Earlier this month, series took an in-depth look at the demand for land, which can now be described as “insatiable,” while developers look to shore up their land positions. That’s especially the case in the industrial sector, the topic of the special report and in-depth Q&A, and, increasingly, the life science and biopharmaceutical sector, which the series investigates this week.
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RALEIGH – The life science industry is booming across the United States, including in the Triangle, where the region is strong. That’s according to Travis McCready, executive director of U.S. life sciences markets, for JLL.
And there’s an increasing amount of capital that is moving into the Triangle, along with other secondary or tertiary markets. With uncertainty in financial markets, with geopolitical conflict in Ukraine, and other areas of uncertainty for investors, capital is also moving into and across real estate sectors.
That includes in the life sciences, where the demand for available space is outpacing the supply of inventory, leading to increased pressure in the region’s marketplace.
WRAL TechWire interviewed McCready about what’s happening nationally, and which trends we’re observing in the Triangle, for the Future of Work special reporting project. The transcript, lightly-edited, appears below.
What’s going on
WRAL TechWire (TW): What has led to the uptick in demand for commercial real estate, especially in the life science sector?
Travis McCready, executive director of U.S. life sciences markets, for JLL (McCready): Commercial real estate is probably the most stable of asset classes to park one’s money, while we sort out the war in Ukraine, the inflationary pressures post-COVID, and things like that.
There’s a lot of volatility about the money. Without doubt.
So it’s not entirely clear what all of the driving factors are, nor is it entirely clear when the trend began, but with both of those qualifiers, it is without doubt verifiable that there has been an increased deployment of capital in secondary and tertiary markets.
The capital is coming in a variety of forms, it is both real estate capital in terms of REI, venture capital, following behind great science that exists in markets and has always existed in markets outside of Boston, San Francisco, and New York.
Philanthropic capital plays a role, too, and that is also being deployed.
And then there’s out-migration, which brings new personal wealth and new talent into these markets. You can track, very clearly, any one of those four metrics.
Population increase in these markets, more vibrancy in these markets, more capital deployment in these markets, and more innovation and entrepreneurship in these markets.
As with all sorts of areas, the pandemic deepened existing trends.
When you go back and parse the data, while you might see a hockey-stick-shaped curve for certain trends, the germination of those trends began beforehand.
On demand… ‘there is no space’
TW: Where is demand, right now, for life science and lab space in the Triangle?
McCready: Demand for lab space is indeed at an all-time high. There are lots of ways and lots of metrics for thinking about demand.
From a macroeconomic level, we are, in the United States, operating with now about 166 million square feet of leasable lab space. Since records were kept, that is the highest amount of leasable lab space in the United States.
Market by market, we’re operating at historically low vacancy rates for lab space. For example, in the greater Boston area, vacancy is 1.2%.
In Raleigh-Durham, we’re tracking about 1.7 million square feet of supply, and 2.2 million square feet of demand through January 2022.
Statistically speaking, there is no space.
Gene therapy on the rise
TW: So, tell us, what factors are driving demand right now?
McCready: Part of what is driving this demand, perhaps what is more interesting than whether we’re at a high, is an exponential increase in investment going toward cell and gene therapy companies.
On the rise, and it’s been a 5x rise in the number of cell and gene therapy companies across the United States that are in development in the last five years, and that’s not going to slow at all.
At the same time, we have our ordinary, and it’s fascinating that we can now say ordinary, biologics manufacturing companies. So there’s a rapid increase in the number of biomanufacturing facilities and biomanufacturing demand that we’re experiencing.
Two markets combined have produced extraordinary demand, not just in the major markets, not just Boston, San Francisco, San Diego, but the next seven or eight markets as well.
The Raleigh-Durham market is the fourth-most vibrant life sciences geography in the United States, largely due to its biomanufacturing concentration, and less related to its R&D concentration.
It’s an extraordinary market right now, where demand, pretty much everywhere, far outstrips supply, and commercial real estate is playing catchup.
TW: What are current trends in life science, and has the real estate market adapted for these?
One of the more fascinating trends in life science development these days is old-school placemaking. These concepts and principles that apply to economic development and urbanization writ large are now finding their way into commercial life science developments.
They’re now more deeply textured, and mixed-used. They’re highly amenitized, with workout and wellness facilities, retail and restaurant facilities, the buildings are increasingly designed to address concerns of carbon net zero.
And they are increasing amenities with other scientific functions that support the R&D or manufacturing enterprise, for example, it’s not uncommon for new commercial developments to be designed with a vivarium in the basement.
Thinking of lab buildings the same way that residential developers are thinking about apartment buildings, it’s not just about the building, it’s about the amenities associated with the facility.
That’s the biggest new trend in commercial development.
But the second trend is one where everyone involved is moving toward an understanding and an embracing of figuring out how to design lab buildings differently for a carbon net-zero future. And this is really hard for an asset class which is so energy-intensive, and requiring of energy redundancy, and has at the same time some of the most strict regulatory envelope of any asset class out there, any commercial real estate asset class out there.
But we’re figuring it out, certain developers, certain architects, certain engineers are really paving the way.
What companies want
TW: What is it that companies are seeking, when it comes to considering infrastructure locations?
McCready: Without doubt, the number one reagent, or factor, that companies are seeking is talent. The availability of talent will make or break a search for space. Once you get past that, and it’s not easy to get past that, the second thing that companies are looking for is available space.
Again, not easy to accommodate, when demand is so high and availability is so low.
When it comes to available biomanufacturing space, in particular, the third factor is cost-effectiveness.
So areas like Raleigh-Durham and other North Carolina markets perform very, very well in biomanufacturing because of the access to talent, the relative low cost of the peer group, and the relative low cost of available space in the North Carolina markets.
The fourth thing that companies are looking for are life science communities. This is less of a factor for a biomanufacturing facility but more of a factor for R&D. Companies want and need to be near or adjacent to their competitors and other life science companies.
TW: So, given this factor, a strong community, where is there opportunity for the region to build on its strengths and overcome weaknesses?
McCready: When you think about why life science companies want to be near other life science companies, it makes a ton of sense.
In the industry, there’s a very high attrition rate among companies, so one way to hedge against availability of talent is to be proximate to your competitor in order to steal their talent.
Secondly, life science companies are convergent companies these days. They have not only just biological, chemical, and life science talent, but also engineering, computer science, and other technical talent, which essentially means they need to be proximate to innovation communities where that diversity of talent is also available.
Lastly, and I don’t think people deeply appreciate this one enough. Depending on what generation you grew up in, people might have this image of a lone scientist working in the laboratory, coming to a discovery on their own.
That is a complete fiction. Scientists are deeply, deeply, collaborative, and as a result, in order to be successful, and in order to accelerate, companies find it necessary to be around their peer group, for sharing of ideas, sharing of methodologies, and increasingly, even sharing data, as a way of accelerating their company and their programs toward commercialization.
This is where North Carolina right now could be a little weak, though it is improving. There are not, in Raleigh-Durham right now, high dense and high concentration areas of life sciences R&D activity, it’s still pretty spread out.
TW: So, what can the region do?
McCready: There is a movement afoot to bring that kind of density to downtown Durham, but that’s a very nascent movement. It’s for this reason that Raleigh-Durham and North Carolina overall continues to underperform on R&D activities, and still overperform on biomanufacturing.
For better or for worse, Raleigh-Durham has no parallel. There is no other market in the United States that has such unquestionable strength in biomanufacturing. That is both the region’s secret weapon and its greatest weakness.
If Raleigh-Durham wanted to transmute into its better, most diverse version of itself, it would need to start to resemble, perhaps, the Philadelphia market, with strength in R&D, strength in particular in cell and gene therapy, and growing availability of assets within the biomanufacturing sector, all bolstered by three or four core globally-renowned academic institutions.
That’s the goal. To really bolster the brand around research and development, capitalizing on its strength in biomanufacturing.
I’ve learned in my career that while substance is super important, so is style. The one thing about Raleigh-Durham, is that the region has always been very demure in its identity, and its branding, and its marketing, but given the high level of competition across the geographies of the United States, there is no longer the time or space for humility. There is an enormous opportunity for Raleigh-Durham to rebrand itself as a globally-recognized life sciences ecosystem, not just the place you go to do your manufacturing.
That would take coordination amongst leadership in Raleigh-Durham, and a little bit of a change of personality, to embrace that identity, which, in my opinion, it has earned.
Finding, making new lab space
TW: Is there a difference in approach when it comes to greenfield site development compared to renovation projects?
McCready: In markets where it is difficult to find greenfield sites, for whatever reason, you can expect that, so long as the supply and demand pencils, you can expect more of these conversions of industrial assets, or even in some cases, office assets, into life science facilities.
For tenants, for companies, these aren’t ideal. They would prefer to have purpose-built lab buildings, but in markets where you can’t find those types of facilities, they will absolutely take a repositioned or an adaptively-reused asset.
Definitely expect more conversions, but they do come with risk. The risk is, and we’ve unfortunately seen this, developers or landlords that are chasing high rents. Those landlords who are not experienced life science operators or landlords are trying to capitalize on the high rents that these industries bring in, but not understanding the level of complexity of the operations of these companies, nor understanding the complexity of the building’s operations.
It doesn’t end well for anyone, too often. Tenants are disappointed, and sometimes, it places their science at great risks. Landlords are disappointed because they didn’t understand how expensive it is, and engineers are disappointed because they didn’t understand the regulatory burden, and communities are disappointed because there is also impact on the community when you do a converted build like this.
We try to make sure that everyone fully understands the burden of these types of developments. At JLL, we help landlords figure out which markets would support building on spec, and then help them as they’re building their facility, find the tenants to occupy the building.
These facilities are incredibly expensive. It’s mindboggling when you look at the cost to buy the land, build the facility, and operate it. There is this whole discipline called financial engineering about how to structure these investments. This sometimes gets underappreciated.
This editorial package was produced with funding support from JLL and other partners. WRAL TechWire retains full editorial control of all content.
More from the series
The series launched here, and the second report discussed high demand. Next, the series explored the relationship between work spaces, work places, and the current labor market. The following weeks, we’ve investigated specific sectors of the real estate market, and next week, we’ll be looking at the future of the market and the region.