How is a slow economy helping scaling biotechs find space?

[00:00:00] James Cook: So last week I went down to the drug store and I got my new by Vaillant COVID-19 vaccine booster. It was made by Moderna, which I mean, before the pandemic, I hadn't even heard of Moderna and now they're more or less a household name. They're a biotech success story. Today investors are funneling billions of dollars into the life science industry. And as these new life science companies grow.

They need the lab space, where they can do all their research at the same time, midsize biotech companies are trying to conserve cash. So this has sort of created a rare opportunity for these early stage companies to sublet lab space from the larger companies. Today, we're going to learn more about how that works. This is building places where we look at the world of real estate through the eyes of the experts that study it every day. My name is James Cook and I research real estate for JLL.

[00:01:13] Bob Coughlin: My name's Bob Coughlin, and I'm the managing director in the life sciences practice at JLL.

Life science has been pretty hot. what's the most current story?

The life sciences industry has been in a real strong growth trajectory for many years. Prior to coming to jll, I was actually the CEO of the Massachusetts Biotechnology Council, and I represented over 1,650 biotech and pharmaceutical companies, here in the US and the growth has been.

[00:01:40] Bob Coughlin: Exponential. we're in a unique situation because. when life science companies are founded, they get money from VC firms, They'll typically have an ipo. There's follow on rounds, and then there's strategic, business development dollars that come from big pharma companies.

Well, right now, that middle bucket of the public markets, has gone away. I mean, there's over a couple hundred companies right now that are trading below cash. That means there's stock. Is lower than the amount of cash that they have in their bank account.

So there's a lot of downside to that, but there's also been some opportunities that have come about as a result of this downturn in Wall Street, But overall, the science is better than. And when you look at the fact that we're getting into areas of cell gene therapy and gene modification and editing therapies that actually change the course of disease and in some cases, cure disease.

[00:02:30] Bob Coughlin: When I got into this industry 20 years ago, we wouldn't use the cure word. We've invented medicine that treated the symptoms of diseases. So I'm bullish on the fact that, the human race is gonna continue to want cures and therapies and they will continue to get funded.

 I've been following likeCRISPR and like the gene editing stuff. So cool.

Not only is it cool, it's keeping people alive. I'm not a PhD scientist or a doctor by any means. I got into this industry because 20 years ago, my wife and I. Had a child with cystic fibrosis. He was born with an expiration date.

[00:03:04] Bob Coughlin: We never thought that he'd make it to high school or college. And, after 18 years and about 13 billion Vertex pharmaceuticals invented a drug that my son took his first dose on November 8th, 2019. . And since he's taken that therapy, he's grown eight inches.

He's gained 50 pounds, and his lung functions back to what it was when he was five years old, and he's a junior in college and he's alive, So how can we not get excited about the life sciences industry when people are going out there every day and they're solving on medical need?

It's great that they create good paying jobs, renting lab space and office space.Right? But the real fact of the matter is, is they're creating tomorrow specific people.

[00:03:43] Bob Coughlin: Okay, so they need very specific lab space to make these discoveries Why can't you just do this research anywhere Well, research is hard. And just the mere fact that we had three vaccines invented in less than 12 months, when historically that stuff takes between five and 10 years. It just goes to show that the better the environment that we put scientists in, the better chance they have of successfully.

Inventing the therapy, and people talk a lot about,drugs are expensive and whatnot. Well, drugs are really expensive to invent, so when you're paying for successful therapies, you're also paying for all those failures that happen along the way as well. But for lab space and the reason markets like Massachusetts and San Diego, and San Francisco and Philadelphia, these markets have been very good.

In the research and development space is because they're branching out the labs and hospitals where the early stage NIH funded research is happening. These labs are state of the art, expensive places to build, not just every developer can go out and build lab space. There's companies that have been doing this for years that have gotten really good at and when you put a tenant, space. You need to make sure that it's a state of the art lab. You got backup power, you got the ear turning over the way it's supposed to be. You have the, clearance,

The ability to store chemicals. amenities that these workers need to put in the long hours. The, pandemic. We had this work from home phenomena. We have a return to office strategy going on now. People that work in labs had to go every. You can't cure diseases from home.

So it's really important that we also focus on that whole live work play. How do you monetize and place make around the lab so that you can retain and recruit that real high end intellectual talent That drives this industry. And, not just every real estate firm has a, a whole list of professionals that are really proficient in life science, real estate, and not all the developers can go out there and build this stuff as well and be successful at it.

[00:05:46] James Cook: the cost of construction, like labor material seems to be growing every day. does it feel like that cost, for tis is, is out of control?

[00:05:55] Bob Coughlin: It is. it's really expensive. And right now because of supply chain disruption and,the cost of materials going up significantly. the cost has only been going up. we should talk a little bit, James, about what. Is happening right now as it relates to space, because for the last three or four years you couldn't get lab space in the, I'll talk more specifically about the Boston urban and suburban market because it's where I spend most of my time in which I'm the most familiar with, but there's no space.

We have over 10 million square feet of permitted space that will be built in the next five years, and that's great. But the problem that we were running into is that companies that were ready to graduate from incubators didn't have any, what we call grad lab space.

[00:06:34] Bob Coughlin: That next 3, 5, 7500, maybe 10,000 square feet of lab space, there was zero availability. But with the market doing what it's doing, there's that whole block of mid-size companies publicly traded that need to extend capital and decrease burn. They're not growing into the space like they had projected over the next five years.

So we have 1.4 million square feet of space that's on the sublease market right now in the Massachusetts turban and suburban market. That didn't exist, say over six months, Like around six months ago. So is that a great thing for the life sciences industry?

It's not, for those companies that are undervalued, but it's a great thing for startup. Privately held companies. Companies that are ready, to graduate from incubator space, they can get into already built out space. You talked about the construction cost. they can hire three or four more scientists.

If they don't have to pay to build out the lab space. They're also more flexible term. They can do a two year or a three year lease, which is more aligned with how life science companies either succeed in three years and grow, or they don't.They have bad news and they go outta business. So these 10 year leases just never worked for the tenants. They'reGreat for the real estate industry, I get it. But the tenants right now have so much more flexibility. this downturn in the market created a much needed relief valve that has really been a godsend right now for a lot of these small companies.

So let's say I'm a small company and I hear, Oh, okay, now there's some sublease space. Is it difficult to match make with that space to actually find the one that fits for you?

Let's think typical real estate, broker, tenant agency work, everybody just wants to get a lease done. Well, what if you were gonna go get a roommate? Would you want it to be just anyone or do you wanna interview that person and make sure that they're a good fit you know, what's their personality, what are their likes, common interests, et cetera?

[00:08:22] Bob Coughlin: So when we do, in the sublease market, we actually try. Look at the CEOs, are they gonna be a good fit? What indications are you looking at? Are you a company that shouldn't be close together because you're competing directly with one another?

They can't become roommates, right? Are you gonna be able to, put up a wall and spread it into two areas? A lot of times you. And a lot of times because of the way the leases are written, a lot of these companies can't lease more than 49% of the space. So you're sharing a lot of services So it's really important that the culture of the two companies is a fit. I think about subways and I'm thinking more about office space. in your world you really are roommates.

In some cases you're sharing lab equipment. In some, you're sharing vivia, right? You're sharing the kitchen, the bottle water station. A lot of them we're able to actually have them share their facilities team so that they can actually save money and extend capital that way.

That's so interesting. do you have any other advice that you're telling, folks out there who might be looking for lab space A lot of biotech companies, they'll have an innovation plan and a capital raise plan that goes along with it. And typically, they never thought about their growth infrastructure and real estate plan along those same lines. If you're a small company that's looking to grow, Pump your brakes. because you have countless opportunities today that you did not have six months ago. So don't let anybody jam you into a space quickly, because they want to get a lease done. meet with a team that knows what they're talking about, that understands your needs, and that can really do an analysis on all the different markets out there and what's available and do it in a way that increases the chance of Solving unmet medical need.

[00:10:04] James Cook: Awesome. I wanna back up for a second and get. The national view, is Boston the biggest life science market in the us?

Per capita we're by far the highest. When you look at the fact that we've got 19 of the top 20 pharma companies have a physical presence here now.

[00:10:20] Bob Coughlin: that's more than any other market. but when you look at California, San Diego and San Francisco combined, they're bigger than our market. Doesn't mean they're better. Right. And you look at what's going on in North Carolina right now as it relates to, clinical GMP manufacturing. they're unbelievable.

I'm a big fan of what's going on in Houston and Dallas and we're working on developments down there because the same way we had a east coast and a west coast, we need a middle coast.

[00:10:44] James Cook: And that goes from Texas right up the middle of our country to where you're sitting, and that is important. So, there's so many great places. the west coast of Florida right now is great for manufacturing, for cell gene therapy. nationally, is the story the same, this sublease, opportunity?

[00:11:00] Bob Coughlin: it is a national story. I'm predicting that in January after the JP Morgan, investors conference, I think you're gonna see. Business development groups in the, investment arms of the large pharmaceutical companies are just gonna start scooping things up and it's gonna get real active. So the future is bright in that aspect.

It sounds like this is always gonna be a hot space.

[00:11:20] Bob Coughlin: Yeah, it's not going away. there isn't anyone in the world that doesn't currently. Know, somebody who's either died of an unmet medical need or is currently fighting one.

So we're all patients. One thing that I know is that the human race is never, gonna give up on its desire to stay alive and be healthy. these new therapies. What's better for the healthcare system than to cure an illness? Since my son has been on the drug that he's.

[00:11:43] Bob Coughlin: He hasn't been in the hospital for an overnight stay once. he spent countless months of his lifetime in the hospital. Do you know what that cost? So the costs avoided, but through wellness is how we do it. If if we can get our arms around Alzheimer's and stave off the symptoms of Alzheimer's for 10 years, you solved the national debt problem.

[00:12:01] James Cook: If we could get our arms around type one and type two diabetes. Think it would saved. So yeah, it's not going away. Well, Bob, Thank you so much for joining me today. thanks for having me, James. It was a great time and thanks for doing what you do.

If you liked this podcast, Do me a favor go into the app that you're listening to right now and give us a rating even better. Give us a little review. Give us a sentence about what you like about the show.

Of course, you need to be subscribed to building places in that same app to get a new episode. Every time we publish, or you can find us on the web@buildingplaces.show.

[00:12:40] James Cook: This episode of building places was produced by Randy Hoffpauir. Our theme music was written and performed by Joel Karachi.