The Future of Real Estate in the Life Sciences Sector
What is the current situation in real estate as it relates to the life sciences industry? Simply put, the demand for space for both new and expanding life sciences companies is outstripping supply and is, in fact, at the forefront of growth in commercial real estate as the new, “post-COVID” economic expansion cycle begins.
Allen Matkins and The UCLA Anderson Forecast recently co-hosted a webinar where the panelists shared their thoughts about the future of the life sciences industry and what this means for the real estate industry as it works to meet the needs of this growing sector. The webinar was moderated by Jerry Nickelsburg, Director of The UCLA Anderson Forecast and Professor of Economics at the Anderson School at UCLA. The panelists included Martin Togni, Partner at Allen Matkins; Nikki Lin, Director of Entrepreneurship and Commercialization for the UCLA California NanoSystems Institute; Steve Rosetta, CEO of IQHQ; and Chad Urie, Senior Managing Director at JLL.
“The tides have changed,” stated Steve Rosetta, “with life sciences becoming in favor with not just real estate investors, but venture capital, lenders, and all sort of different capital sources, which is creating an interesting environment.”
Martin Togni agrees. “I’ve never seen it more competitive and more pressure to get deals done quickly, and this is true for all markets I work in, including San Diego, the Bay Area, Seattle, and Boston,” he said.
Given the current growth in the life sciences sector, several questions arise in connection with real estate requirements. What factors make a particular area attractive for life sciences? Can secondary markets be developed? Should the real estate industry focus on converted spaces or purpose-built buildings and facilities? Will the life sciences industry continue to grow?
WHAT FACTORS MAKE A CITY A HUB FOR THE LIFE SCIENCES INDUSTRY?
Certain cities like Boston, San Francisco, and San Diego are major hubs for the life sciences industry. Chad Urie explains why. “It is no different than tech,” he said. “It’s all about talent. Where is it coming from? Is it already there? Can I recruit effectively and quickly? What is the pipeline of talent so I can continue to feed my company?” Since candidates for life sciences jobs need special education and training, companies will locate to areas with a large enough pool of talent.
What factors play a role in creating the “proper” environment for life sciences companies to develop and thrive? Talent, venture capital groups, and real estate to facilitate the growth, noted Urie. “You generally find people that become serial entrepreneurs that tend to repeat and do things again and again, just at greater scale,” he observed. “These things have been in place for a long time in San Francisco and Boston; it is continuing to develop in San Diego.”
WHAT ABOUT OTHER MARKETS?
While secondary markets are slowly developing; it’s difficult for a city to create this talent-rich environment from scratch. Again, since the labor in the life sciences industry is highly specialized, the availability of talent in a given area plays an important role. Many cities across the U.S. have tried to create innovation hubs and to incubate life sciences. However, Rosetta noted that “it’s not an easy thing because you need to get a critical mass of talent that specialize in various sectors or specialties within the life sciences industry to be able to continue to grow.” Additionally, there has to be available real estate that companies can scale into.
However, Nikki Lin is bullish on Los Angeles’ future as a life sciences hub. “The organic evolution of San Diego, the openness, the readiness for the community to embrace the scientific community – that was interesting, and a footprint that’s a bit smaller than Los Angeles,” she said. “We wonder if we have the right institutional context in Los Angeles. We have the universities, we have the research institutes, we have the community, we have a large population to work with. However, we are spread far apart. For Los Angeles, we’re sensing that the time is now.”
Urie noted that, until last year, his firm hadn’t done any life sciences deals outside of San Diego. Now it’s working in such markets as Los Angeles, Seattle, Houston, Austin, Chicago, and Pittsburgh. Why the change? “Ultimately, you’re kind of getting back to the same thing, which is talent,” he said.
What other factors influence the development of secondary markets? The right educational programs at local universities and a hospital system can facilitate cross-collaboration.
CONVERTED SPACE VERSUS NEW SPACE
Given that there is a lot of empty space on the market, particularly retail space, the panelists were asked whether life sciences businesses can use spaces that have been converted for their particular needs.
While several landlords are willing to convert existing spaces, Rosetta’s firm focuses on ground-up, purpose-built buildings because of the specific needs of life sciences companies and their need for lab space. There are always sacrifices involved with conversions. They generally have to be done quickly and leased quickly, and in the end, the building may still not fully meet the requirements of life sciences companies. It’s a big investment with some definite risk involved.
Lin noted that a converted lab space might be the right choice for a company stepping into the next stage of development, but a larger, established company may need a ground-up space. Even so, conversions are necessary to attract newer incubator companies to move into a certain area and develop that area as a life sciences hub.
Other factors affecting the viability of converting existing spaces for life sciences are zoning requirements and the impact on nearby office space and/or residential areas. Most people don’t want a research laboratory in their backyard, especially if it deals with diseases, pharmaceuticals, and various chemicals.
WILL THE GROWTH CONTINUE?
The COVID-19 pandemic shined the spotlight on the life sciences industry, and the growth has been significant. Will that continue?
All of the panelists think so. Lin observed that government funding dollars are a good barometer in this regard. For example, UCLA received $1.4 billion in research dollars in the past year. If that kind of investment is going into research and development at the academic level, it will certainly trickle up to more growth in businesses in the life sciences industry.
Additionally, there is a growing tendency to consider the life sciences industry as part of national security. While such companies looked to expand in areas that would reduce their operating costs – perhaps overseas – it is now more viable to operate domestically because much more funding is available.
Many large real estate developers now have dedicated personnel focusing almost exclusively on making deals with life sciences companies. Given the current growth of the industry and the strong likelihood that such growth will continue, this trend will no doubt continue into the foreseeable future.
