Monday, February 9, 2004

R.E. & Economic Development

Finding proper lab space still complex process

By Steven M. Purpura

A real estate search can often be a challenging process, even in the current market, which is described as a "tenant's market." In addition to the traditional variables that all companies consider, life sciences companies face a range of unique issues when searching for laboratory space.

Although today's high vacancy rates have provided obvious benefits to tenants, the market situation has actually added to the complexity of the process. For example, there are many more second-generation opportunities to consider. Also, although they have come down by 25 percent, rents are still, in many cases, twice as expensive as office rents in similar buildings.

Following are several questions that a life sciences company should address when setting out on a lab real estate search, whether it is a startup looking for its first post-incubator space or a public company looking for 100,000 square feet of build-to-suit space.

Existing lab space or build-to-suit?

With the high vacancy rates, biotech firms now have more options and must compare existing laboratories versus shell or build-to-suit opportunities. Over the past 18 to 24 months vacancy rates have risen dramatically, and many of the spaces on the market are built-out locations that offer many desirable features.

However, because today's biotechnology companies are performing research for a wide array of applications, they subsequently use their laboratories differently. In general, the more generic the requirement, the better the chance that there is an existing lab space that can, with little or no work, meet the needs of the tenant.

Is your laboratory space really lab space?

Laboratory locations usually have greater HVAC, electrical, floor loading, ceiling height and loading dock requirements than office buildings. These attributes therefore must be quantified early in the process. Some biotech firms have light requirements and can achieve much better economics in class B office space. Other more intense users can consider only buildings with robust base building systems that are better suited to laboratory use.

Cambridge or suburbs?

The suburban biotech market has continued to emerge as an attractive alternative to Cambridge. Covering a wide geographic area, the suburban market now supports biotech clusters in several areas, including Route 128 West, Route 128 North, Route 495 West and Worcester.

Historically the biotech growth outside of Cambridge was driven by lower rents. Recently, the suburban market also benefited from the changing dynamics of biotech firms. Similar to other industries, many senior scientists and executives now live in the suburbs and prefer the accessibility and parking that suburban lab developments offer.

Additionally, experienced suburban biotech landlords have done a good job of targeting biotech firms by providing robust laboratory base buildings and large tenant improvement allowances in their suburban portfolios.

While the industry has been growing stronger outside of Cambridge, there are still several factors that keep Cambridge at the core of Massachusetts biotech. Many companies remain in and are attracted to the proximity to the hospitals, MIT, Harvard and other biotech firms. Synergies and collaborations between companies are announced frequently, and many firms want to stay close to the fray. Accessibility to urban labor and the many available amenities also prove to be major attraction points.

Prominence or expansion?

Many of the requirements in the market are for 20,000-60,000 square feet. Those tenants can either be the largest tenant in a stand-alone building, which in turn will leave them little room for growth, or be a small tenant in a larger park, which will provide more opportunity for growth but limited presence.

While all companies face this difficult assessment to a degree, this is a bigger issue for lab users. It is more disruptive for a biotech firm to have multiple locations and more expensive to consolidate and leave behind existing lab space that meets their needs.

The flip side is that most Cambridge biotech firms locate there for a reason and take pride in the prominence of their facilities. This is especially important in the current competitive labor environment.

With all these choices it is interesting to point out some recent large deals:

These transactions show that there are no trends and that every biotech firm has different decision-making criteria that have produced different results.

Given the amount of available space, it can be a time-consuming and diffi- cult evaluation process for tenants. According to year-end 2003 figures from Richards Barry Joyce & Partners, there are 1,442,454 square feet of available lab space in Cambridge and 808,410 square feet in the Greater Boston suburban market.

Because there are so many options in the marketplace, the process can be streamlined by an experienced adviser who understands the tenant's requirement and has in-depth understanding of the different available options.

Steven M. Purpura is a partner at Richards Barry Joyce & Partners, a commercial real estate firm based in Boston that counsels high tech and biotechnology companies on real estate management.