PGIM Real Estate and Wheelock Street Capital are partnering with Boston Global Investors on a 17-story, 530,000-square-foot office-lab tower under construction at 401 Congress St. Image courtesy of Sasaki
Rising energy costs, lack of housing affordability, limited availability of development sites and costly new building codes add up to headwinds for the growth of the life science industry.
Massachusetts and the San Francisco Bay area, the leading U.S. clusters, share many of these same risk factors on top of the recent declines in private investment already slowing the industry’s growth.
But industry executives and real estate researchers predict neither Greater Boston nor northern California are likely to cede their leading positions to markets such as San Diego and North Carolina’s Research Triangle, the next-biggest biotech clusters, even if the industry enters a contraction phase.
“We’ve got a 40-plus-year head start at this,” said Molly Heath, senior managing director at JLL, citing the Boston region’s potent combination of university research, teaching hospitals, venture funding and startup ecosystem. “Other markets would need a time machine to catch up with Boston.”
The Bay Area has the current edge in the size of its life science real estate portfolio, with nearly 34 million square feet of space to Greater Boston’s 28.4 million-square-foot portfolio, according to Newmark research. But the Boston area is poised to retake the top spot with 17.6 million square feet of current new construction and conversions, compared with the Bay Area’s 9.7 million-square-foot pipeline.
Whether developers will find tenants for all of that space remains an open question.
“There’s been some decent preleasing, but we’re facing more supply than we’ve really ever seen,” said Liz Berthelette, director of research for Newmark in Boston. “This comes at a time when demand growth is moving back to the historic norms, coming off the heady days of 2020 and 2021.”
San Francisco, Massachusetts’ big rival for in both the life science industry and for the title of “most expensive housing” has a
biotech real estate construction pipeline half the size of Boston’s.
This Time, It’s Different?
According to industry group MassBIO, Massachusetts’ life science companies added over 12,000 jobs in 2021, the second-largest historical increase. The industry now has nearly 107,000 employees with average annual wages of $201,549.
Bay State economic development officials with long memories might wonder about a sequel to the downward trajectory of the state’s tech sector in the 1990s, as Silicon Valley eclipsed Massachusetts as the industry leader.
Massachusetts’ life science industry currently lags California in several key metrics, including job growth, National Institutes of Health funding awards and drug pipeline, according to MassBIO’s 2022 industry snapshot.
California added nearly 12,000 R&D jobs, a 21 percent increase, compared with Massachusetts’ 8,769, which represented a 17.4 percent increase. California companies received $5.1 billion in NIH funding last year, outpacing Massachusetts’ $3.3 billion. And California companies have more than 3,000 drug candidates in the pipeline, compared with just under 2,000 in Massachusetts.
Venture capital funding – which has declined across the board as capital markets shift to less risky investments amid interest rate hikes – declined sharply from 2022’s record levels in both states. Through the end of June, Massachusetts firms received $5.1 billion in venture funding, compared to $8 billion in all of 2020 and $13.6 billion in 2021, according to MassBIO.
“That’s not a bad place to be considering all of the turmoil in the economy,” said Jeffrey Myers, director of research for brokerage Colliers in Boston. “Folks understand that pharma and biotech is still a good place to invest, and the demand fundamentally is still there.”
Globally, venture funding declined 23 percent in the second quarter to $108.5 billion, the largest quarterly drop in nearly a decade, according to a report by CB Insights.
“Venture capital investment is on the sidelines for the most part, so it’s been a challenge,” said Joseph Panetta, CEO of industry group Biocom California, which represents 1,700 industry firms. “We continue to see companies with good ideas selectively being able to find the funding they need, but certainly not where it was last year.”
Changes Coming to Zoning, Building Codes
Both regions also have high housing costs, a potential barrier to workforce recruitment, and recent state laws to encourage housing production haven’t yet made a mark. Massachusetts officials recently released final guidelines for 175 MBTA-served communities that are required to rezone for multifamily development near transit stops, but communities aren’t required to submit plans until January 2023.
California abolished single-family zoning in September 2021, but the implementation hasn’t yet resulted in a groundswell of development proposals, said Melanie Cohn, senior director of public policy and government affairs for Biocom California.
Steve Adams
A 2021 change to California energy codes gives communities the local option of effectively enforce all-electric commercial developments. The new standards could make it impossible to build certain types of life science facilities with specific temperature requirements, and further strain the state’s electric grid, Cohn said.
MassBIO CEO Joseph Boncore said former Gov. Deval Patrick’s $1 billion Massachusetts Life Science Initiative primed the pump for the state’s recent biotech boom, doling out $1 billion to support the industry from 2008 to 2018. Gov. Charlie Baker authorized another $623 million toward the program in 2018, through a combination of state borrowing and tax credits.
The latest round of funding runs out in 2023, and Boncore said another extension should be a priority for the next administration.
“When industry and companies see government is invested in creating an ecosystem where they can thrive, they’re going to think of Massachusetts as the best place in the world,” Boncore said.
CORRECTION 5:10 p.m., Sept. 26, 2022: An earlier version of this story misstated the number of life science firms Biocom California represents. It represents 1,700.
