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BioMed Realty Foresees an Active Market in the Year Ahead

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Vue Research Center in South Lake Union. Image courtesy of BioMed Realty

By Jack Stubbs

A month into the new year, many companies are trying to gauge how the industry might evolve over the next 12 to 18 months. Seattle has become increasingly known for its burgeoning tech sector, but the life sciences is another growing sector that is driving demand.

We recently spoke with Mike Ruhl, vice president and Seattle market lead at BioMed Realty, about current trends in Seattle’s life science sector and how these trends might drive further activity in the broader Puget Sound region.

Seattle, BioMed Realty, life science sector, South Lake Union, Bothell, tenant demand,  The University of Washington School of Medicine
Mike Ruhl

Founded in 2004, BioMed Realty is one of the leading providers of real estate solutions to the local and regional life science community. The company owns, acquires, develops, leases and manages laboratory and office space for life science tenants in the seven core U.S. life science markets.

With over 12 million square feet of rentable space worldwide, BioMed Realty’s portfolio of facilities offers partners a wide range of options from traditional office space to small lab space to state-of-the-art build-to-suit life science properties.

How did BioMed Realty seek to make its mark in the life science industry in Seattle last year? How would you characterize 2017?

Overall, the pace of leasing in the Seattle life science market remained robust with 2017, although [it was] slightly slower for new or expanding lease transactions being done in the market.

At BioMed Realty, we have concentrated on meeting the acute demand for space among mid-size companies by building out spec suites at our Omeros building on Elliott Avenue for tenants looking for suites sized from 3,800 up to 10,000 square feet. The suites were fully functional and ready for operations once a lease was fully executed. Rapidly expanding tenants were excited to sign a lease for a shorter time frame and get started on developing their science. We are currently working on our last suite, which we expect to be leased by the end of the first quarter.

Currently, how does the strength of the Puget Sound market compare to the strength of other regional markets across the U.S.?

Historically, the Puget Sound market tends to have relatively smaller tenants that are developing new products, compared to the larger life science core markets on the West Coast such as [those] of San Francisco and San Diego.

Our market is now starting to see growth from the institutional players like the Fred Hutchinson Cancer Research Center and Juno Therapeutics. Spin outs from these innovation powerhouses have added about 10 percent growth to the market size over the last couple of years. In addition, national companies are now looking for more competitive space and skilled employees whose significant others can find employment in Seattle’s booming economy.

What were some of the broader trends that defined the Puget Sound region’s life science industry in particular, and the real estate market in general, in 2017?

Beyond the life science growth and demand trends cited above, the current market is heavily influenced by technology companies—Amazon, Google, Facebook, etc.—growing at an unprecedented rate.

How is the life sciences sector a narrower lens through which to assess the real estate market? At the turn of the year, what’s your take on where we are in the cycle right now?

To use a baseball analogy, it appears we are now in the 7th inning and looking like it might go into extra innings. We are seeing more activity this year over this time last year, which we expect to translate into more absorption for 2018. Capital funding for life science research is anticipated to be very strong in 2018. We have very little vacancy in the market to begin the year and expect a significant build-to-suit project to be negotiated this year for delivery in 2020.

In your view, what were some of the factors that drove demand for real estate in the life science industry in Seattle and the greater region in 2017? Which of these factors will come to the forefront in 2018?

Funding sources were somewhat constrained early last year, which improved noticeably as we moved to the end of 2017. In 2018, we are seeing that this improved capital environment is translating into companies growing and taking down, or looking to take down, more space.

Seattle in particularly is becoming increasingly known as a hub for medical research, biotech and the life sciences. Where do you see this trajectory heading over the next two or three years? How will the healthcare and education sectors in Seattle continue to contribute to the life sciences industry in the year ahead?

All of the core life science markets have world-class universities that help drive the market and provide critical talent pool for life science companies and research institutions. The University of Washington School of Medicine is that primary demand driver in our market. In addition, we have other institutions, like Children’s Hospital, Benaroya Research Institute and Fred Hutch, which all continue to help drive the market.

I see sustained growth for the foreseeable future, especially as a result of the number of companies pursuing immune therapy research in Seattle.

Currently, much of the city’s commercial real estate inventory is located in the South Lake Union area. However, like any area, South Lake Union is constrained by spatial considerations. How much room is there to grow in SLU?

The South Lake Union cluster is constrained physically, as well as by the competition for land by developers looking to develop multifamily, office, hotel and life science projects. With the growth of the tech industry by Amazon, Google and Facebook, to name a few, that has consumed much of the available space in the market.

And these buildings going up are either being pre-leased or leased upon completion. The reality is that [the] SLU market has a finite amount of land left for future Life Science growth, currently approximately 1.5 million square feet.

Looking ahead, what other areas in the region might provide a conducive environment for life science inventory to be developed?

Bothell continues to provide a cost-effective alternative for tenants in the area. The issue for that area is that life science companies like being in the SLU market for the access to talent and close proximity to other companies for collaboration.

What are some of the broader trends shaping the life sciences sector in the Puget Sound region? Which of these trends will continue to play a prominent role in 2018 and beyond?

We have a larger base of private companies in the market today. Institutional companies are spinning out more companies with exciting new science [and] creating new opportunities for innovation and capital raising, which are the life’s blood of growth and demand for research space.

What do you expect for leasing rates and tenant demand in the coming year (and beyond)? Will these figures fluctuate or remain relatively stable?

I expect lease rates to remain steady in 2018. Tenant demand will continue to be robust this year and will affect the supply and rents. We are currently tracking more than 300,000 square feet of tenant requirements in the market. I think this amount of demand will remain steady for 2018 and 2019. Tenant demand is the primary leading indicator for us, with venture capital investment in life science companies as another bellwether.

Looking ahead, what are some of the obstacles that developers and tenants should be looking out for in the industry in year ahead?

Three words: land, land and land, until someone can make more of it. Land is becoming more expensive each year, along with construction costs. One overlooked challenge is the short supply of skilled lab technicians, which life science companies need to help perform the mission-critical work in a research facility.

Is there anything in particular that worries you, and conversely, anything in particular that excites you? Will 2018 bring anything new to the table?

We expect a tighter market given the number of tenants in the market today. This sustained demand presents both an opportunity and a challenge. On the one hand, this amount of demand will drive even lower vacancy rates this year. On the other hand, this lack of supply has a down side because we need to help our companies grow, which is becoming increasingly difficult in the face of increasing land and construction costs.

Is there anything else we should be talking about?

Uncertainty in the local political environment is driving life science companies and developers to rethink their investments in Seattle. The local economy has been blessed with explosive growth over the last five years, which has been great for the City of Seattle. However, it has also put huge strains on infrastructure, which is going to require visionary leadership and action in both the public and private sectors.