Life Sciences Hubs Not Likely to Follow the Urban Flight Trend

The performance of the residential real estate market was always largely determined by households’ ability to earn enough income to purchase a property. Good jobs mean more demand for houses. 

Each geography has its own industries and sectors that fuel its local economy. The most diverse regions have been the most resilient in economic downturns.  

But while most industries are adversely affected by changes in consumer demand, there are some bright spots in the post-pandemic world. 

Biotech and Pharma industries are outperforming other sectors because of today’s increased interest in healthcare. As a result, markets with high concentration of Life Sciences investment have potential to weather a downturn in both residential and commercial real estate space.

Growth in the Life Sciences industry

Despite the recession, life sciences in both public markets and private investment show signs of strength. Venture capital investments in the healthcare industry approached $12.3B in the first half of 2020, likely to outpace $16.7B invested for all of 2019 by far. 

During the peak of the COVID-19 crisis, eight out of nine companies that went public on U.S. stock exchanges were Life Sciences companies.  In the same period, 14 out of 21 U.S. companies that announced plans to IPO were from the Life Sciences sector. 

As of August 7th, the total value of U.S. listed biotech IPOs has risen to nearly $10B.

Life Sciences hubs

Successful expansion of a healthy Life Sciences sector depends on a multitude of key factors:

  • A substantive life science workforce  
  • Educational institutions providing life science graduates
  • Solid VC and NIH funding
  • Medical research and health services institutions
  • Strong concentration of high-tech workers 
  • Extensive inventory of commercial space with laboratory components

CBRE standardized each of these factors, which helped compare markets to one another. Several markets emerged to the top of the heap. 

Boston-Cambridge and the San Francisco Bay Area are ahead with dynamic life sciences markets poised for growth. Another strong market is San Diego followed by Raleigh-Durham, the state of New Jersey, and the Washington, D.C – Baltimore area.

While  budding hubs are emerging in other parts of the U.S., talent scarcity forces companies to seek presence first in markets with largest talent pools.  

It’s all about the talent pool

With rapid growth of the industry, demand for talent is outpacing supply.  

Using Boston as an example, a report released in June by the Massachusetts Biotechnology Education Foundation stated that there has been a 35{11225fd08262222f833f88d2515e540550ed741f3fe5ee59b7d67b81ef367003} increase in life sciences jobs over the past decade. 

Meanwhile the demand for PhD job candidates has grown since 2010 with no measurable increase in life sciences PhD conferrals. And the demand for candidates with a Bachelor’s degree has grown , with only an increase in graduates.

Two-thirds of life sciences jobs are located in just 11 metros. Boston-Cambridge, the San Francisco Bay Area, and San Diego are home to most of them by far.

Sweet spot alternative

Many companies have proven resilient and quickly adapted to maintaining employee productivity amid COVID, resulting in better job stability. 

Cost savings associated with not having office space (and the bills that come with maintaining it) led to announcements from tech companies like Twitter and Facebook about permanent work from home. The real surprise was news about Nationwide Insurance shutting its five regional offices because the shift to working from home during the pandemic has gone so well. 

Working from home entirely, however, isn’t popular with bosses or workers. The prevailing solution for the moment appears to be a hybrid home-and office-work model. In this arrangement, workers split their week between individual work in the comfort of home and face-to-face collaboration in an office setting.   

This sweet spot, according to Global Workplace Analytics, will save the typical employer $11,000 a year for every employee who works remotely half of the time. 

Another upside for employees, they can save between $2,500 and $4,000 a year working remotely half time. Thus, full abandonment of office space is highly unlikely.

Remote work is impossible for Life Sciences 

The Life Sciences industry is limited in its choice of locations. Businesses have to go where lab space can accommodate their operations and provide a labor force to work in their labs. 

This sector is less likely to follow other industries that are downsizing office space as more employees are working remotely. Unlike with tech and finance jobs, mass telecommuting is impractical in an industry that requires laboratory work and brainstorming.  

Biotech is more likely than other industries to be relocating executives and scientists from other states. “Remote work does not really work for a lab-based employee,’’ said Michael Gilman, CEO of Arrakis Therapeutics, a Waltham biotech.

Commercial real estate brokers anticipate increased demand for biotech space in the short run.  

According to William Hartman, an executive managing director at Cushman and Wakefield, in late May he knew of 15 to 20 firms looking for life sciences space in New York City. “Almost without exception, everyone’s moving as fast as they can forward,” he said.

Established companies had to stop most non-COVID related clinical trials. Some sales and marketing jobs are being lost because doctors don’t want to meet with reps and patients.  

“Pharma will persevere and come out stronger on the other end, but what it’s going to look like is still unclear,” said Yana Volman, VP Access Strategy. Volman supports more than 30 biopharma companies at Coeus Consulting Group. She said her large clients are budget conscious and only spend what they have to at the moment. 

“While sales and marketing jobs can technically be done from home, they are nomadic and might migrate,” she said. “But they won’t follow real estate prices. They’ll follow jobs in biotech concentrated areas.”

For now, where biotechs seem to want to be is in close proximity to scalable talent, academic research institutions, and where the attention of venture capital is concentrated. That’s not likely to change anytime soon.

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Polina Ryshakov

Polina is Sundae's Sr. Director of Research and Lead Economist. She has more than 15 years of valuation experience across commercial and residential real estate. Her background includes stints with Cushman & Wakefield, Hanley Wood, and Standard & Poor’s. Polina graduated with a double major in Economics and International Relations from the University of California at Davis and has been a CAIA Charter Holder since 2010.