Biotech Slowdown in Boston Creates Robust Sublease Market and Tenants Are in the Driver’s Seat

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Nick Amarante, executive vice president at Hughes Marino, co-founder of the Boston office and one of the founders of the company’s HM Science division, was featured in a Boston Globe article looking at the biotech slowdown in Boston and its impact on life science real estate. The frenzy of biotech investment during the COVID-19 pandemic has shifted to serious cutbacks across the industry, with companies now focused on streamlining pipelines and headcounts. Where booming biotech businesses were once eager for space—seeking to lease between 6-8M square feet (SF) across Boston in 2021—now East Cambridge vacancy rate for lab space has climbed above 10% for the first time in over a decade, and overall market availability is approaching 35-40%.

And new space keeps coming. Some 12M SF of new development in greater Boston is currently in the works, scheduled to become available in the next three years, and only one-third of that space is pre-leased.

Aggressive leasing during the COVID boom and a tightening in VC funding has led to a robust sublease market and biotech companies in the Boston region can now secure built space far better terms than they would have during the height of the pandemic. Across greater Boston, there are 100+ subleases available, totaling over 3M SF, compared to virtually zero just 18-24 months ago—and new subleases are being added each week. Combined with the fertile sublease market is an overall dip in rents for existing buildings and falling prices for new construction.

For the next 18-24 months at least, life science tenants are in the driver’s seat, with current tenants eager to cover the cost of empty lab space and landlords eager to compete with the sublease market.

New tenants now have the ability to set extremely favorable conditions—including term length, rent abatement, phase-ins and tenant improvement allowances. In most cases, they can secure full turnkey build-outs for their ideal lab space.

Hughes Marino provides interested life science tenants with a detailed roadmap of the sublease market, highlighting 100 such available opportunities across Cambridge, Boston and surrounding suburban areas totaling over 3M SF. Please reach out to our team at [email protected] to receive our Boston life science sublease analysis.

“These sub-landlords have a melting ice cube on their hands and need to reduce burn rate quickly,” says Amarante. “That means they will accept substantial discounts to their remaining rent obligation if it is going to get the space subleased. This inevitably has led to a spill-over effect where the landlords have to respond, and all are now offering significant free rent concession packages and turnkey tenant improvements and will do whatever it takes to try and compete with the sublease market.” The market is shifting at a blistering pace and well-funded companies finally have leverage and optionality to execute on real estate solutions that meet their company goals and objectives.

Custom GMP-Ready Spaces Are Going Vacant as Companies Now Seek Flexibility

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When the COVID-19 pandemic hit, life science companies began attracting serious investment, hiring as fast as they could find talent, rushing to secure space to develop new drugs and vaccines and to manufacture medical equipment and supplies. Real estate investors, panicked over the rush to remote work and shuttering office space, quickly found an attractive new sector to deploy their capital in the life science market. Developers began snatching up available industrial space to build custom GMP-ready facilities at premium cost for these growing companies.

Across Boston, San Francisco, San Diego and Seattle, the life science start-up sector took off following the pandemic—pulling in 70% of all venture capital invested in 2021-2022.

Leading the way is Alexandria Real Estate Equities, which has 74.6 million square feet of lab space across San Francisco, San Diego, Seattle, Boston, New York City, Maryland and Raleigh Durham’s Research Triangle Park, along with existing life science-focused REITs like New York-based BioMed Realty and Healthpeak Properties. Many new players have ventured into the life science development arena including Longfellow Real Estate Partners, Sterling Bay, Oxford Properties and Lincoln Property Company, to name a few, which has created a buying frenzy.

Private Companies’ Vacant GMP-Ready Facilities

Seemingly as quickly as the demand for lab space shot up, just a few years later the pandemic has ended, biotech stocks have taken a sharp downturn and capital has dried up. Private companies are now struggling to raise their next financing round with inflated valuations and those giant GMP-ready facilities are sitting vacant. A few examples:

  • Puritan Medical Supplies in Guilford, Maine, received $75.5 million in 2020 to build out a new 95,000 square foot facility to double its production of nasal swabs—producing 20 million a month at its peak. Now, with demand for COVID-19 tests down, Puritan closed its Tennessee facility and laid off 272 workers.
  • Drug manufacturer Resilience launched in 2020 and established a network of biopharma manufacturing sites across the U.S. and Canada to boost production of cell and gene therapies, vaccines and proteins. The company bought a former Genzyme 310,000 square foot manufacturing plant in Boston from Sanofi in 2021, keeping on some 250 staff. Initially, Resilience continued to make biologics for Sanofi at the site but ultimately set their sights higher, upgrading the site to meet modern GMP requirements. Now, the contract with Sanofi has ended, and Resilience is laying off employees at the site and ultimately could not capture the commercial interest they had hoped for.
  • Thermo Fisher Scientific shut down three San Diego facilities totaling over 200,000 square feet and laid off 230 workers—the third reduction in the local workforce this year—citing a decline in demand for COVID-19 tests and changes in the economic landscape.
  • Boston-based Longfellow Real Estate Partners was planning a 750,000 square foot life science center in Emeryville, CA, buoyed by the momentum of the pandemic-fueled life science growth. Recently the Swiss biotech Lonza Group AG which was in negotiations to lease 150,000 square feet has pulled out, causing Longfellow to dramatically scale back the development.

A National Trend

Across the country, the same story is unfolding. The demand for massive GMP-ready life science buildings—those with existing high power, ample ceiling height, lab and manufacturing improvements, chillers, boilers, shipping and receiving—has vanished, with the pandemic-fueled demand waning and many biotechs consolidating, downsizing or shuttering following a cooling of capital markets.

That’s leaving a glut of buildings on the market that are now too expensive for the non-life science manufacturing companies, which before the massive investment into GMP improvements was made, could have used those buildings to design and deliver goods with the rise of e-commerce, a trend which shows no signs of abating. In San Diego, vacancy rates of GMP properties are up to 4.9% from 2.8% a year ago, or 55% increase. In Boston, they are at 5%, 25% higher than the previous year, and up to 7.7% in San Francisco, from 5.8% a year ago, equaling a 28% increase.

As Demand Slows, What Happens Next?

With the cooling of the capital markets, persistent supply chain issues and the immense amount of capital investment required from the tenant for construction, (often in excess of $1,000 per square foot), it’s unlikely that we’ll see a resurgence in demand for these custom, GMP-ready spaces for the foreseeable future.

Modularity

One trend that remains strong however is the shift toward modular facilities—mixed use office and lab spaces that can produce multiple products under one roof—from monoclonal antibodies to cell therapies to mRNA vaccines. This is the vision behind Merck’s FLEx (Formulation Laboratory, Experimental) in Rahway, NJ, which is designed to be repurposed, used for human health and animal health, and features portable equipment and prefab adjustable clean rooms. The idea is that the building can evolve along with a company’s needs.

Another example of such modularity is located in Philadelphia, where general contractor TN Ward has just completed renovation of Race Street Labs, a 180,000 square foot life science facility adjacent to Drexel University School of Medicine that included renovating the existing building and constructing two floors of customizable lab and office spaces. The site’s website boasts move-in ready lab suites with on-site office management and lab support services.

To meet the changing needs of new biotechs, including those who are applying emerging artificial intelligence and robotics technologies to drug discovery and manufacturing, buildings will need to be customizable and easy to adapt to change.

As Anthony Giuliano, general manager of life science construction at Lendlease, told ConstructionDive: “Over the past few years, pharmaceutical companies and other users of life science space have increasingly sought out facilities that provide flexible operations, and I absolutely expect this trend to continue. The upsurge in companies exploring mRNA therapies following the success of the COVID-19 vaccines illustrates why [product] diversification and the ability to be nimble is so important.”

Quality of Life

Beyond flexibility, companies are looking for quality of life—properties like Princeton West in New Jersey, an R&D campus with a robust infrastructure, modern lab and manufacturing space, café, fitness center and walking trails. Already the site is home to a number of global companies like BeiGene, PTC Therapeutics and Passage Bio, and it continues to expand—announcing plans for three new manufacturing buildings totaling 380,000 square feet.

Prices have to shift to reflect changing demand. San Francisco has been particularly hard hit with the push toward remote work and wave of tech layoffs—with office vacancy tripling since before the pandemic. Landlords in the Bay Area are responding by lowering rents to lock in longer term leases with biotech tenants as the downturn intensifies. Precision oncology firm Ideaya Biosciences achieved a rent drop of nearly 35% on its lease for a custom-designed lab space at DivcoWest’s 5000 Shoreline Court in South San Francisco’s life science cluster.

The Upside for Life Science Tenants

So, what do these shifts mean for biopharma and biotech companies looking for manufacturing space or lab space in near proximity to top research universities? Shane Poppen, Executive Vice President with HM Science said, “Tenants should be seeking opportunities to limit upfront capital investment and extend their funding runway—subleases are a great opportunity to take advantage of expensive in-place manufacturing infrastructure to reduce capital investment required—or they should seek out motivated landlords willing to offer unprecedented concessions such as turnkey tenant improvement allowances to fully cover the construction costs along with providing significant free rent packages.”

Ultimately, there has never been a better time to find flexible GMP and lab space in the country’s top bioscience hubs.

About HM Science

HM Science is a specialized life science division within Hughes Marino, a global corporate real estate advisory firm. Our team provides life science companies with bespoke corporate real estate services, specializing in the unique needs and critical specifications of the industry. With three decades of experience, we are proud to be one of the nation’s most experienced life science tenant representation firms. The team at HM Science specializes in serving the most intricate needs of sophisticated biotech, medical device and other health care companies with the technical expertise and end-to-end service integration to deliver first-class results. No matter the size or location, our team understands the specific technicalities and has the local market knowledge and vast experience to ensure our clients secure the highest caliber and most operationally strategic facility for their needs.

Visit www.hmscience.com or contact our HM Science team directly at [email protected] or 1-844-662-6635 to learn more.

Biotech Slowdown in Boston Creates Robust Sublease Market and Tenants Are in the Driver’s Seat

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Nick Amarante, senior vice president of Hughes Marino, a founder of the Boston office, and one of the founders of the company’s HM Science division, is featured in a recent Boston Globe article looking at the biotech slowdown in Boston and its impact on life science real estate. The frenzy of biotech investment during the COVID-19 pandemic has shifted to serious cutbacks across the industry, with companies now focused on streamlining pipelines and headcounts. Where booming biotech businesses were once eager for space—seeking to lease between 6-8M square feet (SF) across Boston in 2021—now East Cambridge vacancy rate for lab space has climbed above 5% for the first time in nearly a decade, and overall market availability is approaching 35%.

And new space keeps coming. Some 15M SF of new development in greater Boston is currently in the works, scheduled to become available in the next three years, and only one-third of that space is pre-leased.

Aggressive leasing during the covid boom and a tightening in VC funding has led to a robust sublease market and biotech companies in the Boston region can now secure built space far better terms than they would have during the height of the pandemic. Across greater Boston, there are 90+ subleases available, totaling over 2M SF, compared to virtually zero just 18 months ago—and two to three new subleases are being added each week. Combined with the fertile sublease market is an overall dip in rents for existing buildings and falling prices for new construction.

For the next 18-24 months at least, life science tenants are in the driver’s seat, with current tenants eager to cover the cost of empty lab space, and landlords eager to compete with the sublease market.

New tenants now have the ability to set extremely favorable conditions—including term length, rent abatement, phase-ins and tenant improvement allowances. In most cases, they can secure full turnkey build-outs for their ideal lab space.

Hughes Marino provides interested life science tenants with a detailed roadmap of the sublease market, highlighting 90 such available opportunities across Cambridge, Boston and surrounding suburban areas totaling over 2M SF. Please reach out to our team at [email protected] to receive our Boston life science sublease analysis.

“These sub-landlords have a melting ice cube on their hands and need to reduce burn rate quickly,” says Amarante. “That means they will accept substantial discounts to their remaining rent obligation if it is going to get the space subleased. This inevitably has led to a spill-over effect where the landlords have to respond, and all are now offering significant free rent concession packages and turnkey tenant improvements and will do whatever it takes to try and compete with the sublease market.” The market is shifting at a blistering pace and well-funded companies finally have leverage and optionality to execute on real estate solutions that meet their company goals and objectives.

Introducing HM Science, a Specialized Life Science Division of Hughes Marino

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After over three decades of representing biotech, medical device and other health care clients with their specialized operational requirements, Hughes Marino announces the launch of its specialized life science division, HM Science. Life science companies that do research, manufacturing and distribution of biotech, medical device and health care related products operate in a complicated regulatory environment, so HM Science was established to provide bespoke services to this industry sector. While individual Hughes Marino professionals have been representing life science companies their entire careers and cumulatively have thousands of client experiences in the sector, HM Science brings this talent together on a North American basis to offer tenants best of class representation no matter where they operate. 

The launch of HM Science comes at a critical time in the life science real estate sector. After three years where tenants were faced with space supply shortages, hyper-inflating rents and historically longer lease lengths, this is being reversed in real time as the capital markets have created significant headwinds for the sector. While this turmoil will likely be a multiyear challenge for companies looking to raise capital, those tenants that are well capitalized with strong science and leadership teams are going to find the life science sector quickly whipsawing to be the most tenant favorable market we’ve seen in years.

While the office space sector has been soft for over two years, providing life science companies that solely occupy office space unprecedented values and sublease opportunities, summer of 2022 saw the beginning of biotech lab space hitting the market for sublease. Now, that small wave is becoming a tsunami, as all major life science markets around the country are beginning to become flooded with sublease opportunities offering rental rates 20%-25% below landlords’ offerings, plug and play laboratory facilities with equipment in place and sublease terms ranging from 2-5 years.

San Diego, Boston and the San Francisco Peninsula already have 1,000,000 to 2,000,000 square feet of life science sublease space on the market, with Seattle closer to 500,000 square feet. With new sublease offerings being added across the country weekly, choices for tenants are unlike anything we’ve seen in the last 3-4 years. Additionally, some biotech companies are unfortunately going to run out of cash in 2023, and have no choice but to relinquish their lab space back to their landlord, which will create another unfortunate increase of the supply of lab space that the market did not anticipate.

Adding to this supply coming on the market from tenants subleasing or defaulting, 2023 and 2024 are likely to be a perfect storm whereby speculative lab space under construction adds to the swamping of the life science market with options that tenants can take advantage of. In San Diego, there is approximately 4M square feet of lab space under construction for delivery in 2023 and 2024, 8M square feet in Boston, 1.2M square feet in Seattle, 2M square feet in the Raleigh metro area and 5.5M square feet in the San Francisco Bay area. All of this will remove the pricing power that landlords have enjoyed for the last three years, and in the short term, we are going to see increasing tenant improvement allowances, increasing free rent and landlords being willing to consider 5-7 year leases versus demanding 10-12 year terms. 

As the team specializing in the representation of the life science tenants, HM Science will be delivering extraordinary value during this transitional time as our tenant clients look to create operational efficiencies and cost reductions, seek to relocate, downsize or renew in place.