Why Rental Rates At Biotech Labs Are Skyrocketing

The kind of opportunity that technology and energy markets once offered is beckoning investors to property near biotech clusters. Emerging from the recession, technology and energy markets commanded the attention of commercial real-estate investors that wanted to tap into improving occupancy and rental rates largely absent elsewhere.

A similar dynamic is germinating in biotech clusters, which are typically marked by a high concentration of life-science companies near academic research institutions.

Tenant demand is driving fundamentals in the nodes, particularly in Boston, San Diego and the San Francisco Bay Area.

In the biotech bellwether of Cambridge, Mass., the average vacancy rate for lab space was 7.3% at the end of the second quarter of 2015, about half of what it was a year earlier, according to brokerage Cushman & Wakefield.

The average rental rate of $62.47 per square foot marked a year-over-year increase of 25.7%.

In July, Pasadena, Calif.-based real-estate investment trust Alexandria Real Estate Equities (ARE) sold a 70% stake in a 305,000-square-foot building housing Cambridge’s Biogen (BIIB) to TIAA-CREF for $190 million.

The price reflected a “cash capitalization rate” — the initial cash yield to an investor — of a relatively low 4.5%.

What’s more, rents won’t increase for 13 years, according to comments made by Alexandria Real Estate CEO Joel Marcus during the company’s second-quarter earnings call.

“There was a large group of very interested buyers, including a number of sovereign wealth funds,” Marcus told analysts during the call. He also suggested that the company would look at selling more assets in light of the demand.

The growing focus on biotech space is occurring amid medical discoveries and robust investment in the sector.

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A health care measure passed by the House of Representatives in July could also boost National Institutes of Health biotech funding and streamline regulatory approvals for new drugs.

Driven largely by life-science firms, 64 health care companies raised $5.8 billion in IPOs through three quarters this year after 102 health care companies raised $9.2 billion in 2014, according to Greenwich, Conn.-based Renaissance Capital, a manager of IPO-focused ETFs. The Nasdaq Biotechnology Index’s plunge of 21% over the past three months — following a 127% gain in 2013 and 2014 — is expected to curtail IPO activity, according to the firm.

Half The Vacancy Rate

Venture-capital firms pumped $2.3 billion into biotech companies in the second quarter, a year-over-year increase of 32%, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data provided by Thomson Reuters.

CoStar Portfolio Strategy, a division of Washington, D.C.-based property researcher CoStar (CSGP), found that the average vacancy rate of 5.1% in the top 10 biotech clusters in America was more than half the national office vacancy rate. It further noted that a third of the $18.4 billion of NIH funding in 2014 flowed into academic research institutions near those top 10 clusters, including those in Boston, San Diego, Baltimore and Philadelphia.

Rich Robbins, CEO of San Rafael, Calif.-based Wareham Development, downplays the link between NIH funding and occupancy, noting that biotech companies have access to several sources of capital and naturally gravitate toward research institutions. But he’s keenly aware of the need for space in San Francisco Bay Area life-science submarkets, many of which had average vacancy rates of 5% or less in the second quarter, according to brokerage Kidder Mathews.

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Wareham is finishing a 110,000-square-foot life-science building in Berkeley.

Aduro Biotech (ADRO) recently agreed to lease half of it beginning in June, with an option to claim the balance by July.

Wareham also is developing EmeryStation West, a 250,000-square-foot research facility atop a transit center in nearby Emeryville.

Big pharmaceutical companies’ appetite for developing biotech therapies is pressuring young firms to succeed and grow quickly, Robbins says.

“We are definitely being challenged to meet the space needs for life-science companies in the East Bay,” he said. “We need to build 250,000 to 300,000 square feet of new lab space about every 24 months just to keep pace with demand.”

In some cases, investors are looking for opportunities outside of the hottest clusters. Life-science developer Longfellow Real Estate Partners in early October acquired an office building in suburban Boston with plans to redevelop it into lab space for an alternative to Cambridge, for example.

Weighing Alternatives

Advance Realty, a Bridgewater, N.J.-based developer, is similarly leading an effort to convert the former Sanofi (SNY) campus in northern New Jersey into a mixed-use project that could include 800,000 square feet of lab and research space. Other investors are likely to pursue similar redevelopments at the former Pfizer (PFE) and Roche (RHHBY)campuses in the region, says John Cunningham, executive managing director for brokerage Colliers International (CIGI) in Parsippany.

Those projects could provide alternatives to a life-science cluster emerging near the New York University School of Medicine in Manhattan.

While Alexandria is adding 130,000 square feet to its existing 597,000-square-foot life-science center in the neighborhood, a lack of biotech space has led to rents of around $80 a square foot, he says.

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That’s a big expense for young companies, Cunningham acknowledges. But location often overrides those concerns.

“You can drive 25 miles and get a much lower rental rate, but a lot of companies want to be in New York to be near the financial markets and top talent they need,” said Cunningham, who suggested that Manhattan’s life-science area is where Cambridge was 15 or 20 years ago. “It’s very expensive to develop and bring drugs to market, but you have to make the best of all those assets.”

View more information: https://www.investors.com/news/biotech-lab-rental-rates-rising/

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