates an advantageous workforce. I think right now we are just barely scratching the surface of how all those different groups will collide to make the life sciences sector even more impactful over time.”