Boston Life Sciences Market: A Self-Sustaining Ecosystem

John Clogan
The demand for high quality lab and office space in the life science hub of Boston and Cambridge is growing, with a year-over-year rent increase of approximately 10%. Strong investor interest in the industry, coupled with a strong market sentiment, is ultimately leading to a construction boom in the Greater Boston area.

East Cambridge in particular is seeing a demand that is far outstripping pipeline supply. The current vacancy rate of approximately 6% is primarily driven by some significant mergers and acquisitions in the biopharma sector.

Boston as a Pharma Center. 

Not only does the Greater Boston area boast the highest concentration of universities in the United States, including Harvard University, Massachusetts Institute of Technology (MIT) and Boston University, it is also home to a robust venture capital market and the top three NIH-funded hospitals in the nation. The pipeline of talent from some of the top life science courses and world class research institutions makes this an extremely attractive area for big pharma and biotech firms to locate and expand.

It is precisely this environment that creates the perfect self-sustaining ecosystem for life science growth. The Massachusetts Life Sciences Center was established in Boston to invest in and support the industry, further contributing to Boston’s position as the leading life sciences hub in the United States. But all of this success and the continual influx of companies eager to put down roots comes at a high cost of doing business, particularly in regards to real estate.

What is Driving this Bullish Market and its Impact on the Industry? 

According to Deloitte, global healthcare expenditure is expected to rise to just under $9 trillion by 2020, up from approximately $7.5 trillion today. The global population trend is aging, particularly in more developed countries. We are seeing much greater levels of consolidation and collaboration among the big companies, resulting in a thriving period of innovation in the industry.

Due to the industry trend toward individualized medicine, big pharma has been exploring a more specialized form of drug development, which has resulted in mergers and acquisitions of smaller players that operate in niché treatments. At the same time, increased operating costs are putting even greater pressure on margins.

One challenge for the pharmaceuticals industry overall is attracting top talent. The average salary in the industry has increased by approximately 20% in the past five years, while the number of employees has only increased by 4%. Another trend impacting the life science real estate market is the increasing focus on recruitment within the millennial age group. As attracting the right talent is so important, life science companies are conscious of the need to locate themselves in amenity rich areas and provide the type of work environments that this generation expects.

Boston and East Cambridge: High Rents, Low Vacancy and the Emergent Secondary Suburban Hubs.

Rentable lab stock in East Cambridge alone is nearly eight-million-square-feet, with a current total vacancy rate of around 6.5%. This represents an increase in vacancy from the previous year of +3.5 ppts; however, this is largely due to the rising merger and acquisition trend in the industry. This offers some opportunities for other companies to acquire much sought after space in high demand areas.

A notable occurrence of this trend happened in early 2017 when a Top 15 Pharma firm based in the Asia-Pacific region acquired a medical oncology company (and Faithful+Gould client) based in Cambridge, allowing for approximately 200,000-square-feet of high-end lab and office space to come available as sub lease. A global biotech company quickly snapped up this available space and partly relocated one of its secondary life science hubs from Lexington, Massachusetts to Cambridge.

Firms that are looking to establish or expand a presence in the Greater Boston area are challenged to move quickly on available real estate. A project manager with an understanding of the sector and the local market can support biopharma firms in a number of ways. For instance, the firm that acquired our local client subsequently engaged Faithful+Gould to provide full project management services throughout the space rationalization of its now larger real estate portfolio.

What’s Ahead for the Boston Life Science Real Estate Market?

Overall, low vacancies and an increasing need for lower cost space is causing new secondary life science hubs to grow in the wider suburbs, as asking rents in the suburban areas of Bedford, Lexington and Waltham are running 40- 45% cheaper to those in Cambridge. These “sub markets” or secondary life science hubs have seen a year-on-year increase of approximately 15- 20% in rent per square foot from 2016 to 2017.

Boston currently has the highest cost of rent per square foot of every life science hub in the United States, even higher (+7%) than the San Francisco Bay Area. Rents in East Cambridge, just over the Charles River from downtown Boston, have increased approximately 10% year on year, 2016 to 2017. With demand at an all-time high, the future trends indicate a continued rise in rent in East Cambridge along with all nearby suburban life science hubs.

Mergers and acquisitions will continue to dominate the turnover of space in the primary hub of East Cambridge. Lease renewals are also running at an all-time high, pointing to a strong rental market in East Cambridge for the near future. The secondary hubs will continue to experience growth on the back of the single-digit vacancy rates in East Cambridge.

 

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