A Location and a Technology Much in Demand

The New York Times

A Location and a Technology Much in Demand


Jodi Hilton for The New York Times
David Clem, managing director Lyme Properties, a life sciences developer, visits the site of the Center for Life Science Boston.


By ALISON GREGOR
Published: September 6, 2006

BOSTON — As doctors in the Longwood Medical Area make their way from hospital to laboratory to classroom each day, they pass a tower under construction that may be the most valuable piece of real estate in New England.
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The developers of the 18-story Center for Life Science Boston have received dozens of bids to buy the building despite the fact that it is more than a year away from completion. Brokers anticipate it will sell for $700 million or more, or about $1,000 a square foot, substantially eclipsing the price of other life sciences properties in the Boston area, said Elizabeth Carrillo Thomas, an executive director at the brokerage firm Cushman & Wakefield, which is marketing the property.

As Boston and neighboring Cambridge have become global hubs for life sciences, the appeal of this type of real estate, which typically consists of highly specialized labs, has broadened, she said.

“We’ve observed, with all the life sciences real estate we’ve been selling, the acceptance of this type of property as an asset class by the mainstream institutional investor,” said Ms. Thomas, who is a member of a four-broker investment sales team specializing in life sciences properties. Those properties share certain attributes, like higher ceilings, heavier floor-load capacities and more sophisticated mechanical, electrical, ventilation and plumbing systems.

In the life sciences, private businesses, research institutes, medical centers and government agencies are collaborating to advance biological science and technology and develop commercial applications for them. The efforts tend to be concentrated in a handful of locations nationwide, called research clusters, with Boston and Cambridge having some of the highest concentrations. They are often near a university or a hospital.

The Center for Life Science Boston is able to demand high prices because it is in the center of the Longwood Medical and Academic Area, which has 14.5 million square feet of office and lab space packed densely onto 215 acres, making new development rare.

Longwood, home to Harvard Medical School, has had no vacancies for the last five years, Ms. Thomas said.

Though developers envisioned a giant pharmaceutical company’s becoming the main tenant at the Center for Life Science Boston, it turns out that more than 80 percent of its space was preleased as of late August to growing medical centers and research institutes already in Longwood, Ms. Thomas said. The average lease length is 14.5 years.

In Cambridge, which has 15.6 million square feet of office and lab space and is the home of the Massachusetts Institute of Technology, several recent sales of life sciences buildings have exceeded initial expectations, Ms. Thomas said. One Kendall Square, a mixed-use project, sold last spring for $311 a square foot, though it was only 67 percent leased.

“In 1998, at 100 percent leased, it sold for $194 per square foot — a testament to the improved attractiveness of the asset class,” she said.

At another building, 300 Third Street, the bidders included a company that had never bought a lab building before. It sold last spring for $73 million, or $553 a foot, to Alexandria Real Estate Equities, a life sciences real estate investment trust based in Pasadena, Calif., Ms. Thomas said. In July, Alexandria also won out among 23 bidders, many of which did not own life sciences assets, to buy Technology Square @ MIT, a collection of seven buildings, for $600 million, or $514 a foot.

Joel Marcus, the chief executive of Alexandria, said that an increasing number of mainstream investors appear to be bidding on life sciences buildings. However, that may have more to do with the large amount of capital available for commercial real estate investment than any inherent qualities in life sciences properties, he said.

“There’s so much money, and this is a class that has attracted it, but if the money contracted, I think less money would flow into this area,” Mr. Marcus said.

Life sciences buildings tend to be tricky investments, and there are only a handful of real estate developers who specialize in them.

“They’re probably two to four times the average cost of office buildings,” Mr. Marcus said.

Historically, life sciences tenants have also been less than stable, said David Clem, managing director of Lyme Properties, a longtime life sciences developer based in Hanover, N.H., that is doing the Center for Life Science Boston. The firms rarely have much cash flow until their research pays off, which can take years.

“Most of the life sciences companies in the 1980’s were start-up companies,” he said. “Very few were creditworthy. So we had to underwrite the risk.”

But that is changing as more biotech companies in Cambridge gain legitimacy by forming alliances with pharmaceutical concerns.

For developers able to gather the funds and choose the right tenants, construction of life sciences properties can be highly lucrative, Mr. Clem said. Currently, first-class life sciences space in Cambridge rents for about $60 a foot, compared with $35 for conventional office space.

“Assuming the companies succeed and continue to pay the rent, you achieve higher real estate returns than from conventional office space,” Mr. Clem said.

Life sciences tenants have a tendency to stay put, with 25-year leases not uncommon, an attractive feature to investors. The life sciences firms also expand rapidly, meaning they can often absorb space vacated by failed start-up companies.

“We try to find development sites that allow you to build upwards of one million square feet over time, allowing companies to expand without relocating,” Mr. Clem said.

Still, life sciences real estate is not something investors should dive into without doing their research, developers said. They need to know the science.

“There’s obviously a high failure rate when a company is doing this kind of testing, especially an embryonic company,” said Bruce Beal, chairman and chief executive of the Beal Companies, a Boston developer. “So you want to be able to analyze the science of tenants you’re taking into a complex to make sure you’re getting a company founded on good research.”

Also, as life sciences clusters proliferate, community amenities within or near the research clusters are also being viewed as more important. Scientists need work for their spouses, reasonably priced housing and schools for their children, said Tricia Ardigo, first vice president and director of the life sciences group at CB Richard Ellis.

The Swiss drug maker Novartis moved into a former candy factory converted to lab space in Cambridge in 2002, but companies may be less eager to rough it today with expanded life sciences real estate options — and more are being developed all the time.

“Almost every state in the United States is looking at developing research clusters,” Ms. Ardigo said. “The quality of life is important.”

Not all investors think that life sciences properties will gain the attention of the mainstream real estate market. Alex Twining, president and chief executive of Twining Properties, bid with Morgan Stanley on a 185,000-square-foot life sciences building called Life Science Square, expected to sell for once the bidding is complete for more than $90 million, in Cambridge — but not to rent it out as lab space. They instead envisioned using the building to house Web servers.

“Kind of like stadiums, every city thinks that life sciences is going to save it,” Mr. Twining said.
“But if you read all the research, life sciences really only works in a few places. It’s definitely a strong product type right now, but it waxes and wanes.”