The Southline project in Dorchester has signed two leases with two organizations that incubate life science startups as it attempts to create a new life science cluster on Morrissey Boulevard. Image courtesy of Beacon Capital Partners
As life science tenant space requirements become scarcer in the more conservative venture capital climate, Boston area developers are adapting to the new leasing landscape.
Commercial developers, universities and pharma companies all are expanding their portfolios of incubator space offering short-term flexible desks and lab bench rentals on a monthly basis. The market segment is considered a key source of demand in coming years, reflecting venture capital’s evolving investment patterns.
“Private equity, venture capital and life science conglomerates alike are more comfortable taking bite-size investments into small companies at a time when the cost of capital is high, and horizon for exit strategies is less clear,” said Tucker White, Northeast regional manager of insight and research and insight for brokerage Avison Young. “Not everybody can go elephant-hunting.”
According to Avison Young research, Greater Boston now is home to 38 life science incubators, including 20 commercial incubators operated by groups such as SmartLabs, LabCentral and Launchlabs. The facilities typically rent lab benches for startups with up to five employees for periods as short as a month, similar to the co-working office model but including lab benches and shared scientific equipment.
“The beauty of an incubator is: It’s shared space and shared resources for these early-stage companies who are really at an inflection point in their business,” said Ben Bradford, head of external affairs for industry group MassBio. “The more they can focus on science before taking a large leap on a real estate footprint, that’s better for the companies and their investors. And at the end of the day, it’s better for the landlord. They can get more of a sure thing when that company signs a lease.”
Commercial brokers predict that early-stage companies represent the next wave of demand for lab space as the market rebounds in the next several years. Boston-area life science companies raised over $2 billion during the second quarter, according to CBRE, representing nearly half of all life science funding in the U.S. And series A funding for early-stage companies has been the most resilient element of the market.
With nearly 20 million square feet of life science development in the pipeline, according to brokerage reports, representing approximately 10 times the current tenant demand, projects that do move forward will be less choosy about holding out for long-term leases with well-financed companies, industry experts predict.
MIT is asking Cambridge officials to give it more flexibility in lease terms and size of tenant spaces in its Volpe Center redevelopment in Kendall Square, in order to accommodate more growth-stage companies. Image courtesy of NBBJ and DREAM Collaborative
VC Funding Returns for Startups
As lab vacancies remained negligible in places like East Cambridge until 2021, developers had little incentive to include incubator space in new projects. Many new buildings inked long-term leases to mid-stage companies before completion.
As VC funding declined and vacancies have risen since mid-2021, more commercial developers are including incubator space in new developments, including projects that are attempting to create new life science clusters.
This spring, the Southline redevelopment of the former Boston Globe headquarters in Dorchester signed a 22,000-square-foot lease for Portal Innovations, a Chicago-based venture capital firm that provides seed capital, industry networking and equipped lab space. Southline previously inked a 45,000-square-foot deal in 2022 with Flagship Pioneering, which rents space to multiple early-stage companies in which it also invests. Beacon Capital is seeking to create a “fully developed life sciences ecosystem in a single building,” CEO Fred Seigel said in a statement.
Nonprofit LabCentral, which oversees 225,000 square feet of startup space in Greater Boston, has “limited spots available” at its facilities as companies graduate into other locations, Chief Business Officer Mike LaRhette said in a statement.
“The startup environment is improving as LabCentral’s application rates have returned to levels seen before the COVID-19 pandemic. There is limited availability in the facilities based on the natural ‘growth transitions’ of our resident companies, and a waitlist is forming based on the increased application volume,” LaRhette said.
Research, Not Real Estate Prioritized
For many traditional mainstays of Boston’s office markets such as financial services, leasing high-priced real estate has been a central component of their return-to-office strategies.
Not so for biotechs, where real estate costs take a backseat to R&D spending as a financial priority. Incubator spaces, with their short-term commitments, offer a compelling alternative.
“As a cost equation, renting by the desk or the bench is always going to be more cost-effective than leasing space,” said Mark Fallon, director of research and strategy at brokerage Hunneman in Boston. “In today’s environment, [biotechs] are much more concerned about their purse strings. And if you’re a landlord, incubators provide assurance you’ll be able to find tenants, as opposed to a 10-year lease deal.”
Even Massachusetts Institute of Technology is seeking more flexibility in its leasing plans for 1.7 million square feet of office and lab space at the Volpe Center redevelopment in Kendall Square, citing changes in the market.
MIT frames its request – currently pending before the Cambridge Planning Board – as a chance to retain incubator graduates in Cambridge rather than watching them migrate to growing clusters in places like Boston and Watertown. Only six of the 48 biotechs coming out of Cambridge incubators in recent years stayed in the city, MIT real estate officials stated, citing brokerage research.
Steve Adams
“If Cambridge cannot provide the space the growing innovators need, they leave,” MIT Investment Management Co. Managing Partner John McQuaid wrote in a filing. “Once growing innovators do depart, data shows that they are likely to stay in the location chosen during this expansion and growth phase, and are unlikely to return to Kendall Square.”
“The changes would enable the Volpe project to retain companies seeking approximately 30,000 square feet, currently an important segment of leasing demand,” MIT said in a statement.
To entice startups to remain in Kendall Square, the maximum lease term would be extended from one month to five years.
Incubator graduates’ options to lease expansion space outside of MIT-owned properties in Cambridge have improved in 2023 amid rising lab vacancies, however, indicating that commercial developers are growing competition for the Volpe project’s lab space.
At the end of the second quarter, East Cambridge’s lab availability rate hit 11 percent, according to CBRE data. The emerging West Cambridge market, totaling nearly 3 million square feet, has a 12 percent vacancy rate and 50 percent availability rate.
