Life Sciences: LSRE developers are still developing

There are still opportunities if you have the right ingredients, Revista panelists agree

By Murray W. Wolf

Editor’s note: This article is part two of our coverage of a recent panel discussion on life sciences real estate (LSRE) development. Part one appeared last week.

PASADENA, Calif. – In light of a 43.8 percent decline in life sciences real estate (LSRE) construction starts during the past year, another 83.1 million square feet in the pipeline and ongoing challenges in the capital markets, it would be easy to assume that LSRE development has ground to a halt.

Not quite. Although there has certainly been a drop-off in activity, LSRE developers broke ground for about 28.4 million square feet of new projects last year, including about 5.4 million square feet during the fourth quarter (Q4).

So what does it take to get a life sciences project out of the ground these days? To answer that question, BREI participated in a panel discussion on LSRE development during the RevistaLab Life Science Real Estate Investment Forum in Pasadena, Calif., Feb. 29.

The session, titled “A Deep Dive into Life Science Development,” was moderated by BREI Publisher and Founder Murray W. Wolf and featured:
■ Will Germain, CEO and managing partner, MCB Science + Health;
■ Eric Johnson, executive managing director, Transwestern Real Estate Services;
■ Nancy Moses, principal, Trammell Crow Company; and
■ Liz Sillay, senior counsel, HCA Healthcare (NYSE: HCA).

After presenting national data and discussing the development market in general (which we reported in last week’s article), the panelists took turns discussing specific development projects their firms currently have underway.

HCA is a major player in LSRE

The publicly traded health system HCA Healthcare Inc. – founded as the Hospital Corporation of America in 1968 – probably isn’t one of the first organizations that leaps to mind when one thinks of life sciences and LSRE.

But maybe it should be.

HCA is not only the nation’s largest health system as measured by the number of hospitals – 184, to be exact, larger even than the U.S. Department of Veterans Affairs (VA) – it also boasts dozens of research locations across the country. Although it might not have dedicated life sciences research facilities in the traditional sense, HCA conducts clinical research within its hospitals and other facilities, collaborating with academic institutions, life sciences companies and other organizations on a wide range of research initiatives. These collaborations include clinical trials, population health studies and outcomes research, among others.

Ms. Sillay began by saying that she would explain “HCA’s vision for life sciences and clinical trials and research that supports the life cycle of life science real estate development. I’m going to look at it through three lenses from an HCA perspective,” she said, including physician alignment, patient demand and graduate medical education (GME).

“We are using clinical research as an engagement tool for our physician relationships,” Ms. Sillay continued. “We’re always looking at ways that we can invite further involvement from our physicians, and address their desire to be interested in the management of their practices and growing their productivity and meeting patient need.”

She noted that performing clinical trials can be an ancillary stream of revenue for HCA and its physicians.

“You get dollars from sponsors and it provides that stream of income,” she said. “It also invites patients who want the cutting-edge therapies, and they’re oftentimes more likely to be insured. And then it also becomes very compelling to attract cutting-edge physicians who want to be doing research as a part of their practice, and so it’s holistic from a physician recruitment and attraction and physician satisfaction standpoint.”

Referring to a slide illustrating a range of physician alignment models along a continuum from “light” to “strong,” Mr. Sillay noted, “So if we would have looked at this slide maybe four years ago as a physician alignment technique, I would only have clinical research on the light end. But, probably two years ago, I started adding clinical research to this slide in the middle of the spectrum… We would question it, ‘Do you want to perform some research? We really want you focused on the clinical effort here, how are we tracking your RVUs (relative value units).’” Today, however, research is often a key component of HCA’s physician alignment strategies, she said.

Next, Ms. Sillay shared a slide that outlined the six verticals of research focus at HCA: GME, its Research Institute, its Clinical Operations Group (COG), trauma, nursing and other.

“So, at HCA, this is a brand new slide that we’re releasing,” she said, “and we have research going on across our entire enterprise and it’s in multiple verticals and within… all of our service divisions.

“Now,” she continued, “we’re really strong on research. So we’re building out lots of infrastructure and really having those conversations early on in physician recruitment about the kinds of research they’re interested in, what patient populations they’re targeting and how we can support them from an infrastructure methodology (standpoint) to ensure that research is successful…

“I support the research institute. COG is our Clinical Operations Group, and we’re doing lots of unique partnerships with large academic institutions and with Google to do AI (artificial intelligence) and data-driven kinds of research.

“Our trauma physicians and our trauma practices are best in class, and they’re really on the cutting edge of all kinds of developments within the trauma space that’s very novel in terms of delivery of therapeutics that would be early stage and more commercialized.”

As for patient demand, Ms. Sillay said, “Clinical trials are really exploding across the country, both for academic positions and in private practices and independent groups. So all those factors point to tremendous growth from the demand side…

“There are tremendous new therapies. There are all kinds of specialized models of care that look different than any other delivery model that has existed prior to maybe even two years ago. So CAR T-cell therapy can be curative in certain indications, and it requires a highly specialized space that typically exceeds the space that’s available within the hospital facility. It’s a very highly acute patient population.

“Therapies like that will drive an increasingly unique need for life sciences space and I would really double down on understanding those therapeutic techniques, devices and agents that look completely new from what we even understood just five years ago.”

She noted that the Research Institute “is a branch of HCA that is the infrastructure for running clinical trials across the country,” adding that the firm is doing oncology research in a 50:50 joint venture (JV) with McKesson Corp (NYSE: MCK). “So that’s really fascinating…

“But on the wholly-owned HCA side, you have The Research Institute. It’s only growing, so we’re having tremendous demand from our physicians and from our patients to run clinical trials… So another lens that helps us understand the demand for research and the needed space is what we’re doing with physician training,” she said.

She noted that HCA has 36 research sites across the country for interventional clinical trials, representing 13 divisions and nine business lines.

As for GME, Ms. Sillay noted, “HCA is now the largest provider of graduate medical education in the country, which means we’re training more physicians than anyone else. They go through the ACGME (Accreditation Council for Graduate Medical Education) required curriculums for their training, a component of which is the performance of research. So that in and of itself is really driving HCA’s need for research-focused space…”

She noted that HCA has 72 teaching hospitals, 304 programs and 5,185 residents and fellows.

What’s driving demand for LSRE?

Ms. Sillay then noted several other trends driving demand for LSRE, namely:
■ Healthcare-focused private equity (PE) funds are diversifying from physician staffing to biotech research and development (R&D), bricks and mortar, and a convergence of both.
■ There is pressure to onshore drug development, manufacturing, storage and delivery.
■ There has been advancement and expansion of complex therapies, such as the aforementioned CAR T-cell therapies, gene splicing and others.
■ There has been a proliferation of novel academic/private/public partnerships in the firm of innovation districts, economic incentives and new models for tech transfer collaboration.
■ Entrepreneurial ecosystems are thriving in emerging economies that will leverage data talent for biotech/life sciences development.

“When I think about trends that drive all kinds of things – including the physician world, but also life science, the life science enterprise, life science early stage companies and the real estate associated with all that – I’m looking at regulatory factors. I’m a lawyer, so that’s what I think about a lot.”

Ms. Sillay cited the recent bankruptcy of Envision Healthcare, which was the largest physician staffing company in the world and was backed by the well-known PE firm KKR & Co. Inc. (NYSE: KKR).

“They went bankrupt last May, which destabilizes a lot of the workforce for many of our facilities,” she said. “But you’re seeing those (investment) dollars being ready to deploy to other sources.

“The physician employment enterprise is much less attractive because of falling revenue streams that we’re all aware of, but the dollars are still there, and the expertise and the interest in healthcare is still there. And so PE and VC are going to look at life science interests as a diversification tool, but also a really compelling way to offset the losses in the physician employment sector.”

She also noted that, coming out of the COVID-19 pandemic, “The explosion of manufacturing on shore, I think, is a big trend that we’re seeing. There is a tremendous push to onshore manufacturing, development of drugs and the distribution just stateside. So I think that will play a role in both the development here, and then also manufacturing and warehousing for life science-specific needs. We’re seeing lots of cold storage as novel therapeutics develop that have specialized needs for storage and transport.”

With regard to innovation districts and the like, she said, “I am seeing a proliferation of all kinds of unique collaborations between the universities who are just like hospital systems. They need to double down on profit-making activity, which looks like commercializing their on-the-bench ideas and concepts from their professors.

“They go out to their local and federal governments, not just NIH (National Institutes of Health), but the DOE (U.S. Department of Energy) and the DOD (U.S. Department of Defense) can infuse research dollars, and then they’re partnering with their local governments to create and incentivize space and provide subsidies for the real estate rents to launch these early stage companies and really bring into play the novel therapeutics that will be transformative.”

Ms. Sillay concluded, “And finally, I’ll just say… I’m on the board for Life Science Tennessee. I love to play with early-stage companies. They’re so compelling. They’re really energetic and enthusiastic, and I see that that’s really exploding. There are more people who want to get into that space. We’re seeing public policy and academic policy that incentivizes it, and allows more bench research to get into the public domain.

“So, I’m really strong on early stage leaning into the larger life cycle for development. And I would just encourage you to, like you come to these real estate conferences, if you’re really interested in the life science space, attend one of the larger national conferences. BIO is going to be in San Diego in June. I do a lot of local conferences because Tennessee is very strong in life sciences… And going to those conferences can help you understand what the pipeline looks like, and then grow downstream sort of what the development for real estate would look like.”

“I had no idea that HCA was so deeply involved in life sciences,” Mr. Wolf of BREI said. Aside from the demand drivers physicians, patients and students, he asked what role HCA’s leadership has played in its involvement in life sciences.

“That’s a great question,” Ms. Sillay responded. “As with all things at HCA, you know, this vision was born at the very top… We have a lot of talented executives who’ve been with our company for years who have identified this as a trend, and who believe from their own investment perspective that biotech is a growing area, and they’re doubling down personally and professionally.”

TMC has thrown its weight behind LSRE

Toward the end of her presentation, Ms. Sillay of HCA mentioned the Houston/Austin, Texas, corridor as one of the hot new growth markets for life sciences.

Mr. Johnson of Transwestern shared a current example of that, the Helix Park project at the 1,400-acre Texas Medical Center (TMC) in Houston. Houston-based Transwestern is the master developer for the $1.5 billion, 37-acre, master-planned, mixed-use Helix Park.

“The Texas Medical Center is the largest medical center in the world,” he began. “It has 63 different institutions that make it up; 20 of those are colleges and universities. There are 300 research labs there.” He noted that 20 percent of all the clinical trials United States are done in the TMC, which is also home to MD Anderson Cancer Center, “the number one cancer center in the world…”

“So we kind of started medical tourism in the ‘70s and it just grew into this large not-for-profit campus of 63 institutions. We get about $1 billion a year in NIH grant funding between the institutions now… and so we’re going to talk about a research campus that was created.”

Although the TMC has long been known as the “Cadillac” of clinical care, Mr. Johnson said, its leadership realized about a decade ago that “a lot of our academic research institutions really need to get out and expand on the research side and get more into commercialization.”

In the past, due to a lack of venture capital, new technologies devised by researchers in the TMC would end up being commercialized elsewhere, in the life sciences hubs of Boston, San Francisco or Europe.

“And so our state started to track that and said, ‘Do you know how many jobs we’re losing and hemorrhaging from the research that’s coming out of the TMC?’ And so they created a venture capital fund called CPRIT. It’s the Cancer Preventive Research Institute (of Texas), and it’s a $6 billion venture capital fund that the State of Texas created that’s non-dilutive to your equity,” he said. “Without CPRIT we’re probably not going through this case study right now, because that’s what kept a lot of our technology here over the last 10 years…

“The TMC came in and said, ‘Hey, we’re going to do a master-planned, 37-acre campus. We’re going to relocate and decant all the academic research down to that campus from MD Anderson, UT Health, Baylor College of Medicine – who’s number one in genomics (and has) the largest mice population in the United States.

“We’re going to come down here and then we’re going to put eight sites for industry as well, and they chose Beacon Capital as their partner to build the industry sites. And so we’ve got 5 million square feet of life science real estate that’s going to be built over 37 acres. Eighteen of those acres are greenspace.

“So it’s basically as Liz was talking about. You’ve got the translational research. You’re going from the bed to the bench, right here on this campus.”

Plans for Helix Park include about 5 million square feet, Mr. Johnson said, of which about 950,000 square feet has been developed so far, including a 521-room hotel and conference center, a 350-unit residential tower and about 120,000 square feet of retail.

“This mixed-use campus is already filling out,” he said.

‘I’ve never seen a project that’s been as hot’

As for the life sciences component of Helix Park, Mr. Johnson said about 1 million square feet of life sciences space has opened during the past two years, starting with the 250,000 square foot, Elkus Manfredi-designed TMC3 Collaborative Building, which opened in October 2023.

As home to more than 120,000 employees, he noted, if the TMC was a central business district, it would be the eighth largest, comparable to Seattle.

“So it’s a lot of people, a lot of students, a lot of research, and the Collaborative Building’s sort of the clubhouse, almost like the Broad Institute of in Boston, where you’ve got TED Talks going on… It’s owned by the Texas Medical Center, MD Anderson, UT Health (and) Texas A&M, and then it has for-profit in here as well.”

The Collaborative Building houses eight venture capital firms, he said, including Chicago-based Portal Innovations, which plans to open more than 30,000 square feet of lab space early this year.

“All the tech transfer and commercialization groups from each organization and institution within the TMC are located in this building. So it’s a one-stop-shop,” Mr. Johnson said. “You come in here. You’re an international biotech. You’re a pharma company. Look at, ‘How do I translate into Houston in this giant massive ecosystem?’ You can go into one building.

“And then we wanted industry to be partnered next to it, so we chose Beacon Capital as our partner,” he said, showing a slide of the 12-story, 355,000 square foot North Tower of the multi-tenant Dynamic One lab and office building, which was completed in November 2023. It’s the first of four planned buildings to be developed by Transwestern for Beacon Capital Partners and the real estate firm Zoë Life Sciences. The 12-story, 320,000 square foot South Tower is scheduled to open during Q3 2025.

Transwestern handles leasing and property management for the facilities.

“The tenants are just now moving in to both the Collaborative Building and (Dynamic One),” Mr. Johnson said. “I think what’s interesting is… we’ve done about 400,000, 425,000 square feet of new leasing in the last two years in these two buildings,” despite a down market for LSRE. “Why is that happening?”

He said, “We’re doing like seven tours a week from international-type platforms. I’ve never seen a project that’s been as hot as this in my career. I’ve been doing this for 30 years, and it is amazing what’s going on down here. So the velocity, the quality of companies that are coming in here and the support is amazing.”

He said it helps to have move-in ready lab space available.

“They’re set, ready to go, fully equipped,” he said. “You just jump into those spaces. They’re about 320 bucks a foot that we’ve spent to do those spaces, that Beacon Capital has invested…

“But I think the main reason why we’re having so much success is that this is a not-for-profit campus and so the TMC, with all this academic research, just boxed everybody out – didn’t really mean to do that 80 years ago, but industry could not come anywhere near the campus. And now we’ve got a 37-acre, for-profit campus, it’s been deeded for-profit. And so now Big Pharma, biotech can now for the first time come down, be with their joint venture partners, can co-locate there in those spaces.

“And then one other trend that we’ve seen is the fact that through this (life sciences) bubble that sort of burst, and a lot of that growth was coming in from private equity and institutional capital that’s coming into the biotech space, and when it crashed, there’s a lot of transparency. People said, ‘What happened? How did this happen?’

“I think one of the trends that happened was, everyone said, ‘We’re outsourcing all your labs. Here’s your clinical, and your labs are out of the country. Next time, we want to see, if you’re going to get our capital, we want a lot more transparency. We want the labs to be much closer to the clinical, literally bed to bench.’

“And so, all of a sudden, in the last nine months, we’ve just seen so many international companies that are coming here to be next to their clinical trials at MD Anderson, at Baylor, UT Health. And so that’s what’s driving it.

“It’s been really interesting,” Mr. Johnson said. “It’s been really wild for two years and we’ve got 450,000 square feet of proposals out right now in additional leasing we’ve done. So it’s moving very rapidly. We’re already starting construction on the next building, and we’re about two-and-a-half years ahead of schedule.”

‘I’m not going to go looking for developments in random locations’

Ms. Moses of Trammell Crow then discussed three major life sciences projects her company has in development:
■ Science Square, a 368,000 square foot project in Atlanta that is scheduled to deliver in Q2 2024;
■ Vista Sorrento Labs, a 117,000 square foot project in San Diego that is scheduled to deliver in Q3 2024; and
■ Biotechnology Park at UCLA Medical Campus, a 250,000 square foot project in Torrance, Calif., that is slated to get under construction in 2026.

“Where are developers building life sciences? I’m going to highlight the innovation districts,” she said.

Referring to the Science Square project in Atlanta, she said, “This is a partnership with Georgia Tech and… it’s because of that partnership with Georgia Tech that we’re building in this area. They already have a very successful Tech Corridor, and now they’re just building this into life sciences, multifamily – partnering, making sure that again there’s a whole collaboration here in partnership with the school, to keep the funding within the school…”

She said Vista Sorrento Labs in San Diego is an example of how developers tend to gravitate to the core life sciences markets, often hand-in-hand with high-tech development.

“So, yes, San Francisco is having a little setback right now, but it will come back,” she said, as a core market that is home to “a lot of technology, a lot of innovation…”

Then, referring to the UCLA biotech park project, she said, “And then, this is really where the sausage is getting made… and Liz hit a lot on hospital campuses. And there, right now, (the) County of Los Angeles, the Harbor UCLA Medical Campus in Torrance, Calif., has invested over $1.7 billion into a new outpatient tower, a new inpatient tower, a parking structure – kind of an overhaul of this this campus.

“Within that campus, you also have the Lindquist Institute. They have about 250,000 square feet of research and lab space. They have a vivarium there. They actually have larger animal testing… which is huge because you don’t really have those anywhere else.

“And so how do you now then incorporate your hospital campuses, the partnerships with schools that actually partner with the County of Los Angeles in research and lab space? So this is a new opportunity.

“I’m very fortunate that I’ve had a lot of work with the County of Los Angeles,” Ms. Moses continued said. “I’m not going to go looking for developments in random locations and hope that it works, even in West Los Angeles. There really needs to be a partnership in the markets that aren’t core markets. So this is an opportunity, investing with hospital campuses to try and really figure out how to make it work.”

Ms. Sillay of HCA added, “If you wanted to bet on new and emerging markets, I would go with where academic centers are, where (there is) an aggressively friendly, local and state economic development team. They’re interested in anchoring life sciences and relocating them there. They’re doing incentives. They’re doing comprehensive and large packages to attract the Pfizers, but also the mid-stage.

“But what I think will really drive an explosion in novel therapeutic development will be finding data talent. So, drug development has been unique and specialized in (that it) required lab space, but drug development will now be so impacted by AI and by data-driven research that you’ll have to have the data human resources to really provide that overlay on top of the lab science.

“So in those markets where it’s going to be less expensive to develop, where it’s less saturated – if you can find a strong presence of academic institutions, lots of data people, and then a friendly set of governments, I think that’s the perfect combination for a development project.”

Are emerging markets viable for LSRE?

Mike Hargrave, a founder and principal with Revista, asked how the panelists’ enthusiasm for emerging markets squared with comments from a previous panel discussion during the conference, which indicated a preference for the established life sciences hubs.

“That’s a really good point,” Mr. Johnson said. “It’s hard to be an emerging market and get the capital…

“So we had an industry building,” he said. “They want to find not just capital but smart capital (that’s) been in the space for a while, has relationships. They could bring something to the table, not just cheap capital. You can go get capital to build something and if you put an academic institution into it, you know, you can do that, but we wanted someone that really has done this before, that’s been in these knowledge clusters. And so we really wanted one of the top developers that’s in the space.

“And so you do have to go and sell what you have. They’re going to look at the research that’s in your ecosystem and see if it’s translating. What’s the commercialization look like? Where can the venture capital come from? Where are the incubators? You know, where’s the boot camps and the cohorts and things like that?

“And we’re really fortunate in Houston that we have a TMC governing entity because they’ve invested in all that and it’s part of their mission, so it’s not-for-profit. But if you’re a market and you don’t have something like that and you’ve got to create (it), you’ve got to galvanize a city, to do that and create that – it takes a long time.

“But you really need it before you are going to go get the really the top players to bring their wisdom and their knowledge and their relationships… It’s hard in the beginning and you’ve got to scrap a little bit, and you’ve got to figure out who’s willing to take that risk.”

Ms. Moses of Trammell Crow added, “It’s funny you say that and, again, I’m going to keep throwing office in there because it’s a… great opportunity to talk about – kind of historic.

“Right now, everyone’s struggling with the office assets they’re holding onto, right? However, there’s the opposite effect where we’re talking about a flight to quality. And as a developer, in two or three years, if you are still looking at developing a brand new office building, there will be a need for that. So I get to play in that space, right? I’m not worried about Class B or existing Class A product because I’m a developer. I get to build the new stuff. So I’m looking at it from a different perspective.

“And I think as it relates to life science, the partnerships,” she continued. “It really does. We have to rely on certain partnerships in order to make sure that what we’re doing makes a lot of sense, and I think that allows for that creativity and it allows for us to actually create new core markets.

“And I think (there are) emerging markets that are absolutely coming down the line… I’m very lucky CBRE’s my parent company. So I get to go to certain tenant conversations about what they’re planning to do and… what they’re thinking about for their headquarters and what their thought process is. And really it is about those larger tenants in the life sciences space and where their head’s at, and where their growth wants to be and how do we support that growth” in emerging markets.

“And then again, going back to the last panel, when they’re looking at a portfolio of existing product, they’re looking at the core markets that we’ve created.”

Mr. Johnson of Transwestern said that a developer can’t build a “state-of-the-art… beautiful life science building” like Dynamic One in Helix Park without the existence of a life sciences ecosystem.

“It’s really showtime at that point,” he said. “At that point, you’ve got your capital, you’re ready to go. It’s all about recruiting and retention. That market doesn’t have an ecosystem full of grad labs and different companies at different stages in the ecosystem, you’re not going to get a group to come in and develop that building.

“So you have to prove up that you have all the stages there, and it’s right, that this is ready for that. There are companies that are maturing, and they’re either going to go somewhere else or they’re going to stay in this place.”

‘It could have happened a long time ago’

Mr. Germain of MCB Science + Health added, “I agree with everything that you guys have said; you guys are spot on.

“Two additional comments on the emerging markets. So I think a lot of the cities and states that these emerging markets are in, the government in the municipalities are working really hard to develop innovation districts and ecosystems to really grow those markets. So I think there’s a lot of government investment and intention in those markets, which I think is a good thing. They’re all helping to make sure all of the elements of what a traditional ecosystem looks like are represented there – whether it’s the VC funding, whether it’s the startup kind of community – allowing for a company to mature in place and stay in that market.

“The other thing I would say is, the core markets obviously, historically, have been priced very aggressively from an investment standpoint, right? So the cap rates are a lot lower, historically, really harder to get into, higher barriers to entry. From an investment standpoint, some of the emerging markets have been easier to get into. The returns have been slightly better in terms of a little bit higher yields. At least that’s what we have seen while I was at Ventas and right now.

“So I think there’s still a lot of good reasons to look at the emerging markets and see the attractiveness of the emerging markets, but I think those emerging markets that are really looking at those core markets and saying. ‘Hey, what are the elements that we’re missing in our market?’ and really attacking those specific elements, I think over the next several years they’ll start to stabilize and you’ll see them. I don’t think they’re ever going to be Boston or San Diego, but I think they’ll get pretty close and they’ll stabilize pretty nicely.”

Mr. Johnson added, “Houston could have done this 20 years ago. It was leadership and vision, and we finally got it. So we’re 20 years late to the party, right? We’re there. We had one of the top venture capital guys from Boston come down. He said we’ve awoken the sleeping giant. Houston’s awake now. Look out! We’re going to fill this thing up pretty quickly.

He concluded, “And because we have all the clinical that’s there, we have all the pieces, now we have the venture capital coming, and now the companies are coming internationally to be close to the clinical trials. But it could have happened a long time ago. It takes vision, leadership and the municipalities to come together, and that doesn’t always (happen)…” ❏