As demand for lab space rises, Philadelphia-area developers step up to meet the growth (Video)

Source, Philadelphia Business Journal, Natalie Kostelni

While traditional office tenants have retrenched from making long-term leasing decisions and are searching for ways to cut back on square footage during the pandemic, life science companies have been signing leases across the region – from Blue Bell and King of Prussia to University City and Center City.

These companies have emerged as a bright spot in an otherwise quiet, unsettled office market. They are striking long-term deals on spaces that provide a combination of offices and labs, which are in short supply, high demand and growing as a result of the region becoming a center for cell and gene therapy and other life sciences firms. The sector represents more than 800 companies and 56,000 employees in the Philadelphia region.

“What we’re really talking about is a primary industry, and Philadelphia’s position with regard to that industry and what makes it a desirable location,” said John Gattuso, CEO of Gattuso Development Partners, at a recent Philadelphia Business Journal forum called the “Quest for Lab Space” that looked at the growing market for this specialized real estate.

“I think it’s important to think about this as an entire ecosystem,” Gattuso said. “You have primary research being done at institutions like the University of Pennsylvania, Children’s Hospital, Wistar and other locations. That’s very important. So, there’s a pool of knowledge – and intellectual knowledge in this area of cell and gene therapy, in particular – that resides here in Philadelphia and is world-class and competitive with really, virtually almost any other region in the country.”

The three other areas of the country with life sciences clusters that directly compete with Philadelphia are San Diego, San Francisco and Boston.

In the last five years, life sciences tenants have signed leases on nearly three million square feet of space to relocate to the region or expand existing footprints, according to recent JLL data. And, trends point to its rise. Since 2016, leasing activity involving life sciences companies has increased by an average of 54% each year.

Some recent deals that have been completed during the coronavirus epidemic include:

• ThirdLaw Technologies leased 4,808 square feet at 512 Township Line Road in Blue Bell. It joined KorGene, a company that is developing targeted, molecular diagnostics, that expanded by 8,259 square feet at the building.
• WuXi Biologics leased 33,000 square feet at the Discovery Labs in King of Prussia and expects to add 100 jobs by the end of this year.
• Century Therapeutics, Integral Molecular, and Exponent Inc. separately signed leases totaling 32,500 square feet each at One uCity Square.
• Imvax Inc. leased 17,000 square feet at the Curtis building in Philadelphia late in 2019 and moved in earlier this year.

Another 360,000 square feet in deals are currently in the pipeline to be completed next year, and that is expected to grow. Several life sciences tenants are in the market looking for space, according to JLL data.

Demand for the space has prompted Brandywine Realty Trust, Center City’s biggest landlord of trophy office space, to focus on it. The company currently has 856,947 square feet leased to life sciences companies and projects to lease another 574,389 square feet by the end of next year.

“We look at that energy that’s being developed out of the institutions in our backyard right here, it’s creating that incredible demand for companies to do everything they can, despite the dearth of lab space in this market, to do everything they can to try and stay,” said Steve Rush, vice president at Brandywine.

The Philadelphia real estate company has several development projects in the works that will cater to these companies. In addition, Brandywine is evaluating office buildings it owns in the suburbs and city to determine which would make good candidates for office-lab conversions. One example of that is Cira Centre. Brandywine is converting floors three through nine at the Philadelphia office tower into life sciences space.

“There’s a lot of life science users that are in the marketplace today. Everybody needs that space up and running as quickly as they can for a variety of reasons,” Rush said. “New construction is going to take 24 to 30 months to deliver the space to the tenant. On conversions, particularly like Cira Centre, we can get that done in about a year – 11 to 12 months and have the tenant actually sitting in the space. So, it’s in response to that kind of market demand to accelerate the delivery of the space for the tenant.”

The cost to develop the space from the ground up or even through conversions isn’t cheap. The tenant fit-out for these spaces can range from $500 to $600 a square foot. The expense comes as a result of needing higher floor-to-ceiling heights, more sophisticated air handling and air processing equipment and fitting out the space for lab or manufacturing use, which costs two to three times more than typical office space.

“I think that cost is part of what has created constraint in the market,” said John Grady, senior vice president at Wexford Science & Technology, which is developing uCity Square. “It’s expensive to build these buildings. It can be risky to go and build a building on spec the way we started with One uCity because you want to know that there’s going to be a depth of market to be able to respond. I think that our market is now starting to grow and our supply will catch up with our demand because people are more convinced that these are good investments to make, and there will be a market for them.”

While lab space is in demand, many foresee that there will eventually be increased need for manufacturing space as these companies have success with raising capital and advancing their clinical trials.

“What we hear from a lot of clients and particularly these entrepreneurs that have come out of university labs, they really want to keep manufacturing close,” Grady said.

In validation of Philadelphia as a life sciences hub and an example of expanding its manufacturing capabilities, Iovance Biotherapeutics Inc. is scheduled to open next year a $125 million, 136,000-square-foot new manufacturing facility at the Philadelphia Navy Yard. Gattuso Development is developing the building for the company.

When it launched a national search for a location to build this facility, it looked at San Diego, Boston, San Francisco and other markets before settling on Philadelphia. The company considered several factors including real estate opportunities as well as access to talent and transportation.

“All those factors played a role in our decision to select Philadelphia as the hub for our manufacturing center,” said Fred Vogt, general counsel at the San Carlos, California, company that is developing cell therapies for the treatment of cancer.

While it looked at sites throughout the region, it zeroed in on the Navy Yard, which already has several life sciences companies that operate manufacturing facilities at the South Philadelphia campus. For Vogt, that meant those companies were able to recruit talent.

Incentives also played a role. The Navy Yard is designated as a Keystone Opportunity Zone, which provides companies breaks on certain state and local taxes.

“They’re supposed to be for blighted areas, but the Navy Yard is a beautiful area,” Vogt said. “It provides this sort of Bay Area feel with the KOZ tax abatements that are worth quite a bit of money. They’re really valuable.”