New Factors Give Occupiers Even Stronger Hand in Lab Market

Originally published on Banker & Tradesman.

As Inevitable Comes Due, Landlords Grapple with Market Glut

The life sciences and lab market across the Boston metro area has been in a state of flux for some time. While many of the reasons for this are now well established, a few factors have begun adding some additional pressure on landlords and owners to contend with additional forces outside of their immediate control.

There’s been a relatively recent spike in real estate taxes and operating expenses for some lab buildings, particularly in brand-new developments (versus conversions of existing buildings). In most instances, these increases have occurred in the Boston market, but some recently completed suburban projects have been affected as well.

Tenants are banding together and pushing back, and landlords are looking for ways to bring these costs down. It has become a competitive disadvantage for landlords looking to fill vacancy or sublandlords trying to dispose of space. Even aggressively quoted rents are offset by inflated triple-net lease costs.

Of course, an increase in taxes is not due to increased demand; in reality, these additional costs are due to lack of occupancy and an attempt to give a lifeline to city coffers. Vacancy remains at record highs (at Cresa Boston, we are tracking 27 percent market-wide) as more and more new developments are completed and added to the inventory. These new projects, which are typically awash with shell space, account for a majority of the vacancy as the tenants that are looking for space these days are more likely to gravitate towards existing conditions (generally either subleases or spec suites). Tepid demand is having little to no impact.

In addition, according to Cresa’s most recent quarterly markets report focused on the life sciences market, industry leaders are keeping their eyes on the BIOSECURE Act, a piece of federal legislation expected to pass in the near future that would effectively prohibit Chinese biotech companies from doing business in the U.S.

This could lead to a renewed push for companies to onshore their biomanufacturing process. The biggest impact locally would come from WuXi, who manufactures 19 approved drugs in the U.S. and has a large presence in Massachusetts. Will this pending legislation start driving some life sciences deals forward? It’s too early to tell.

Indicators of Investor Interest

Overall, the industry is showing signs of life in some important measurement areas. MassBio’s most recent “Industry Snapshot” report shows that 3,000 jobs were added in the state, while our R&D workforce grew by almost 4 percent. M&A activity has increased, and a significant amount of venture capital money actually went to companies outside of Cambridge, with newfound strength noted in communities like Waltham and Watertown.

It’s also important to remember that the area remains the epicenter of drug development and innovation. It’s hard to imagine venture capital investments or new lab construction matching peak levels anytime soon, but the industry should continue to thrive. Despite Alexandria Real Estate Equities’ very public pullback, they are still moving forward on several notable projects, including the redevelopment of the Watertown Mall, which just received approval from city officials. International investor interest also remains strong for the area’s lab assets, as evidenced by Norges, the world’s largest sovereign wealth fund, investing $746.4 million in a pair of Kendall Square buildings in Cambridge.

The public sector is investing in this ecosystem as well, as Cambridge looks forward to hosting one of three national hubs for the new $2.5-billion federal health research agency, ARPA-H. All of this is indicative of the strength of the local life sciences market. The shift in the market was inevitable – the market has settled and our stats clearly show this. We are now faced with a surplus of space for lab users in all markets that we track.

As internal financials loosen, and real estate decisions return to the top of mind, occupiers will face an entirely new market. Supply is no longer the slightest issue. Occupiers can rejoice, taking their time to move their company forward at the pace and in the direction of their choosing.

John Coakley is a managing principal at Cresa Boston.