Over the past five to seven years, there’s been a significant shift in the way large pharmaceutical companies develop new drugs.
Instead of relying heavily on their own internal research and development efforts, these companies are instead partnering with respected academic institutions and startups as they seek to discover the next blockbuster drugs and treatments.
The idea, says Adam Sichol, managing partner with Longfellow Real Estate Partners, is to “restructure themselves in a way that R&D is really coming out of small, more nimble startups or academic institutions with large research functions.”
This shift has for the most part benefited the local real estate market, where multiple major research universities are located. A report issued last summer by real estate firm JLL ranked the Triangle as the second-best real estate market in the U.S. for the life sciences industry, behind only Boston.
“It’s all about talent and where is the talent,” Sichol said. “... They’re going to the major universities, the best universities in the country where there’s already a talented workforce in place.”
The challenge for real estate developers such as Longfellow, which develops and buys properties that cater to life sciences and technology companies, is to offer spaces that appeal to the different types of tenants now working together.
Last month, Longfellow paid $117.7 million for the Keystone Technology Park in Durham, an 11-building complex at the corner of Davis Drive and Hopson Road that contains 806,000 square feet of office and lab space. Boston-based Longfellow already owned about 250,000 square feet of space within a 2-mile radius of Keystone, and the acquisition gave the company one of the largest portfolios of life sciences real estate in North Carolina.
Longfellow bought Keystone to give it “a critical mass so that we can really fully service the life sciences and technology tenants that are out there,” said Jessica Brock, a Longfellow managing director. “So whether you need 5,000 square feet or 250,000 square feet we have different options.”
Keystone is about 84 percent leased to a tenant roster that includes Sygenta, Sensus, Experimental Pathology Laboratories and Metabolon. Over the next few years Longfellow aims to increase the percentage of life sciences and technology companies in the park.
Sichol said many technology companies have shown an increased desire to be in the same locations as life sciences companies, largely in order to increase their access to talented employees and capital.
The Triangle was ranked fourth in last year’s JLL report on life sciences real estate, but it has since moved ahead of San Francisco and San Diego.
JLL ranked regions based on the existing concentration of life sciences workers and the potential for future growth, venture capital funding, government funding and patents.
Mehtab Randhawa, JLL’s research manager for the Triangle, said this region’s rise in the rankings can be attributed to a number of factors.
Private life sciences companies have been moving here, and “thanks to having solid life sciences research here we’ve been able to spin out a lot of local firms just from internal research done at the universities,” she said. “It’s helped grow the market.”
Another factor is cost.
While rents for life sciences in the Triangle rose 12.4 percent compared with last year, according to JLL, the region’s real estate costs remain well below other major life sciences clusters. The price per square foot for life sciences space in the Triangle was $19, while in Boston it was $47.40 per square foot and in San Francisco it was $37.40 per square foot.
“The overall package for a company to come into Raleigh becomes pretty attractive,” Randhawa said. “You’re looking at lower lab rents and lower office rents to accommodate the corporate side of any company.”
Research Triangle Park has long contained the vast majority of the life sciences and technology real estate in this region, but most of that space is owner-occupied.
Small to midsize life sciences companies prefer to lease space to preserve cash, Randhawa said, creating an opportunity for landlords such as Longfellow.
“There is demand for leased product in the market, and any small new company coming in doesn’t have multiple options to choose from,” she said.
Another trend helping expand the market for leased space is the decision by many large life sciences companies to reevaluate their real estate portfolios in the wake of the recession. Companies are now looking for ways to shrink their real estate footprint to reduce costs. GlaxoSmithKline, which has drastically reduced its real estate holdings in the Triangle in recent years, is perhaps the best local example of this trend.
While GSK and other large companies’ retrenchment has cost the Triangle jobs, it has also freed up lab space for other small companies, Randhawa noted.
As for Longfellow, it views its investment in suburban life sciences space in the Triangle as being complementary to its other major local investment. The company is developing the Durham Innovation District, a 15-acre site in downtown where it expects to eventually have more than a million square feet of lab and office space.
Sichol said different life sciences tenants want different things. For some, the lower rents and close proximity to the airport will make leasing space at Keystone more attractive. For others, being in a trendy, urban spot in downtown Durham will be more important.
“I think they’re really complementary,” Sichol said.