How should Life Sciences Real Estate Evolve as the Ambitions of Occupiers Change?
Just as any researcher or entrepreneur translates an idea from the academic environment to its institutional framework and then to a sustainable, income producing entity – real estate plays a critical role throughout an organization’s entire life cycle. This is especially true for the basic life cycle of a life science company.
There are some basic real estate fundamentals that are for the entire life cycle of a life science company. For instance, most laboratory (e.g., biology or chemistry) space will need robust systems to provide a safe, clean environment for the research staff. Additionally, a strong amenity offering is critical to recruit and retain today’s workforce, which includes, but is not limited to, solid food offerings, health & lifestyle offerings and close proximity to transportation connections.
Most organizations have varying pressures put on them throughout the life cycle of their businesses. These pressures typically manifest across four stages of growth and will dictate how these respective organizations approach their real estate needs.
Eureka: This is the moment when an academic researcher comes up with an idea that could be translated into a commercial endeavor.
This is typically in an academic or research environment such as MIT, Harvard, Oxford, Cambridge, etc. The individual then works on the tech transfer or enterprise office to begin the journey. MIT has been very successful at translating research into successful organizations. The university was one of the first to encourage its academics to pursue creative opportunities. In exchange, MIT would get some equity in the budding organization. As far as space needs, MIT created the academic culture to allow the research community to examine and explore entrepreneurial opportunities.
Incubation: Academic tech-transfer and enterprise groups help grow ideas and move them into various sorts of incubators.The entrepreneur will have some angel funding and will need a lot of help and support to advance the technology.
On the real estate front, the entrepreneur will be looking for as much flexibility as possible on rental terms, but the rent is elastic. There are lot of incubators that have various pricing structures, but they are flexible on short lease length – some are even month-to-month. A lot of U.S. incubators also force companies to graduate after a certain time frame, typically five years. Additionally, the incubator will give the entrepreneur access to basic life science infrastructure. This could include basic business advice (e.g., legal, accounting, etc.) or basic laboratory materials – such as expensive lab equipment like NMR. This access will allow the entrepreneur to conserve capital and invest in continuing the research, which in turn will lead to additional rounds of capital investment.
Scale Up: At this stage, the company has grown and expanded through a couple of rounds of fundraising and has a core group of employees. The company will be a lot more focused on lease terms: rent is important, but term flexibility is still key.
The executive team should be thinking what the eventual exit will be. This exit could be an IPO or a potential buyout/takeover. It needs to present itself in the best financial position possible, and long lease terms don’t allow that. Management will be keen to keep capital down – thus having the same access that they had during ‘incubation’ is interesting to them, but not overly critical. Additionally, a strong recruitment effort to expand and attract more talented employees becomes a driver for the business. As a landowner, this is the critical stage to get the amenity offering correct. If a scale up firm cannot leverage top amenities along with premier office and lab space to recruit the correct talent, it will not be interested in the project.
SME: At this point, the organization has either gone public, been acquired or merged, and the executive team is committed to investing in the business. Thus, there is more of a willingness to sign longer leases for a lower rent.
Since these organizations are willing to commit long-term to a location; direct investment into its real estate is seen as a key tool for recruitment. Additionally, investment in expensive pieces of cutting-edge laboratory equipment is another recruitment tool. In the earlier stages, the organization does not typically have the capital to make this level of investment. Therefore, similar to prior stages, the amenity offering is key as it is a critical tool for recruitment.
Maturity: By this stage, control is key. Maturity could be defined by big pharma or biotech. Traditionally, big pharma would mean that a landlord would sign a lease and get out of the way.
The end user would want to control everything: design & construction to estate management & amenity offering. There was a period of time where these organizations did not let employees fraternize with other organizations. Over the last five years, there has been a shift from total control, especially with estate management and amenity offering. Even though these sizeable organizations are willing to give up control on the softer services – they still want to be heard and expect landowners to act in their best interest.
When assessing the real estate needs of a life science company, it is clear that there is no cookie-cutter approach.
The stage of the life cycle will dictate the stresses on the business and the ultimate real estate needs of the organization. Additionally, understanding what is going on within each individual market is a critical component to bring a successful project forward. In order to ensure that a real estate development project is successful, it is essential that the negotiator truly understands the pressure on the business based on where it is in the life cycle. The life science market is a dynamic and growing one, so there are tremendous opportunities for developers that can fully anticipate the needs of life science companies across the many different stages of growth.
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