Optimizing Real Estate Portfolios
Recent merger and acquisition activity is definitely having an impact on location decisions and the physical footprint of life sciences companies. Mergers and acquisitions often occur among firms that are located in the same geographic markets; there is duplication and redundancy of facilities and infrastructure.
“The story in most markets is that big pharma has been shrinking,” says Thomas Sullivan, a senior vice president at CBRE in East Brunswick, N.J., and director of the advisory board for CBRE’s Life Sciences Group. Drug manufacturers started shrinking in New Jersey a decade ago, he notes. The impact has been felt more in the office sector, and to a lesser extent in R&D space as pharmaceuticals companies have downsized in those areas.
“That consolidation is still occurring and the impacts are still being felt, although we are starting to see the end of the curve as far as the big pharma decisions — at least for our region here in New Jersey,” says Sullivan. For the most part, decisions have already been made as they relate to leases that companies decided not to renew, campuses they plan to vacate, and R&D facilities that will be relocated. The transactions that follow those decisions are still trailing in terms of disposing of those assets or backfilling empty space, he adds.
For example, it was announced earlier this spring that real estate firm Advance Realty and a Boston-based investment partner have acquired the former Sanofi U.S. research and development complex in Bridgewater, N.J. The developer plans to relocate its own headquarters to the site and also is reportedly looking at plans to redevelop parts of the 1.2-million-square-foot campus that sits on 110 acres. Paris-based Sanofi vacated the campus after relocating its U.S.-based R&D operations to Cambridge, Mass. That project will most likely be a redevelopment opportunity due in large part to the age of the existing office space, notes Sullivan.
“M&A activity will continue to be a major driver toward location decisions,” says Sullivan. Once those mergers occur, there will be more focus on portfolio analysis on what are now combined operations and global redundancy. That will continue to have an impact on the life sciences industry over the next several years, he adds. “There is no transaction — of any scale — that you see in the marketplace that does not lead to some real estate implications,” he says.
Yet where large pharma companies are shrinking, biotech firms are picking up the slack. In New Jersey, Celgene Corp. is one firm with a large and growing footprint. That firm owns their primary campus in Summit and continues to absorb additional leased space in the market — perhaps 200,000 square feet of office absorption each year.
Another trend among both big pharma companies and some middle market biotechnology firms is to create efficiencies and run leaner by focusing on core competencies and choosing to outsource other functions, such as facilities management, real estate, and employee benefits. Companies also are opting to outsource core functions, including contract research, contract manufacturing, and contract packaging and shipping of products. Centralizing services and outsourcing non-core competencies will be a bigger focus going forward as companies look for ways to create greater efficiencies and operate more profitably.
Clusters Remain Strong
The life sciences sector as a whole remains a formidable industry. The global pharmaceuticals, biotechnology, and life sciences industries generated total revenues in excess of $1.1 trillion in 2011. Between 2007 and 2011, the global pharmaceuticals, biotechnology, and life sciences sector has been growing at an average rate of 6.7 percent, according to Deloitte.
The sector relies heavily on talent, which is why location decisions focus primarily on existing clusters. Although there are a number of strong and growing clusters across the United States — from Minneapolis to Austin — the largest hubs for life sciences based on firms and employment numbers continue to be Greater Boston, San Diego, and the San Francisco Bay area.
The Boston-Cambridge cluster is the country’s largest. There has been growth from both the large pharmaceutical firms, as well as a younger generation of start-ups that are growing in the greater Boston Area, notes Ted Lyon, a senior managing director and principal at Cassidy Turley in Boston. For example, The Massachusetts Life Sciences Center board of directors awarded a $5 million capital grant earlier this year to help fund the establishment of LabCentral in the Kendall Square area of Cambridge. The state-of-the-art facility will serve as an incubator for biotech start-up firms. In addition, several life sciences firms in the Boston area have held successful IPOs this year to add additional capital to fuel growth. “That is all positive in our market,” says Lyon.
Life sciences firms also are driving build-to-suit activity with long-term lease commitments. “That has been happening for the last couple of years and this year is no different,” Lyon notes. One of the largest projects is the Alexandria Center at Kendall Square. The seven-building, mixed-use redevelopment will span more than 1.75 million square feet when fully developed, including apartments, office, and retail space. The project calls for 1.53 million square feet of office and lab space. The first building in this phased development project will be completed in the fourth quarter of 2013. Biogen Inc. is one of the firms that has committed to locating its new headquarters here.
In sum, although there is going to be shrinking in some life sciences sectors, most notably among pharmaceuticals, growth is on the rise in other areas such as biotech. “That is why the clustering around places like San Francisco, Boston, and San Diego is going to continue, because that is where the talent is in this type of science,” concludes JLL’s Humphrey.