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Boston Life Sciences Market Shows No Sign of Slowing in 2020

cambridge-crossing

Pictured is DivcoWest's Cambridge Crossing mixed-use development in Massachusetts.

At this point, it sounds like the movie “Groundhog Day,” but 2019 was another impressive year of growth and success for the greater Boston life sciences real estate market — and that growth shows no signs of subsiding any time soon.

gratton,duncan

Duncan Gratton,
Cushman & Wakefield

Strong levels of venture capital investment, big pharmaceutical partnerships and merger and acquisition activity continued to fuel unprecedented demand for life sciences space, not only in and around Cambridge but also in submarkets like the Seaport, Watertown and certain Route 128 corridors.

Venture capital (VC) funding for life sciences, while not quite at 2018 levels, remained robust with nearly $6 billion invested through the end of November. Major funding deals that closed in 2019 include Ginkgo Bioworks ($290 million), ElevateBio ($150 million) and Beam Therapeutics Inc. ($135 million), which all committed to leasing lab space in existing buildings and new developments throughout the area.

Supply-Demand Balance

The urban Massachusetts life sciences market, which includes Boston, Cambridge, and the inner suburbs of Watertown, Lexington, Medford and Waltham, now enjoys an inventory of about 20 millon square feet and ended 2019 with a vacancy rate of just over 4 percent. Successful speculative developments at Arsenal Yards in Watertown, 35 Cambridge Park Drive and Cambridge Discovery Park in Alewife delivered more than 500,000 square feet of new lab space that virtually fully leased at record rent levels upon completion.

Proof of this very healthy level of demand can be seen in rental rates in the Alewife/Watertown submarket, which have increased more than 60 percent in the last three years. The signing of the 900,000-square-foot Sanofi deal in late December 2018 at Cambridge Crossing in East Cambridge led the way. Rental rates for new lab space now exceed $100 per square foot on a triple net basis with near zero vacancy in East Cambridge.

The fact that lab requirements, particularly in the urban core, outstrip the existing supply by a 2:1 ration means this area is one of the only markets in the country where additional lab space is being constructed to meet demand, according to Cushman & Wakefield’s Boston bioSTATus 2019 report.

There are currently 10 projects under construction in greater Boston totaling 3.2 million square feet of lab space. Collectively, these properties are currently 68 percent pre-leased. However, we are also tracking more than 12.7 million square feet of additional proposed life science development projects.

To no one’s surprise, 11 million square feet of this total is equally divided between Boston and Cambridge, with Watertown, Somerville and Waltham also seeing healthy amounts of new construction. With developers trying to find ways to reconstitute existing space to provide unique, amenity-rich options, it’s often a race to the ribbon-cutting.

The question is: will all of these properties actually get built?

Many of these projects are being proposed by experienced, well-financed developers including Alexandria Real Estate Equities, Related Beal, Tishman Speyer, Divco West Real Estate Services LLC, Massachusetts Institute of Technology, Boylston Properties, Leggat McCall Properties and DLJ Real Estate Capital Partners. The winners will be those that secure well-located, transit-oriented, amenity-rich locations and break ground most quickly.

Watertown and Somerville are two areas that should perform well. Watertown, with its much-improved amenity base via the opening of Arsenal Yards, has already attracted a cluster of life sciences companies that now occupy almost 1 million square feet. Somerville, with its proximity to Kendall Square, deep base of millennial workers and addition of a new MBTA Green Line in 2021, also seems poised for growth.

Public policy always plays a prominent role in real estate development and will absolutely impact trends in life sciences development during the next 12 months. Debates regarding prescription drug pricing, research regulation and other non-real estate specific issues are all factors. Possible government action and/or legislation always has the potential to sway the local real estate market in unpredictable ways as well.

Venture capital funding represents another questionable determinant of success. About $20 billion is being invested nationally in life science in 2018 — five times more than was invested a decade earlier. With Cambridge seeing $1.8 billion alone, that means that if Cambridge were considered a state, it would rank second in the entire country in total life science VC investment, trailing only California.

Potential Inhibitors

VC funding fuels the life science industry, especially for early-stage companies. If that funding stream remains strong and more established companies continue acquiring or partnering with early-stage startups, there’s no reason this borrowed time of historic expansion shouldn’t continue for a little longer.

And finally, it remains to be seen if the investment and lending community will continue to fund lab projects on spec, especially if demand suddenly goes stagnant and the market determines overbuilding is taking place. Despite unprecedented demand and construction, Boston lacks available land, and many developers still prefer build-to-suit projects versus building on spec.

With the city’s arduous permitting and approval process and high construction costs, it typically takes three years before buildings are complete, which can be promlematic for risk-averse or cash-strapped developers. And while none of us has a crystal ball and many prognosticators have been predicting the end of this unparalleled boom, all indicators point to another strong showing as we head into the first quarter of 2020.

 

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