By Brendan Carroll, research director, Cushman & Wakefield
Through the first three quarters of 2020, the Boston life sciences market is seeing record occupancy, a continuation of large new-building leases, stable rents at record levels, high levels of pre-committed new construction and an insatiable appetite for inventory in new submarket clusters.
Cushman & Wakefield defines laboratory properties as facilities optimized for the physical scientific research of biotechnology products.
COVID-19’s Impact
Following a pause of leasing activity in the first quarter of 2020, lease negotiations for laboratory facilities resumed quickly in the second quarter, hitting a level that commercial office properties have still yet to see. While optimism quickly returned for the region’s office-using businesses, widespread execution of remote office-using job functions has proven to be more effective for many of these workforces than market leaders previously envisioned.
Brendan Carroll, Cushman & Wakefield
The consensus among real estate observers suggests a long-term decrease in the percent of in-office workers for traditional office-using functions. However, the importance of the continued use of physical spaces for biotechnology research will not be affected, as this function cannot be accommodated through current and easily envisioned remote work practices. These are highly specialized jobs performed by employees with highly targeted skill sets, and the various equipment, machinery and software needed to perform these jobs cannot simply be packed up and re-installed in a home office.
In the long term, the pandemic may prove to be accretive to the use of laboratory space due to the importance of addressing public health problems for which biotechnology research may provide a solution. But while the current public health crisis does support a continued need for quality lab space, the fact is that much of the investment and growth underpinning today’s surge of life sciences activity had, in fact, been envisioned before 2020.
New Clusters Emerge
As the 6.9 million square feet of laboratory space in Kendall Square is frequently referred to as the world’s most prominent “cluster” of biotechnology research activity, the emergence of additional clusters outside this area is extending the inventory of laboratory space in an unprecedented geographical way.
Cambridge Crossing, the 5.5 million-square-foot mixed-use neighborhood, will have 2 million square feet of commercial inventory delivered between 2020 to 2023, half of which will be laboratory space. Approximately 75 percent of the commercial space at Cambridge Crossing has been leased following intensive and rapid dealmaking.
This activity included a 902,000-square-foot lease by Sanofi, a group that will consolidate previously disparate locations of the Genzyme operations it had acquired in 2011. New Jersey-based pharmaceutical giant Bristol Myers Squibb (BMS) also leased 360,000 square feet in a facility developer DivcoWest began building on a speculative basis in 2019.
Outside of Cambridge, Boston’s Seaport District is also emerging as a key destination for biotechnology companies. Though Vertex Pharmaceuticals’ 2011 lease for 1.1 million square feet in the district was not immediately followed by a large influx of demand from biotechnology groups, more recent activity has suggested substantial organic growth of biopharma activity is starting. A previously substantial discount to Kendall submarket lease rates (of over $100 per square foot for new facilities on a triple-net basis) has been notably narrowed.
The importance of employees’ physical presence on the job site and the degree to which the “prestige” of locations in the cluster vary by organization. However, it is clear that in some ways, a biotechnology user that previously would have exclusively targeted a physical location in Cambridge can now look beyond that area.
CRISPR, the second of two major new building transactions taking place in 2020 along with BMS, leased 260,000 square feet at a facility at which construction had already commenced, this time by a life sciences unit of office tower developer Tishman Speyer. In addition, large swaths of land owned by Procter & Gamble as part of its historic Gillette razor factory are increasingly envisioned as biotechnology research sites. Recent acquisitions by Alexandria Real Estate Equities and affiliates further confirm the belief in the the Seaport District’s viability as the next multi-million-square-foot submarket of laboratory inventory.
Watertown, also a submarket with substantial rent investment from Alexandria in the form of the acquisition of the 850,000-square-foot Arsenal on the Charles campus, has seen its inventory increase from 300,000 square feet in 2017 to more than 1 million square feet in 2020. This figure includes facilities under construction.
Urban infill laboratory cluster development is also moving forward at highly compelling sites in Somerville’s Union Square, where DLJ Real Estate Capital and Leggatt McCall Properties are developing Boynton Yards, a 289,000-square-foot speculative lab facility. Plans for the development of several facilities adjacent to Harvard’s future practical sciences campus in North Allston are also advancing.
While just 23 percent of the region’s laboratory inventory presently exists in Boston’s Central Business District or its inner suburbs, the two areas account for 56 percent of the current construction pipeline.
Conversion Craze
While assets have been converted for laboratory use throughout the region since the 1990s, the locations and building types for convertible uses have rapidly expanded over the past two years. Presently, there are at least a dozen examples marketwide of properties at varying stages of conversion to laboratory use.
In Cambridge, large portions of the Cambridgeside Galleria shopping mall are set to be redeveloped into a set of laboratory facilities with up to 800,000 square feet of space. One Winthrop Square in the Financial District and 51 Sleeper Street in the Seaport are both in the process of being converted to 116,000- and 86,000-square-foot laboratory assets, respectively. Waltham’s 1560 Trapelo Road is also set to be converted into a 70,000-square-foot laboratory facility.
A Solid Foundation for Growth
Continued growth in demand for the region’s laboratory real estate appears likely, given a continued demand for targeted health therapies and substantial financial backing that continues to increase. Venture capital investment in Massachusetts-based biotechnology companies is on pace to reach $11 billion as of October, a level that would nearly double the preceding annual record of $6.5 billion set in 2018.
Public equity markets’ investment, on pace to reach $8.7 billion, could more than double the previous highest level ever recorded of $3.9 billion, also set in 2018. As Boston remains among the country’s best value propositions for success-focused biopharma concerns, an efficient capital placement infrastructure nearly guarantees a continued growth of the 27 million-square-foot Greater Boston laboratory market.
Brendan Carroll is a Research Director at Cushman & Wakefield, focusing on Boston and Americas Life Sciences.