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Bulking Up On Biotech

The biopharmaceuticals industry was the second most profitable in the United States in 2005. The market capitalization for publicly traded biotech companies alone reached $311 billion. While biotech real estate accounts for an estimated 5% or less of the overall office market, the industry's global financial outlook is stellar.

Last year, national biotech real estate deals were highlighted by Biomed Realty Trust Inc.'s $600 million purchase of a nine-building portfolio from the Lebanon, N.H.-based Lyme Properties. The 1.1 million sq. ft. of Boston-area lab and office space is now 97% leased.

Biotech's other hot spot, San Francisco, is seeing a rebound in development and acquisition of bio properties as well. In 2003, the closing of a major Pfizer facility doubled the region's biotech vacancy to 600,000 sq. ft. But late last year, Pasadena, Calif.-based Alexandria Real Estate Equities Inc., the largest biotech REIT in America, purchased 500,000 sq. ft. of new space to build additional capacity.

“As a diversification play, more investors will include biotech in their portfolio,” predicts Jerry Keeney, first vice president for CB Richard Ellis. “Rents are three to four times higher than a typical office building. Because most properties are build-to-suits, vacancy rates are usually always in the single digits.”

The flip side is that it's also more expensive to build biotech facilities, says Keeney. The cost to build out a structure for a normal office building is roughly $50 per sq. ft. For biotech lab facilities, the cost can run anywhere from $180 to $200 per sq. ft., he says.

While the development cost remains high, new medicine is poised to reap huge profits in the coming years. A record-setting 38 new drugs were approved by the Food and Drug Administration (FDA) in 2005 and over 70 are on the docket in 2006. Couple this with a burgeoning retiree population over the next 30 years, and the market outlook for biotech is brimming with the need for more research and production facilities.

With this expected windfall, real estate investors are still taking a measured approach due to the very unique property demands of the sector. Of the over 1,400 biotech companies in the U.S., many are young start-ups that want to bring revolutionary products to market, but with product lifecycles pushing seven years or more and ultimately uncertainty of FDA approval in the end, the value proposition for certain investors is debatable, says Daniel Cordeau, senior vice president of Spaulding & Slye. “Life sciences real estate investors want to see an exit strategy,” says Cordeau. “They're looking for security over high risk.”

If a [biopharmaceutical] firm leasing space doesn't get its drug approved or is bought out by another company, for example, then office landlords need to have another tenant waiting in the wings to fill the space, adds Pär Almhem, president of Swedish-based Pharmadule Emtunga, a developer of custom biotech facilities.

Investing in the development of a highly unique, medical-grade building is only going to appeal to a select niche of investors. But with biotech returns averaging some 1% to 2% higher than the general office market, says Cordeau, biotech is a smart play for investors wanting a diversified portfolio.

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