Reeling from the coronavirus pandemic and the growth of emerging technologies from the nation’s top laboratories, commercial real estate (CRE) is repositioning itself to accommodate the demand for life sciences space.
Not since Salk and Sabin beat polio in the 1950s has the U.S. been more focused on scientific innovation. The race is on to defeat countless diseases and conditions — a race that requires vast amounts of life sciences CRE.
How Life Sciences Affect Office Demand
According to Cushman & Wakefield, $70 billion in private equity and National Institutes for Health funding went into North American life sciences-related companies in 2020, a figure that rose to a record $78 billion in 2021. As a result, there’s strong demand for the specialized laboratories, offices and facilities that life sciences research requires.
“Developers are rushing to build in life science markets as supply of lab space lags demand. Including owner- occupied properties, 21.6 million square feet of lab space is underway nationally,” said CommercialEdge.
Not only are new facilities coming online, existing buildings are being converted for life sciences use.
- The developer already owns the site. That’s not only a cost savings, but existing sites often feature premium locations near the amenities that employees value.
- Conversions are a faster way to add space. New construction typically means a lengthy approval process, plus there are potential weather delays and supply shortages.
- In September 2020, Bloomberg reported that
“most people who work in the life sciences — pharmaceutical, biotech, and other medical research fields — can’t do their jobs from their couches or backyard sheds. For them, the pandemic has helped fuel a real estate scramble.”
Perhaps most importantly, the life sciences CRE market attracts investors and tenants alike because such properties are likely to be in demand for years to come.
“The life sciences sector is buttressed by more fundamental, long-term shifts than most industries, such as advances in science and technology, expanding uses for biotechnology, and the long-term trend toward more individualized treatment,” said Matt Gardner, CBRE’s Americas life sciences leader.
Gardner added that “indicators and market forces will shift on a quarterly or annual basis, but the underlying science continues to develop and expand.”
Such underlying value is visible to property owners and investors.
In July 2022, for instance, CoStar noted, “Several markets with a particularly large tech, biotech and healthcare presence — such as Austin, Texas; San Diego, California; and Tampa, Florida — have seen above-average rent increases and faster recovery in [office-using] employment than the national average since the fourth quarter of 2019.”
Or as CommercialEdge explained, “Life science properties continue to command high sale prices in 2022, with the average facility trading at $645 per square foot, 150% higher than the overall average of $258 per square foot for general office buildings. Buildings that are candidates for lab space conversions can command higher prices, too.”
The Best of Times for San Diego and Austin
San Diego and Biotech Beach
For companies interested in attracting life sciences talent, few places are more alluring than San Diego. It’s part of Southern California’s Biotech Beach, a life sciences hotspot that’s home to The Scripps Research Institute, the Salk Institute for Biological Studies and a huge number of bioscience jobs.
According to the San Diego Regional Economic Development Corporation, the area includes “more than 1,800 Life Sciences companies employing more than 61,000 workers with an average wage of $168,694, amounting to a $27 billion regional economic impact.” Biospace.com says San Diego is one of the eight “best cities in the US offering biotech jobs.” In fact, it’s just behind Boston and San Francisco.
In the San Diego market, KBS Senior Vice President of Asset Management and Acquisitions Tim Helgeson said that the life sciences industry is “a major economic driver providing high salaries which continuously attract both local and out-of-state educated workers. San Diego is also home to major research universities, like UCSD and San Diego State, and offers current students convenient access to mentorship and job opportunities. The opportunity in this sector is why last year our company assisted in the acquisition of a 296,327-square-foot Class A office complex in the heart of Sorrento Mesa, San Diego, California’s life sciences and technology marketplace.”
Helgeson points out that “the U.S. government recently increased funding for life sciences. Job creation and overall life sciences employment saw a year-over-year rise of 5.3% in January 2022. More specifically, nationwide the biotech research and development subsector — a major segment of the San Diego life sciences market — experienced more than 11% growth in employment during that same period.”
San Diego offers an especially attractive life/work balance for the 3.3 million people who live there. Welcoming beaches, a world-famous zoo, Comic- Con, a major naval base, proximity to Mexico and international trade plus a mild climate year-round are all part of San Diego’s appeal.
Another draw: housing. In mid-2022, the typical area home sold for $965,000 according to the National Association of Realtors. That may seem steep when compared with many markets, but it’s an outright bargain when measured side by side with leading California metro areas.
Austin and the Life Sciences Real Estate Market Report
As always, America is on the move, and this time around, one of the most favored destinations is the Austin area. The Austin metro population increased by 167% between 1991 and 2020, second only to Las Vegas according to Axios.
What makes Austin a hot market? It’s the capital of an enormous and fast-growing state. There’s no Texas income tax. The typical Austin existing home sold for $613,200 in the second quarter, up 19% from a year earlier, but a bargain when compared with many high- cost, high-tax markets.
Also, it’s hard not to notice Austin’s growing clout as a tech employment center:
- Tesla has moved its headquarters to Austin and is building a Gigafactory there with more than 10 million square feet.
- Apple has invested $1 billion in a new Austin campus with 3 million square feet. It’s expected to employ 15,000 people when built out.
- Oracle — the giant database company — moved its headquarters to Austin from Redwood Shores, California, in 2020.
According to Kastle Systems, as of mid-September, the average office occupancy rate in 10 major metro areas stood at 47.5%. Austin is one of the 10 metro areas surveyed, but it had a 60.5% occupancy rate.
Located on roughly 20 acres, Austin’s SouthTech Business Center includes four buildings. The KBS- owned multi-tenant property features 260,112 square feet of space and 744 surface parking spaces.
Erected in 2001 as industrial space, the buildings have 21-foot ceiling heights, which means there’s plenty of room for HVAC and other mechanical equipment. Wide 30-foot-by-30-foot column spacing and loading at ground and dock heights permit large equipment to be easily loaded and unloaded. Because this is climate- controlled flex space with heavy electric power, a single address can include offices, laboratories, meeting rooms, storage and other facilities.
Home to MedtoMarket (M2M), a private medical training and coworking facility, SouthTech Business Center was able to renovate its footprint to accommodate M2M’s needs with research and development labs, state-of-the-art auditorium, stadium event center and training facilities.
The SouthTech Business Center is more than bricks and mortar, however. It’s well located, and that makes it attractive to the talent every business requires.
Put it all together, and there are reasons why more and more life sciences companies are looking at San Diego and Austin. These are attractive life sciences hubs where skilled professionals are now working to make tomorrow better for all of us.