Real estate as reagent: How the right Life Sciences space
can drive innovation

Between 2014 and 2019, biopharmaceutical companies around the world invested $984 billion in life sciences research and development (R&D). Now, new discoveries are opening the door for scientists to tackle some of the most complex and difficult-to-treat diseases of our time. Many diseases previously regarded as deadly are now manageable and even curable.

R&D spending was projected to reach a record $182 billion in the United States in 2019 and is expected to grow to $213 billion by 2024, an indication that companies are investing now to improve their future pipelines.

The total number of drugs in development increased by 46% over the last five years, with more than 7,000 medicines in clinical development worldwide.

As the life sciences industry continues to fuel breakthrough discoveries, real estate and facilities are playing a vital role in helping companies gain access to essential talent, capital and other resources for innovation and growth.

Can real estate strategies help relieve the pressure on Big Pharma?

New industry dynamics are transforming how new products are discovered, manufactured and brought to market—and driving real estate and facilities decisions. Small and mid-tier companies were responsible for 63 percent of new products brought to market since 2013, according to HBM Partners. Meanwhile finding new blockbuster drugs is becoming harder and more expensive for Big Pharma, and the challenge shows no sign of easing in the near term.

Among 12 leading large-cap biopharma companies, R&D returns fell to 1.8% in 2019—down from 10% in 2010. Concurrently, the cost of bringing a new drug therapy to market has reached record highs, growing from $1.2 billion in 2010 to nearly $2.6 billion in 2019. Clearly, Big Pharma companies are under pressure to improve efficiency in every aspect of their operations—including real estate and facilities.

Without productive, efficient R&D processes that deliver revenues sufficient to maintain continued innovation, the traditional Big Pharma business model falls apart. To maximize resources available for reinvestment, Big Pharma is adopting agile real estate strategies and entrepreneurial approaches to reinvent R&D and compete with smaller enterprises that are doubling down on product innovation and delivery.

The largest biopharmaceutical companies are approaching R&D optimization through a variety of avenues: investing in startups, licensing technology to fuel their own drug pipelines, bringing incubator spaces into the market, creating flexible lab spaces, embarking on joint ventures and more. Many are also outsourcing R&D while reducing their in-house product development efforts. Start-ups and small and mid-tier companies, meanwhile, are attracting ever-higher volumes of investor capital and seeking space in which to grow.

Less established life sciences clusters receive greater share of venture capital funding

In 2018, 10 of the 16 top life sciences clusters in the United States achieved all-time highs in venture capital (VC) investment, combining to raise $17.7 billion. However, 80% of that total was distributed to only three clusters: San Francisco, Boston and San Diego. It is therefore no wonder these lab markets are becoming increasingly saturated and prohibitive to new tenants. .

In 2019, VC funding pulled back slightly from 2018 record levels, but the more interesting change was that the pie was much more evenly distributed across clusters, with the top three clusters accounting for just 58% of total funding. This illustrates that investors are recognizing a need to branch out and support less mature lab locations to accommodate the real estate footprint necessary to achieve growth targets’

Finding room to grow

The flow of investor capital is creating increased employment and new construction requirements among start-up life sciences companies. Demand for highly sophisticated lab space and cutting-edge pharmaceutical production facilities has exploded with the expansion of life sciences R&D, and obtaining sufficient space is a growing challenge.

For example, the advent of personalized medicine has spawned a subset of early-stage companies focused on developing and manufacturing ‘small batch’ pharmaceuticals, adding even more pressure to the demand for lab space within or near life sciences clusters. In fact, in most markets, a lack of suitable lab space for research is the top issue facing life sciences tenants.

With average vacancy across U.S. life sciences clusters hovering at 9% and vacancies below 2% in the tightest submarkets, rents are reaching breathless heights. In the Mid-Peninsula area of San Francisco, for example, rents have nearly doubled from $32 per square foot to $62 per square foot since 2014, while vacancy has remained below 6% over that period.

The top-ranked clusters of Boston and San Francisco rank first in both rent levels and new life sciences construction, with 3 million square feet of new lab space under construction in each this year.

Despite this surge in new supply, developers in these and other top markets haven’t been able to build new space or convert office properties quickly enough to meet demand. The high real estate prices and low vacancies in the top clusters create opportunities for innovative real estate concepts to provide a critical path for growing companies.

In Philadelphia’s King of Prussia suburb, for example, MLP Ventures recently announced its ambitious plan for Discovery Labs, the United States’ largest coworking ecosystem for healthcare, life sciences and technology-enabled companies. When fully built out, the $500 million, 1.6 million-square-foot campus will comprise 12 connected buildings. It will offer R&D spaces in the 50,000- to 125,000-square-foot range—20 times larger than the average office coworking space—to provide critical infrastructure for life sciences innovators.

The rise of life sciences incubators

With real estate costs at all-time highs and availability at all-time lows, life sciences companies—along with real estate owners and investors—are finding new ways to engage with the up-and-comers. Life sciences incubators are popping up across the United States and becoming a critical part of the ecosystem. Massachusetts alone is home to more than two dozen incubators.

For young companies looking to grow in the top life sciences clusters, incubators fill a critical facilities gap. Part investment fund, part accelerator, incubators nurture the growth of early-stage life sciences companies by providing turnkey laboratory and office space, entrepreneurial support, strategic programming and access to capital. 

Some incubator concepts are in-house. For example, early adopter Johnson & Johnson established its JLABS incubator concept five years ago and now operates incubators in 11 locations around the world. JLABS space options range from a humble five-foot bench to a 5,000-square-foot wet research lab outfitted with the latest equipment.

Flexible laboratory design is the key to agile innovation

Inside the laboratory, new approaches to design and construction are enabling agile R&D, according to JLL’s Journey to the next gen lab report. Yesteryear’s fixed equipment and benches are being replaced by flexible designs to accommodate fast-shifting research priorities.

Today’s scientists need space that can be easily reconfigured to accommodate different kinds of research and facilitate interaction with colleagues. Mobile benches and unassigned workspaces, for example, allow for fast changes in personnel and the type of work being performed. Utility connections accessed from the ceiling allow for flexible configurations without the need for renovations.

Additionally, laboratories are beginning to include a new kind of research space: the computational science center. In the past, a traditional R&D facility would consist of mostly lab space and a small proportion of office space. Now, those proportions are shifting toward equal parts wet labs, flex space and office space for the data scientists.

Lab breakthroughs necessitate real estate breakthroughs, too

Technological advances in medical development, compounded by growing demand from emerging economies, are projected to propel prescription drug sales worldwide from $900 billion in 2019 to $1.2 trillion by 2024.

Smart business and real estate strategies, along with access to state-of-the-art facilities and talent, will be essential to offset the high cost of innovation.

Forward-looking enterprises are using real estate data and sophisticated analytics tools to align facilities and locations with corporate goals, while supporting agility and resiliency. They’re adopting data-driven approaches to managing their facilities to optimize efficiency, and creative laboratory concepts that support the ever-evolving development of new medical treatments. As these organizations have found, innovative corporate real estate thinking can accelerate those sought-after R&D breakthroughs.