Yardi Matrix recently published an analysis of the Boston office market that was more comprehensive than just the life sciences market, but paints a good picture of what the commercial real estate market is like there as well. Here’s a look.
It’s well-established that the two largest hubs of the life sciences and biotech startups are Boston and San Francisco, with Boston and Cambridge edging out their West Coast counterparts. Typically, these are cited as desirable because of access to top-level academic institutions such as Harvard and Massachusetts Institute of Technology on the East Coast and University of California-San Francisco and UC-Berkeley on the West Coast, and nearness to venture capital. From the point of view of life science workers in a sometimes-volatile business—especially biotech startups—it’s desirable to know if you want to change companies there are plenty of options nearby.
With that in mind, Yardi Matrix recently published an analysis of the Boston office market that was more comprehensive than just the life sciences market, but paints a good picture of what the commercial real estate market is like there as well. Here’s a look.
Tech Hub, Not Just Biotech Hub
The report notes that Boston is home to many innovative companies, not just in the life sciences. Examples include Apple expanding its employee based in Boston, and Google recently leasing the complete office component of a development in Cambridge’s Kendall Square. Wayfair, an e-commerce company, is also expanding there. The report notes that tech incubators drove major corporate expansions in the city.
On the biopharma front, Siemens Healthineers, which is the mother company for several medical technology companies, is headquartered in Munich, Germany, but its U.S. offices are expanding in Boston. Takeda Pharmaceutical is relocating its operation from Chicago to the Boston area.
The report cites that Boston has a 7.8 million-square-foot development pipeline, yet pipeline outpaces real estate and office space supply and most projects under construction are pre-leased.
At the end of April 2019, Boston’s office vacancy rate was 9.7%. But, the report notes, “Due to aggressive demand coming from the growing technology and health-care industries, Class A assets were 7.4% vacant, while Class B assets were at 12% vacancy”
As those designations imply, Class A are the highest quality buildings in their market, generally newer built within the last 15 years. Class B are a step down, generally older, tend to have lower income tenants. They may be well-maintained, and many investors believe them as “value-add” investment opportunities because they can be upgraded. Class C properties are generally more than 20 years old and located in less desirable locations, and generally require renovation.
Specific Life Science Investments
There has been recent news about Boston-specific developments for life sciences. Arie Belldegrun, founder and former chair, president and chief executive officer of Kite Pharma, has teamed up with real estate developer Tishman Speyer to launch a biotech-focused real estate company, Breakthrough Properties. Kite was acquired by Gilead Sciences in 2017 for $12 billion.
Belldegrun’s family company, Bellco Capital, entered the joint venture and has bought its first property, a one-acre site in Boston’s Seaport District. The site went for $80 million. Breakthrough is also looking at sites in San Francisco. The site in the Seaport District has 250,000 square feet of development rights and is planned to be completed by 2021.
“This came out of necessity,” Belledgrun told Bloomberg. “I realized that there’s a significant need for an ecosystem in life sciences where scientists can work and interact.”
Belldegrun has also launched Vida Ventures, a venture capital firm focused on biotech startups. He indicates that Breakthrough Properties will also offer business development services to its tenants, and Vida Ventures may invest in some of the biotech companies it hosts.
Breakthrough’s chief executive officer is Dan Belldegrun (Arie’s son), who has worked for Tishman Speyer for several years.
“Life science innovation is happening at an unprecedented pace as technology and science continue to merge,” stated Dan Belldegrun. “Breakthrough is ideally positioned to support this new paradigm and help innovators around the globe pursue life-changing discoveries. We are thrilled to launch this effort with our first deal in Boston, and quickly expand to other innovation markets around the world.”
And on July 31, 2019, Alexandria Real Estate Equities announced plans for another life sciences development in Boston. The firm has 250 properties, about 25% of which are in the Boston area, with the rest in San Francisco, New York and San Diego.
Alexandria indicates that could develop a site of up to 650,000 square feet at 5, 10 and 15 Necco Street in Boston’s Fort Point neighborhood. At the company’s recent second-quarter earnings call, Peter Moglia, co-chief executive officer and co-chief investment officer of Alexandria, discussed the plans for a laboratory facility to be built next to the future site of General Electric’s future world headquarters.
The site “represents a strategic opportunity to expand Alexandria’s unparalleled, world-class” life science development in the Boston area, Moglia stated.
In May, Alexandria and National Development, based in Newton, Massachusetts, bought a 2.7-acre plot of land fronting the Fort Point Channel. The price was $252 million. There is a renovated 95,000-square-foot warehouse on the property that GE has leased for 12 years. Zoning allows for a 12-story commercial building.
Aside from that investment, the two firms recently spent $81.1 million in March to buy a multi-level parking garage at 10 Necco Street. Alexandria also partnered with Anchor Line Partners to develop a nine-story laboratory facility in South Boston at 99 A Street.
New Venture Capital Investment
As mentioned earlier, proximity to venture capital firms—or at least the awareness of VC firms—is part of the appeal of Boston and San Francisco. On August 1, Boston-based venture capital firm Vida Ventures raised $600 million for its new, oversubscribed life-science fund, Vida Ventures II. Vida launched in April 2017 and already has over a $1 billion in funds. It has invested in 14 companies, and three have launched initial public offerings.
“The successful fundraise for Vida II and the speed with which we were able to close the fund reflects Vida’s high-quality team and the success of our inaugural fund,” Arie Belldegrun, Vida Venture’s co-founder and senior managing director, stated. “Life sciences has become one of the most dynamic industries and a focal point for venture firms.”
Belldegrun added, “Vida maintains a unique advantage by combining a best-in-class investment team with first-hand business and scientific expertise that directly applies to our portfolio investments. With the added expertise from our newest team members, we are positioned better than ever before to add value by identifying and investing in meaningful science that ultimately has the potential to help patients in need.”
Vida’s first fund closed in November 2017 with $255 million. Since then it has invested in 14 life science companies. Vida also recently co-led the Kronos Bio Series A financing round that raised $105 million.
But Vida Ventures is only one life science-focused VC firm in Boston. Third Rock Ventures, Clarus Ventures, and Flagship Ventures are just three other prominent venture capital companies focused on the life sciences that work out of the Boston area.
Growth, Growth and More Growth
The report cites that as of the end of April 2019, 7.6 million square feet of space in Boston was under construction, with about a third of it concentrated in Cambridge. About 2.5 million square feet of that is scheduled to be completed by the end of this year. Another 31.3 million square feet is in the planning and permitting stages.
In a May 31, 2019 article on the state of Boston’s life sciences real estate market in Life Science Leader, Audrey Epstein Reny, managing partner at The Abbey Group, a Boston real estate developer, wrote, “The next few years will prove to be transformational for the Boston market. We want to ensure that we are keeping top companies and talent, which means that we need to continue to deliver lab and office space that works for companies and the workforce of tomorrow, especially as companies are priced out of traditional life science and tech clusters. As an already-established and authentic neighborhood with a diverse population, the South End is emerging as Boston’s next hub for innovation.”
