Life Sciences Losses Land in Chicago

This year has started off with bad news for Chicago commercial real estate, as a battle over botched lab space deals is underway.

Chicago-based Portal Innovations filed suit against Boston-based Beacon Capital Partners, a major office landlord accused of failing to meet funding commitments tied to several of Portal’s shared lab space ventures, including sites in Fulton Market, Houston, Boston and Atlanta.

The dispute centers on missed capital calls that Portal says could leave it unable to meet obligations on leases it signed with Beacon’s financial backing. Beacon pushed back, saying the outstanding capital call was less than $1 million and that it has already sunk tens of millions into Portal-backed buildouts.

Their drama drags the life sciences real estate mess squarely into Chicago — a market that, until now, had largely sidestepped the turmoil hammering San Diego, Boston and the Bay Area.

And it’s not just Portal. The company’s model of flexible, fully built lab space for early-stage biotech startups draws comparisons to WeWork’s ill-fated coworking empire. Shared lab space is a capital-intensive business, especially when tenants can’t scale. Chicago already saw one version collapse when BioLabs was evicted from a Sterling Bay-owned Lincoln Park property last year. That 125,000-square-foot property is about to be sold to Dallas-based Altera Fund Advisors, likely at a substantial discount from Sterling’s $64 million mortgage debt. The buyer plans to convert it from lab-oriented into outpatient medical offices.

Meanwhile, national cracks in the sector continue to spread. In San Diego, Bank OZK this week sold off a $265 million loan note on a life sciences project also built by Chicago-based Sterling Bay to Strategic Value Partners. But that’s only part of OZK’s exposure to San Diego’s struggling new development market for labs.

The bank also holds a $915 million loan on a 1.6 million-square-foot waterfront life sciences and office campus built by IQHQ — a six-block life sciences and office project that remains largely vacant. By the estimate of Rebel Cole, a finance professor who has been outspoken about the risk within Bank OZK’s loan book, the project could be worth as little as $500 million, nearly half the debt balance, depending on market rent assumptions and lease-up prospects.

Of course, the sole building Sterling Bay completed at its famously stalled megadevelopment Lincoln Yards, a 285,000-square-foot lab structure, is also still fully vacant and served as a warning the life sciences slowdown would hit Chicago. Bank OZK also extended more than $50 million in debt for Sterling Bay to build that project, and it’s now being shopped with pricing expectations to come in below the loan balance.

It’s a stark reversal from 2021, when life sciences was the darling of institutional investors. More than $10 billion poured into the sector that year as investors chased lab space insulated from the pandemic’s office headwinds. Taconic Partners, for one, plowed $2 billion into New York projects aiming to corner the sector. Now, the firm’s plans are largely frozen.

The latest life sciences report by CBRE painted a sluggish picture: the sector’s vacancy rose to more than 23 percent across the U.S., though the 0.8 percent increase marked the smallest since late 2022. There’s little clarity on when absorption will return.

Once thought immune to remote work trends, life sciences real estate is proving just as vulnerable to overbuilding, interest rates and shifting capital flows as any other asset class. Now, Chicago is experiencing the fallout.