Staying ahead on the life science leasing curve
Booming biomedical fields are a no-brainer for office landlords. Could retail be next?
Life science lease deals and building conversions have been popping up across New York City and other major commercial real estate markets — perhaps in surprising places.
At 450 West 126th Street in Manhattanville, a former bakery is getting a fresh start as the Taystee Lab Building, Janus Property’s planned 350,000-square-foot life science hub. At 125 West End Avenue on the Upper West Side, Taconic Partners and Nuveen Real Estate are converting a former Disney-owned ABC campus into a 400,000-square-foot research center. And at 30-02 48th Avenue in Long Island City, Alexandria Real Estate announced plans to turn a building once used for book binding into more than 175,000 square feet of laboratory and office space.
All three projects predate Covid-19. But the pandemic may give them an even greater advantage, as other commercial properties struggle to stay relevant. At Hudson Research Center, another Taconic project with Silverstein Properties, for example, the New York Stem Cell Foundation, HiberCell and the Rogosin Institute lease office and lab space.
“One of the reasons New York, historically, has not experienced the same growth [with life science companies] as Boston and San Francisco is because you just haven’t had the real estate for it,” said Matthew Weir, a senior vice president at Taconic. “You’re starting to see that really take off now.”
While some of the locations may seem atypical for biomedical buildouts, they are helping breathe new life into a major sector of real estate that’s taken a huge hit since March. And as New York’s beleaguered office market finds new long-term tenants across several key areas of life sciences, retail landlords are starting to question if the same fate could await them.
Established and emerging life science hubs that include New York, Los Angeles and Chicago are poised to benefit from “pandemic-related tailwinds,” with the global prescription drug market expected to surpass $1 trillion by 2022, according to a report from JLL. In the cities that have longstanding ties to life sciences, employment in the field has been booming while commercial property vacancies remain low. In Boston — where 19 of the 20 biggest biotech and pharmaceutical firms have a presence — employment growth has hit 23 percent over the past five years, while commercial vacancies are at an average 6 percent. In the San Francisco Bay Area, another leading market for life sciences, employment has increased 21 percent in the same period, with vacancies just over 7 percent.
“It’s primetime, with the spotlight on the industry, to raise capital,” said Michael Brown, a commercial real estate broker with Colliers International who leads the firm’s national life science team out of Florida.
“And capital raises [for life science tenants] are exceeding even the most aggressive expectations before the pandemic,” Brown added.
As many restaurants and other retailers struggle to find their footing in the age of Covid, with thousands closing their doors permanently, leasing challenges are taking a big toll on Manhattan’s retail market, an October CBRE report found.
Active retail leasing volume for the 12 months ending in September totaled 2.67 million square feet, down by nearly a third from the 3.9 million square feet from the same time period a year ago. And asking rents across Manhattan’s 16 main shopping corridors have fallen to $659 per square foot during the third quarter, down 12.8 percent from the same time last year, and the lowest level since 2011.
The city’s office market is seeing the opposite effect with space outfitted for biomedical and other life science tenants, according to a separate CBRE report. Asking rents for lab space have been steadily rising, hitting an average $95.39 square foot across the city in the first half of 2020, up from $88.72 at the year end of 2019. Meanwhile, available lab space for immediate occupancy remains scarce, at just over 2 percent.
And for those who have been able to leverage the tight supply, the money has followed. In New York alone, more than $1 billion of venture capital funding poured into life sciences last year, up from $990 million in 2018 and $366 million in 2017, making New York one of the fastest growing markets for commercial tenants in the field, according to JLL.
“The relationship between supply and demand is probably going to always be a little bit out of sync,” said Joe Fetterman, an executive vice president at Colliers who specializes in healthcare and life sciences. “But, those developers that are in the ground or planning to be in the ground immediately are feeling pretty safe about their bet.”
While vacant retail offers a wealth of potential space for life science tenants, it’s not always a simple formula. Audrey Symes, JLL’s director of healthcare and life sciences research, told The Real Deal by email that while “the idea of retail-to-lab conversions is intriguing given the general parameters,” there are several impediments built into many properties.
Commercial labs require very specific ventilation and ceiling heights, water power, sewage and other infrastructure that a ground-floor retail space may not be able to accommodate. Buildings must also abide by zoning regulations for larger labs to operate, which puts “a natural limit on the scale of these conversions,” Symes noted.
Even with office properties, that’s one of the reasons it can be such a challenge to find the perfect space — regardless of the building’s previous use. Healthcare fund manager Deerfield Management, for example, almost gave up on trying to find space in Manhattan for the research lab Cure until it came across 345 Park Avenue South.
Deerfield, which oversees about $8 billion in assets, purchased the 12-story building from RFR Realty for $345 million last year and has spent more than $200 million to convert the 300,000-square-foot property into lab space. Cure’s new homebase is expected to generate upwards of $160 million in tax benefits for the city, according to a 2019 analysis by the city’s Industrial Development Agency.
“Every inch of it is constructed to be a lab,” Deerfield managing partner James Flynn said of the converted space.
Outside the box
While smaller retail spaces throughout Manhattan and other dense parts of New York would be too tight of a fit, malls and shopping centers outside of the city’s core may be more adaptable. The same goes for large warehouses and other industrial properties, many of which are already being upgraded as last-mile and logistic centers for e-commerce companies.
With upgrades similar to those seen in large office buildings — following the necessary zoning laws and other protocols for lab space — fewer hurdles may exist.
“There’s absolutely no doubt in my mind that it’s possible,” said Matt Malone, an associate principal at the design firm Perkins & Will, who specializes in science and technology projects in New York. “From a sustainability perspective, it makes a lot more sense for us to reuse the existing building stock than it does for us to completely raze it and start over.”
Malone, who is involved in the redevelopment of 125 West End Avenue, noted that his firm similarly repurposed a former standalone big-box retail property for the University of Rochester Medical Center.
Other businesses that provide healthcare services, including doctors’ offices and drug stores, have been using storefront and strip mall spaces for decades. More recently during Covid, urgent care centers have opened walk-in locations, as medical needs increase and retail rent prices come down.
“It’s a great way to get exposure” for your services, said Evan Gasman, a real estate agent with Carr, a specialty brokerage that represents healthcare companies looking for space.
And the upsides could be even greater for property owners looking for creditworthy tenants.
“For the most part, [doctors’ offices and medical labs] are a recession-proof business,” Gasman noted. “They’re not restaurants, they’re not anything that is remotely high risk.”