Biotech real estate thrives in otherwise ailing market

Bill Archambeault, Journal Staff

Biotechnology companies should expect to see rents level off this year as the area's commercial real estate industry attempts to catch up with the demand for lab and office space from the only industry in the region showing continued growth.

Despite the higher costs of developing lab space and limitations in leasing that space to tenants from other industries, biotech development has gained favor and appears ready to meet the needs of the 300 or so biotech firms in the Boston and Worcester area.

Prime biotech space in Cambridge should continue to fetch healthy, "triple net" rents (in which the tenant pays operating expenses and taxes) of $50 a square foot or more, said Daniel Guenther, principal and senior real estate economist at Lansdowne Research in Londonderry, N.H. There will be some slip in biotech rents, Guenther estimates, from around $55 a square foot to around $50 a square foot.

But much of the reduction will likely come at the expense of properties in less preferable locations, Guenther said. Properties like 100-300 Technology Square in Cambridge, which is being developed by the Massachusetts Institute of Technology, should see rents remain steady.

Kathleen Doyle, a principal with GVA Thompson Doyle Hennessey & Everest in Boston, agrees that rents will remain fairly stable. Landlords have traditionally been reluctant to invest in developing lab space because infrastructure costs run $110 to $150 a square foot, well above the cost of developing office space. And unlike traditional office space, the space would then be usable only by other lab tenants.

But with the success of developers like Forest City Commercial Group Inc., Lyme Properties LLC and MIT, which have seen their investments in lab space pay off, other developers are showing more interest in taking advantage of biotech growth in a sluggish economy.

The more sophisticated developers, GVA Thompson notes in a new biotech report, are offering tenant improvement contributions ranging between $50 and $90 a square foot, while more traditional office space is being leased to tenants with tenant improvements in the $25 to $40 range.

While no one is suggesting that biotechnology space will supplant the need for traditional office growth to pull the market out of its doldrums, particularly in Cambridge and the suburbs, biotech's steady growth has not gone unnoticed.

"It's probably the most active segment of the market," said Gregory Lucas, a senior managing director in Insignia/ESG Inc.'s Boston office. "It has some legs, but I don't think it's a panacea for what's going on. There is not the depth to this market that there is to the office market, and there never will be."

The risk associated with devoting significant amounts of capital to buildings geared to a single industry appears to be fading somewhat, he said, as developers commit to biotech use.

"It is legitimized in Cambridge and, to some degree, in Worcester, and in pockets on (Route) 128 it's becoming legitimized," he said.

As demand for biotech research and product development continues to fuel the industry, the real estate industry is trying to determine how solid and sustainable biotech growth will be. NAIOP, the National Association of Industrial and Office Properties' area chapter is hosting a program Feb. 6 that will analyze what the future holds for biotech growth.

Janice Bourque, executive director of Cambridge-based Massachusetts Biotechnology Council and the moderator for NAIOP's program, says the area's developers and property owners appear to be providing the kind of space the industry needs to nurture new biotech firms and support established, growing ones.

"Key groups have been visionary and proactive in the development of biotech space," Bourque said. "What they've found is that there is no biotech space that goes empty long. We've demonstrated that there are not these big empty buildings that languish there. There continues to be demand."

The one area that needs addressing more than any other, she said, is in supplying smaller blocks of incubator space for startup firms, which may need only a few thousand square feet of lab and office space. A heavyweight like Millennium Pharmaceuticals Inc., for example, is leasing an additional 450,000 square feet at Forest City's University Park for a total of 750,000 square feet in the area.

But Bourque and Guenther say universities are meeting the demand for incubator space, pointing to developments like Boston University's 2.5 million-square-foot BioSquare project.

Overall, the area appears to be well-positioned to meet the growing needs of the industry, Bourque said.

"I don't think they'll have to turn anyone away, as long as we recognize that demand won't be flat," she said.