Nearly five years have passed since the high-tech boom and bust. Emerging from the dust is a more mature, focused industry that offers unexpected opportunities for commercial real estate professionals. Understanding these companies’ space needs is the key to finding new opportunities in this niche.

In 2003, the U.S. biotech industry spent $17.9 billion on research and development, and in 2004 biotech companies raised $20.8 billion in new financing, up 26 percent from the previous year, according to the Biotechnology Industry Organization. This rapid growth opens up a world of opportunity for commercial real estate professionals interested in this field. Life sciences, pharmaceuticals, and other industry-related companies require specialized services for their very specific needs, says James V. Cahill, CCIM, a real estate adviser with the Staubach Co. in Vienna, Va., who specializes in biotech facilities.

Cities and states with biotech companies often are known as “life science clusters,” Cahill says. Currently, New Jersey, Maryland, Boston, Philadelphia, Seattle, the San Francisco Bay area, and San Diego are active clusters that are attracting companies that want to locate near like-minded businesses. Among these clusters, there has been an uptick in biotech activity in the Maryland, Boston, and Philadelphia markets in particular, Cahill says.

What Biotech Tenants Want

From a tenant’s point of view, it is important to educate landlords about biotech practices because many are concerned about hazardous materials use and what happens after a biotech company leaves the space. Landlords may assume that the risks are greater than they really are, so tenants should be proactive in educating landlords about the potential problems.

For the most part, biotech tenants have very specific needs for lab/office space, according to Cahill. For example, life sciences companies need traditional lab space as well as office administration space whereas pharmaceuticals companies need mission-specific facilities for product R&D.

Companies often seek single-story flex buildings with 16-foot clear ceiling heights, water and steam systems, and heavy roof and floor landings. Also, “Zoning is an important factor,” Cahill adds. Some companies use animals for tests and experiments, which requires specific zoning as well as other restrictions for code compliance. Landlords also should be aware of such activities, especially in markets with active animal rights organizations. Property insurance is another consideration: “Housing a vivarium can have an impact on property insurance, but the landlord usually will pass this increased cost on to the tenant,” Cahill says.

Build New or Adapt?

“It goes on a case-by-case basis,” Cahill says. “There is no right answer to this question.” Cost analyses are the best way to determine whether it’s better to adapt an existing space or build new. In many cases, the company’s specific needs can make it very costly to adapt space, Cahill explains. Sometimes the potential tenants assemble a team that includes both the landlord and a property manager to decide whether or not they can retrofit the space to their needs. Other times, landlords will hire a third party to analyze the space.

Clean Room Standards

Most biotech companies must meet the Food and Drug Administration’s Good Manufacturing Practices standard. Depending on the line of work, laboratories and offices have certain clean room standards that limit amounts of dust and particles allowed in work-space air. The space then needs to be validated. “The FDA requires that some labs, R&D facilities, and pharmaceutical manufacturing facilities be built in strict compliance to the GMP procedures. These standards are extremely high and the tenant that builds these facilities must demonstrate that the design, construction, and procedures for conducting their business are in compliance with FDA regulations. The FDA will then inspect the facility and validate that [it] meets the standards,” Cahill says. Tenants usually hire a biotech expert to design and build these facilities so the space’s design meets the standards.

Biotech utility needs differ from traditional office utilities, which is another important factor that property owners and landlords must consider, Cahill says. Most users need to have clean and reliable power because electricity spikes could harm research equipment. Labs also need backup generators in case of power outages during experiments. Proper climate control is essential because humidity levels also can affect research outcomes. Some companies even require purified water to avoid any sort of contamination that may ruin their work. As for general tenant improvements, Cahill says that landlords sometimes will pay a portion of the costs, but the tenants usually fund a majority of the TIs for lab buildouts.

Industry Trends
Because of high start-up costs, many states offer incentives that attract biotech companies. Some states have targeted the life sciences industry specifically, and as a result, build generic speculative lab space that reduces start-up companies’ costs, Cahill says. Other incentives include incubators, modular clean rooms, and quality lab space for young companies.

Overall, commercial property owners and landlords can find many new opportunities in the biotech market, particularly if they are located near a biotech cluster. Understanding these companies’ unique space needs in the first step toward breaking into this growing niche.

Small Science With Big Promise
The science of small – working with matter on a molecular scale – is the next big high-tech field, experts say. That assumption is based on the amount funding pouring into nanotechnology: Last year more than $8.6 billion was spent on research and development, according to Lux Research. State funding for research, facilities and business incubator programs topped $400 million, and the federal government kicked in another $1 billion, making nanotech the most prominent publicly funded science initiative since the space race.

Compared with biotechnology, nanotech has a better shot at commercialization because it can be applied to all manufactured goods. Current innovations using the science include NanoDynamics’ self-correcting golf ball, EnviroSystems’ EcoTru burn wound dressing, and Nanofilm’s Clarity Defender windshield protector, which repels bugs and precipitation.

Several states, including Washington, Pennsylvania, and Minnesota, are ramping up nanotech initiatives, challenging the field’s existing leaders – California, Massachusetts and Texas.

©CCIM Institute. Reprinted with permission from Commercial Investment Real Estate, volume XXIV, no. 3, online.