Competition Heats Up for Life Science Space, with No End in Sight

Competition Heats Up for Life Science Space, with No End in Sight

The life sciences industry is being pulled in different directions—with mergers and acquisitions, drug patent expirations, emerging market needs and the challenges of attracting a highly educated workforce. Nevertheless, demand for space from life sciences companies is still far outpacing supply, pushing up rents and forcing prospective tenants to grab cluster spaces when they can be found.

According to a recent report from real estate services firm Cushman & Wakefield, the global pharmaceutical market is expected to grow to $1.6 trillion by 2018, at the same time as there has been a tremendous amount of consolidation in the industry. Emerging markets are also changing the focus of global firms, with China expected to make up almost 40 percent of pharmaceutical companies’ non-U.S. customers by next year.

Roger Humphrey, executive managing director of the life sciences group at real estate services firm JLL, says the industry has been growing very fast due to demand from both large and small firms. The big pharmaceutical companies have been shedding space due to mergers (last year, there was a record $300 billion in pharmaceutical mergers and acquisitions, according to Cushman & Wakefield), but small and mid-size firms are immediately filling the empty space, he says. As popular drug patents expire and a flood of generic medicines are expected to flood the market, the large firms are looking for better ways to earn revenue, such as expanding globally by pushing into emerging markets such as Brazil and China, or exploring more research and development of biopharma products (biological medicines, based on living tissues such as vaccines).

Humphrey says the current life science campus clusters, such as the Boston-Cambridge area and San Francisco, are growing even more dominant because new drug research is more complicated, requiring strong relationships with existing science-based universities where the clusters are based.

“There is a lot of new discoveries in biopharma, but these are large-molecule drugs, and the manufacturing is more complex,” he says. “Therefore, you’re going to be competing with the technology sector to entice well-educated millennial workers.”

More emerging life science markets such as Denver and Seattle are getting a lot of attention, according to the 2015 JLL Life Sciences Cluster Report, which is set to be released to the public in early July. There’s limited construction in the sector, the rents are being pushed upward in the major life science markets, and large firms are considering lower cost secondary markets to develop build-to-suit lab space, according to the report.

“The growth of generics has helped fill the vacuum of the emptied space, and created demand for development in secondary markets, or redevelopment of former vacated properties,” Humphrey says.

Many life science property owners and developers have been busy this year. Eli Lilly and Co. is building a new drug delivery and device innovation center in Cambridge, Mass. Forest City Enterprises agreed to buy out former partner Health Care REIT’s interest in University Park at MIT, a 27-acre life science campus next to the college, last month for more than $400 million. BioMed Realty Trust, one of the largest owners of life science space in the country, completed more than three million sq. ft. of leasing in the past year. Wexford Science & Technology, a BioMed subsidiary, has been working on a number of projects, including serving as a partner on the 4-million-sq.-ft. expansion of the University City Science Center in Philadelphia.

Greg Lubushkin, CFO of BioMed, says that availability of life science space is tight across the country because of high demand. Rents for office and laboratory space are increasing in cluster markets, a trend he expects to continue for the foreseeable future. Lubushkin adds that his firm took 400,000 sq. ft. of space discarded by consolidations in Cambridge and leased it out in three months at higher rents. It is also building a 300,000-sq.-ft. new building in San Diego because that market is 95 percent occupied.

“Our challenge, in the current environment, is ensuring we have the space necessary for tenants to grow,” Lubushkin says. “As an example, we recently announced a 295,000-sq.-ft. lease to Alnylam Pharmaceuticals for a very well-located asset in Kendall Square in Cambridge that isn’t set to become available until May 2018, as the project is fully leased until then. We are seeing more and more companies commit to space sooner to ensure they will be able to secure these core facilities to house their future research needs.”

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