This week, New York-headquartered manager Tishman Speyer announced a large life-sciences leasing deal in Boston. Breakthrough Properties, a joint venture formed with Los Angeles biotechnology investment firm Bellco Capital a year ago, signed up a gene editing company as a tenant for its debut development property. The laboratory building, referred to as ‘The 105,’ is spread over 263,500 square feet and will be completed in early 2022.
PERE learned that negotiations for the transaction started at the time of Boston’s first lockdown in March. CRISPR Therapeutics is understood to have signed a long-term lease of 12 years for the full building, agreeing to pay $80 per square foot in rent.
That Breakthrough Properties was successful in closing a deal at a market-consistent rent and lease term, even amid a raging pandemic, demonstrates the growing dependability of life-science companies as a safe and stable occupier category for institutional landlords.
Institutional investors were being drawn to life-sciences facilities, alongside other alternative sectors such as medical offices and data centers, even before this public health catastrophe. From 2014 to August 2019, US institutional investment in life-sciences facilities averaged $6.5 billion annually, representing 11.8 percent of the total alternative investment pie, according to broker CBRE. The sector has benefited from secular shifts, including technological advances in medicine, changes in healthcare delivery mechanisms and an aging population. It also boasted an attractive average cap rate of around 6.1 percent in 2019, the report said.
Events unfolding in the wake of covid-19 give the sector a more pronounced boost. The biopharma industry is at the forefront of the fight against covid-19. Indeed, in Massachusetts alone – where Tishman struck its leasing deal – over 85 companies are said to be working on tests, treatments or vaccines, according to a report by the Massachusetts Biotechnology Council.
Importantly, this work requires in-person activity not possible if staff work remotely, unlike financial services companies or other traditionally blue-chip occupiers. So while previously high value, central office locations witnessed notable occupier attrition, the reverse was true for laboratory space. The downtown office market saw availability and vacancy rates increase 110 basis points to 15 percent and 8.6 percent quarter on quarter to Q2 2020, according to CBRE’s estimates. There was almost 930,000 square feet of negative absorption in the quarter. In contrast, there was 8 percent growth quarter on quarter for lab spaces in the same area, with 78,000 square feet of positive absorption.
Some managers have begun to make concerted bets on this sector. In April, for instance, Toronto-based giant Brookfield Asset Management purchased a 50 percent stake in a 700-acre life-sciences campus near the University of Oxford for a reported $250 million through its $15 billion Strategic Real Estate Partners III fund.
Understandably, owners of actual offices would need to reconfigure their space to suit the needs of a life-sciences business, if they are to compete for this much-coveted occupier. Such repositioning and retrofitting would, naturally, impose an additional capex burden. However, most office landlords are regardless finding themselves grappling with uncertain future cashflows and the added capital costs of making buildings covid-proof. There is widespread unpredictability around when offices will resume full operations, and whether some of the biggest marginal users of office space like tech companies would even lease the same volume of space as post-covid as they did pre-covid.
Landlords that transition their target tenant profile to biotech and pharmaceutical occupiers could well be the first real winners in a sector beset with more questions than answers currently.
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