The IndieBio laboratory and co-working space in San Francisco. (Cayce Clifford/Bloomberg)© 2018 Bloomberg Finance LP
The life sciences industry is taking off, with the medical technology and biotech sectors expected to grow further as traditional pharmaceutical companies are joined by startups and incubator labs driving new research and development. And with life sciences innovation rising, so is demand for the space in which to innovate.
“Real estate is becoming a key component for collaborative R&D environments,” Deloitte found in its 2019 Global Life Sciences Outlook. “In order to engage with startups and gain access to new talent, life sciences, biotech, and medtech companies are creating incubator spaces in innovation clusters around the globe.”
During the four-year period ending September 2017, U.S. biotechnology research employment increased 27.1%, compared to 7.2% for overall employment. This led to an increase in demand for laboratory space, substantial enough that speculative supply was sought out in San Francisco and Boston, established government and venture capitalist funding concentration areas. Life science clusters in other regions of the country, namely Cambridge and San Jose, are beginning to challenge Boston and San Francisco.
With more than $66 billion in venture capital invested in bioscience companies from 2014-2017, commercial real estate is expected to benefit, as life sciences requires significant square footage for laboratories, office workers, R&D and device manufacturing.
In 2015, venture capitalists invested an unprecedented high of $17 billion in the industry ‒ a record broken by the $20 billion invested in 2017. Real estate submarkets boomed in both California and Massachusetts, with other states slowly following suit, adding new construction and repurposing legacy space for the life sciences industry. Here’s how some of those life sciences real estate markets are doing:
San Diego
In California, San Diego is catching up to the Bay Area when it comes to life science cluster strength and size. While San Francisco and San Jose continue to attract the majority of funding from venture capitalists, the life sciences industry has expanded rapidly in San Diego over the past five years. This uptick in activity has grown employment more than 20% and contributed over $33 million to the local economy.
The impact on commercial real estate in San Diego has been significant, as 2.7 million square feet have been constructed since the beginning of 2016 for new life science facilities, and more than 360,000 square feet are still under construction. Up to a third of dedicated life sciences workspace is owner occupied in San Diego; the remainder is leased space.
Boston-Cambridge
With lab space demand for life sciences verticals rising, Boston-Cambridge lab vacancy lows were below 1% last year. There has been 9.8 million square feet of lab inventory growth over the past decade, and demand for lab space currently stands at 2.5 million square feet.
In the Longwood Medical Area, the densely packed medical and academic community in Boston that includes Harvard-affiliated institutions such as Boston Children’s Hospital, Brigham and Women’s Hospital and the Dana-Farber Cancer, only around 10% of commercial space is leased, with owner occupancy making up the bulk of square footage.
Another life science zone in the Boston area is Route 128, which saw 400,000 square feet of new requirements in 2018 alone, with 117 life science companies occupying 8.5 million square feet along the highway.
Rent for lab space in Boston-Cambridge increased by 50% over a three-year period, making investment in commercial space for the purpose of leasing to life science companies a viable submarket.
Indiana
Indiana has specialization in four different life sciences subsectors and showed steady growth in both the drugs and pharmaceuticals subsector and the medical devices and equipment subsector from 2014 to 2016.
Indiana had the highest location quotient among all U.S. states for drugs and pharmaceuticals, according to a 2018 report on the U.S. bioscience industry, meaning that the degree of job concentration in the industry is high relative to the rest of the country. Within Indiana, Bloomington was ranked high for small U.S. metros, and the Indianapolis metro area was ranked high for large metros.
Indiana was ranked as being among the top 10 states for bioscience patent distributions in 2016. The state is home to a city dubbed the orthopedic capital of the world and to some of the globe’s largest medical device manufacturers, and boasts life sciences exports totaling $9.8 billion, the highest in the U.S. The economic impact to the state is $59 billion.
Chicago
Chicago’s university system and transportation network attract life sciences companies seeking better cost-of-living and working arrangements with proximity to medical centers and manufacturing districts. NIH funding increased 3 percent year-over-year, and total inventory vacancy stood at about 3.5% last year.
Most life sciences lab space in Chicago is concentrated within suburban campuses, and is owner-occupied, leaving the door open for additional off-campus growth to meet the needs of over 100 biotechnology and pharmaceutical companies with requirements for R&D space.
Medical institutions based in Chicago continue to expand on the new research space added over the past five years, with a portion of Northwestern’s 1.2 million square feet of new medical research space dedicated to industry collaboration.
Other life sciences markets, such as New Jersey and Philadelphia, also exhibit strong momentum in select submarkets and can be expected to require new construction and reallocation of space in legacy industry properties to accommodate biomedical growth.
With more innovation on the way ‒ StartUp Health found that Q3 2018 was the most lucrative quarter for digital health since at least 2010, with funding reaching over $11 billion ‒ we can expect the commercial real estate industry to be one of many beneficiaries of the growth in life sciences.