Michael Brown has spent a majority of his 40+ years in CRE specializing in this unique field.
I have spent a majority of my 40+ years in CRE specializing in this unique field. Like other sectors, the deals that take place in life science CRE often precede monumental advancements in other industries. The market is already moving to respond to the overwhelming demand for vaccines, therapeutics, and other biologics to counteract the effects of this powerful virus.
Here’s what that could mean for our industry:
• Active life science clusters will receive a wave of interest from investors and researchers. The current market conditions in the most active life science clusters across the United States indicate a short supply and surging demand for quality research and manufacturing space capacity. I recently moved to Northeast Florida to work from Colliers International’s Jacksonville office, which puts me in close proximity to the dynamic Alachua and Gainesville cluster that surrounds the University of Florida. Here in Jacksonville, I anticipate a similar cluster will form around the Mayo Clinic, thanks to a recently announced partnership with Florida State University. Other notable clusters with similar market conditions to watch include San Francisco, Philadelphia, the Research Triangle, Boston, San Diego, Seattle, Northern New Jersey and Maryland.
• Availability will be a key consideration. Any existing facilities that can offer a fast path to validation will likely see an increase in value to tenants or buyers. However, the acute nature of the coronavirus pandemic has brought several key issues into question with regard to providing focused research for a vaccine and accelerated clinical trials for SARS-CoV-2. The U.S., Israel and other countries are talking about having vaccines ready before the end of the year. The short supply of available capacity to manufacture a vaccine means that other current drug discovery and development projects could be postponed to immediately free up critical capacity in the labs and process facilities.
• Turned dirt will have a slight edge over speculative projects. Projects on the supply side that have already broken ground will likely not be as affected as projects requiring a lead tenant for construction to begin; projects that are in the planning or due diligence phases may be put on hold until the coronavirus and its long-term effects are better understood. Putting further demand on the market are companies who will be engaged to seek a deeper understanding of the virus, SARS-Cov-2 and eventually performing development work for any therapeutic candidates or vaccines.
• Global supply chains will shift toward local solutions. The global coronavirus pandemic has identified risks in the supply chain. As a result, life science stocks are being treated to a roller coaster ride as executives struggle to understand how the supply chain goods (for both research and manufacturing) can be managed or shifted to local manufacturers. Right now, it looks like a significant number of companies will be affected by the inability to rely on third-party outsourcing for materials, specifically those originating in China, India or the EMEA. As a result, decisions will have to be made to change strategies that may bring more therapeutic material manufacturers closer to home in the U.S., whether it is from contract research organization (CRO) and contract development and manufacturing organization (CDMO) sources, or expanding internal core capacity to achieve global redundancy.
• Tenant improvements will make or break deals. For small to midsize companies wanting to control their own pre-clinical and clinical product, smaller but more flexible facilities may become the likely strategic choice to provide a relatively quick occupancy. It will be more important than ever to seek out life science savvy landlords and developers who understand what it will take to go from concept design to validation. Landlords who want to edge out their competition could explore investing in higher-than-average tenant improvement allowances, dependent upon variables such as credit, age and stage of the occupant, the feasibility of the science, and the experience of the executive team.
• Experience is important, but recent experience is everything. Landlords who have experience building life science facilities, whether it’s a research building or a manufacturing building, are different animals. There are best practices that are being established around the world, including by the FDA — but remember, multinational companies will evaluate all of their options when choosing a site. Your property will be competing against others in the United States, EMEA, Asia and India, each with its own set of approval criteria. It’s a moving target at times, and the best practices from three years ago in any one of these countries may no longer be the best practice elsewhere. Our team is built to serve clients on a global scale.
There are many possible scenarios that could affect pricing, supply and demand for life sciences real estate. Right now, the market appears to be maintaining a steady rental rate for the national supply side, with a strong indication that rates could continue to rise based on the limited supply of both high quality research and process manufacturing facilities. A slowdown or postponement in public and private funding could affect the demand side (and pricing) until the economy emerges from the current downturn. Existing capital and assets will be in the best position to move quickly. Decisions made in the coming months will have a significant impact on the health of our industry — and our global population.