Pharma and Life Science in Real Estate: A Guide For Potential Investors
November 8, 2021
The life sciences industry is experiencing something of a real estate boom. Already prosperous before the pandemic, life science construction and development are surging. The need for administrative, R&D and manufacturing spaces is greater than ever before. Savvy real estate investors might be tempted to get in on the action.
It's important to realize that building pharma and biotech facilities and labs is much different than building spec spaces for retailers and small businesses. There's a lot of nuance related to the design and construction of these facilities. To ensure efficient occupancy and good financial return, a keen understanding of the industry’s fundamentals and considerations is a requirement.
Redevelopment vs. Ground-Up
Greenfield development can be expensive. For any commercial real estate project, acquiring land, connecting to public utilities and building out the space comes with a high price tag. When working on a life sciences project adding the cost of specialty equipment and required mechanical systems, constructing from the ground up requires a large financial investment on the front end. That's why renovating existing space may be a better option for would-be real estate developers looking to invest in the biotech boom.
However this needs to be balanced with the reality that not every building is an ideal candidate for conversion into laboratory space. For example, high rise buildings don't have the vertical access shaft requirements needed to handle the volume of chemicals produced in some labs. Former healthcare facilities, office or warehouse will generally have a more favorable skeleton. With piping, low ceilings, thick walls and other infrastructure, these buildings can be retrofitted into lab spaces.
Whether renovating an existing space or building on spec, having a clear understanding of the type of lab space and corresponding clean room requirements is key to an efficient and economical project. Lab spaces can be built for a specific tenant and use, or constructed at a baseline classification level with an infrastructure that can accommodate conversion into a higher classification in the future.
“With the ever expanding life sciences industry and consequently new research paths continuing to open, having an adaptable building may make the most sense,” says Michael Bruno, president of Stone Creek Construction Group. “Incubators and multi tenant use spaces are also examples of buildings that need to be designed and constructed with this adaptability plan.”
Location is Key
The design and construction of the building are important, but it's not the sole factor here. Being in a geographic location with an overall ecosystem that supports development of these types of projects is a huge influencer. These factors have lead to the creation of life science corridors in specific locations throughout the country, with Boston, San Francisco, San Diego, Raleigh-Durham and New York-New Jersey being the top five of these clusters. Each market contains the capital resources, research institutions, and talent which are top contributing elements to innovation and development.
On a hyper-local level a key consideration is whether the correct zoning in place for the intended use. Zoning requirements vary between jurisdictions, so it's vitally important to have a clear understanding of local regs. Some localities offer tax incentives and abatements for high-tech developments. Investigating and taking advantage of incentives can guide the selection of a site.
As the work being done on the premises is vastly different from the activities in other types of commercial buildings, the health and well-being of employees must also be considered. Infrastructure systems such as eyewash stations, air filtration, decontamination stations, UVC lights, electrostatic discharge mitigation, pass-through cabinets and chambers and hazardous material disposal units are basic elements to consider when planning for safety in a lab setting.
A Sound Investment
Spaces designed for labs and biotech include features not commonly found in commercial properties. Therefore, you should expect a higher development cost. But you can also expect a substantial return on your investment due to increased market demand.
The pandemic has certainly hastened the need for life sciences real estate, but it's not the only reason for the exponential growth being currently experienced and projected into the future. By 2030 the U.S. will have some 73 million senior citizens, accounting for 21% of the total population. This aging population is a significant factor driving the need for more real estate dedicated to labs and life sciences firms.
There is much to be gained by investing in real estate for life science firms. With the unique set of challenges the industry has in terms of design and construction, proper research and due diligence to ensure the investment remains secure is essential before embarking on a bioscience project.