A Balancing Act in the Life Sciences Sector

In this episode, Cumming Group’s Ron Pruzinsky and Caddis Partners’ Kyle Miller discuss the complex rightsizing of the national Life Sciences sector, Central region hotspots throughout the U.S., and new areas for growth and funding opportunities.

[00:00:00] Brad Ducey: Welcome to the Construction Insiders Podcast, where our host Jessica Busch talks with industry experts about new trends, best practices, and how to successfully deliver construction projects in today’s market. Whatever your role on a project, we think you’ll find these discussions interesting and worth your time.

[00:00:19] Jessica Busch: Alright. Thank you. We are back again today to talk about life sciences. We have not touched on the subject in a while, but thought it deserved a updated look since things are constantly changing in this sector. So today we brought in Ron Pruzinsky from our team with Cumming Group. He is our central lead here in the life science sector, really keeping the pulse on the industry and what’s going on both locally, regionally, and keep an eye on the national indicators and how those are impacting the central region.

We have Kyle Miller with us today as well. So thank you for joining us. He is with Caddis partners. They are a real estate development company and they focus on the healthcare space. Thank you both for taking the time and yeah let’s not waste any time. Let’s dive right in to some of those national indicators I just mentioned, the labor force. Right now it’s showing flat, as of today’s recording. How is that impacting things? What are you guys seeing? What’s the crystal ball and how are you planning to move forward?

[00:01:21] Kyle Miller: Hi Jessica, thanks for having me here today. So yeah, the labor market for life sciences is actually fairly strong.

While there’s highs and lows, dips and valleys. The labor force is actually growing. It’s been growing about rate about 21 percent over the last few years and hit a peak last year. And while it has slowed down a little bit it is still growing just at a lower rate.

[00:01:43] Jessica Busch: So to you it’s a positive indicator, you would say at this point for the foreseeable future.

[00:01:48] Kyle Miller: Yes, it is very much a positive indicator.

[00:01:50] Jessica Busch: With a positive indicator like that, we also are reading about some of the bankruptcies in the space on a national level. So what does that say to you?

[00:02:00] Kyle Miller: I think really it’s very natural in life sciences, when it’s more research oriented, not all research is successful.

So what the bankruptcies indicate is that it just shows the volatility that’s implicit to the sector. And really allows for those areas that are not working through to a fully successful product or project. Tweeting those out and allowing opportunity for new entrants to come in and take over that space.

It frees up capital, it frees up space, and really it just is part of a sustainable growth model for life sciences.

[00:02:35] Jessica Busch: Okay, and so Ron, you’re nodding your head over there. Do you have something to add?

[00:02:39] Ron Pruzinsky: Yeah, I think the other thing that you look at when you do, or you evaluate the, bankruptcies that are up from the previous years. You have to look at the rush to market during the early days of the pandemic.

And now those are being right sized with some of the other researches that weren’t actually put to market. So we could actually see that being leveled out to the levels that would have been normal for growth, but because we’re looking at a number that has increased over I think data that was put out four years ago, that’s probably what we’re looking at too as far as the bankruptcies on those private markets.

[00:03:20] Jessica Busch: What about inflation, funding, kind of inventory space, is that having an impact?

[00:03:27] Ron Pruzinsky: Inflation is having a big impact on everything. And with inflation, the other thing that we have to look at is supply chain, how we get materials in and out. And that affects what we do or how we drive our research.

[00:03:39] Kyle Miller: Yeah, I think inflation is also impacting how the sector is growing in their space needs really by driving less into new development and more into redevelopment.

[00:03:49] Jessica Busch: Interesting. Okay talking about these big market areas. San Francisco, San Diego, the Research Triangle, what are you seeing in those specific areas?

[00:03:59] Kyle Miller: Sure. The primary areas of growth for life sciences have historically been in those three markets.

[00:04:05] Jessica Busch: And that’s where like the funding’s been going.

[00:04:06] Kyle Miller: That’s where all the funding been going, that’s where all the growth has been happening. And even in those markets it’s still very specific as to where that is. It’s all based on the philosophy of clusters driving innovation. With Boston, in particular, a very good example of an area that Most of that growth is happening in the Cambridge area.

That growth has been pretty steady over the years. The vacancy is very low. So it’s very highly occupied. And there are one area specifically that is going into redevelopment of spaces in order to get more product on the ground, more research facilities up and operating. Sooner rather than later.

[00:04:45] Ron Pruzinsky: Just to add on that, when we look at the inventory and adding new inventory there, the planning for this isn’t necessarily to fit if we need space for 100 more people. We’re actually going in at, over that rate to up to 150 more people or how that’s sustaining because we know that the growth in these life science markets are increasing and we’re just trying to stay ahead of the demand.

[00:05:10] Kyle Miller: Exactly, I would also add that San Francisco and San Diego both are seeing growths just like they are in Boston. Again, very clustered, less new development, more redevelopment of properties there as well.

[00:05:22] Ron Pruzinsky: Exactly.

[00:05:23] Jessica Busch: Just thinking the same thing today, I love it. It makes for an easy interview, so thank you.

For San Francisco and San Diego, the redevelopments, is there a reason for the redevelopment approach versus, I think, I’m assuming you would say it’s the opposite in the Research Triangle.

[00:05:37] Kyle Miller: So in California, construction costs have historically been higher than anywhere else in the U. S. That gap has closed in the last few years because of inflation and supply chain difficulties for just for building new spaces, especially technically oriented spaces. Got it. And so that’s why everything that is becoming that much more expensive, it adds to the bottom line. The bottom line of the budget, I should say.

With that, doing everything we can to reduce those costs, therefore trying to redevelop those spaces, it’s just a cheaper alternative.

[00:06:09] Jessica Busch: Okay, so we have those three kind of classic regions we think of when we think of life, science, and growth. But we are sitting here in Dallas together. Today, talking about Texas as well, and that’s why you guys are here and there’s a lot of growth in Texas and life science is one of those sectors that’s taking off in Texas.

So what are you guys seeing? What do you expect to see? What is going on in Texas? Why do we keep hearing about life sciences in Texas?

[00:06:34] Ron Pruzinsky: Yeah, recently, we completed over at Pegasus Park, biotech hub right outside of the medical center up here neighboring to the University of Texas Southwestern Medical Center.

Additionally, you start looking at the life science space, especially when we talk about bio. There’s a hundred and twelve thousand square feet expansion just in the Texas Medical Center in Houston. And those are huge. Also, when we talk about life science, it’s beginning to be more of a catch all, I think, phrase for everything that’s in healthcare or supported to healthcare, pharmaceutical, I think we classify in there, but the other things that we would tend to classify outside of containment labs and research and development labs, and those can be broken down into Subcategories of themselves.

You take a petrochemical corporation or product and you would see a clean room that you would typically see in a pharmaceutical, but then you’re also seeing the laboratory effects and how we’re trying to break apart those molecules, and you would see that more in a containment lab, not necessarily a CDC level of a BSL three, but you would absolutely see containment labs and other things in those types of research.

[00:07:56] Kyle Miller: And to add on to that, I think you’re seeing a lot more growth in Texas, Dallas and Houston specifically for life sciences because being in the middle of the country while occupancy costs are not decreasing at all. Occupancy costs are lower than they are on the coasts where life sciences are really entrenched. And so it really just is a natural spot for life sciences to grow further and faster.

[00:08:23] Jessica Busch: Okay, so mentioning this growth, let’s talk about owners and partners in this sector. Who are these main players and how has that kind of played out?

[00:08:31] Kyle Miller: So the funding for life sciences has really increased over the last, it peaked in 21 and 22.

And has really been a Combination of venture capital funding and federal funding. Okay. Venture capital funding which is naturally in the heart of the San Francisco area stems out of the same venture capitalists that fund a number of other businesses, tech sector, that type of thing.

But the bioscience is very big in San Francisco. So the VC funding generates quite a bit out of there. But it’s across the board Boston has its groups there are groups in Chicago actually the partners of CADIS Partners have their own smaller scale venture capitalists funding of healthcare and life sciences.

[00:09:13] Jessica Busch: A funding arm.

[00:09:14] Kyle Miller: Correct, yes. When, looking at this the VC funding is really looking at it from that business perspective. There’s a need there’s a ton of demand, and there’s a lot of attention being paid to it. The opportunities are there. The VC funding is now starting to stabilize a little bit, come down to closer to pre pandemic levels and federal funding through ARPA, the Advanced Research Projects Agency for Health, is coming in more to support and surpass VC funding, probably over the next few years at least.

[00:09:46] Jessica Busch: So I don’t mean to cut you off here, but when you’re talking about the different types of labs, we have the clean rooms, the containment labs. Are there also building nuances with those? How are those different? Does that adjust what you do on a day to day with that?

[00:10:02] Ron Pruzinsky: Yeah. So when we talk about clean rooms, typically you would find clean rooms in the pharmaceutical or data centers or, even in the chip manufacturing portions of it. And then in the containment, we look at the bio research and different types of research that are funding. The major differences between the building types all have to do with the mechanical functions of it when you especially go into some sort of containment lab, everything needs to be separated air intake exhaust and there’s different requirements either put out by CDC or just by typical building code, clean rooms are absolutely hyperallergenic and you start seeing people were in these, nice spacesuits and the funnier the spacesuit, the higher the containment.

[00:10:54] Jessica Busch: That’s a good measure. I like it. Funding all of this and life science. Who are we seeing? Who are the main partners, the owners? What are we seeing in the life science sector for that?

[00:11:03] Kyle Miller: There are really three main groups of owners in the life science sector. Large scale you would see, roughly a third are being owned by the aerospace industry, the pharmaceutical industry, they’re basically industry owned.

Then you see a small portion of them, roughly 12 percent owned by hospitals, universities, government, those type of owners. But then, the largest portion, 55 percent of all life science facilities are owned by investors. And actually, that’s where a lot of the growth is with those investors.

While I mentioned earlier, there’s a lot of redevelopment going on, new facilities are actually being, or growing at a rate of roughly 24 percent over the last few years. Which is probably not going to continue. But the ownership of those facilities is, just like any other commercial real estate, asset is being owned by investors looking for that return from this growing industry.

[00:11:56] Jessica Busch: With that percentage of ownership, the ROI must be there, or they wouldn’t be still investing in this sector.

[00:12:02] Kyle Miller: Oh, the ROI is absolutely there. Rent growth peaked last year at probably around $60 a square foot on average. Triple net. Rent is now roughly, it has come down since, it’s probably in the mid 50s.

But prior to the pandemic, that rent was I would say somewhere in the, mid 30s to 40 range. All triple net. So yes, while costs have increased, the rents have increased. But with the sector growing so well at, the jobs growing at 21 percent on average year over year, despite having, the number of bankruptcies, with all the space out there yes, there’s definitely a return there.

But it doesn’t mean that we’re not prone to overbuilding.

[00:12:43] Jessica Busch: Fair enough. So talk about VC money in this sector a little bit then. Companies are investing and seeing the ROI. It still seems like a hot sector for VC.

[00:12:53] Kyle Miller: Absolutely a hot sector for VC. Venture capitalists understand, where growth is.

They understand that one out of, a hundred projects are going to actually be successful when it is successful. It’s a huge success. The growth just really indicates that there is a lot of research that is now being done that didn’t really, make it even to that level of getting a grant or getting an investment before. So now they’re putting a lot more players into the into the market to try to fulfill those needs that are out there, and the pandemic really highlighted that. I think it’s really the growth vehicle and the growth engine for the sector.

[00:13:32] Jessica Busch: Continuing our talk about money, ARPA. Where are you guys at? Thoughts on that? What’s your takeaway?

[00:13:37] Kyle Miller: ARPA is great from the perspective of really subsidizing and candidly, probably for the near future, taking over some of the VC funding. Inflation has taken its toll, so venture capitalists are, not necessarily pulling back, but they’re not being as aggressive in their funding as they have been over the last couple of years.

So that’s stabilizing. ARPA’s been great. It came out, it’s in its second year. Came out last year with a billion dollar budget. For 2023, it’s a billion and a half probably similar budget for 2024, and we’ll see, but it’s great because what ARPA does is takes the funding for life sciences from the federal perspective and breaks it into three groups, three hubs.

You have a hub in Cambridge, you have a hub in Washington, D. C., and you have a hub in Dallas Fort Worth. In Dallas that’s the first real significant investment of federal dollars into a, middle of the country life sciences hub.

[00:14:38] Ron Pruzinsky: I think one of the things that Cumming Group has been looking for. We’re looking at as far as the ARPA funding is our strategic growth in the Dallas Fort Worth MetroPEX along with Texas as a whole, but also continuing our growth in our existing markets in the Washington, D. C. and Cambridge areas.

[00:15:01] Kyle Miller: And what this will allow for with these hubs and ARPA in general is to expand on their hub and spoke mentality, where those spokes will reach out into tertiary markets outside of those three hubs with probably some proximity. So that the funding will come from a federal source through those hubs, into those hubs, but also reaching out into other areas.

So for instance in DFW Pegasus Park was picked as the hub, the location of the hub for ARPA. Out of Pegasus Park, they will fund projects in, Austin, Houston, Oklahoma City, other smaller areas that have research facilities.

[00:15:40] Jessica Busch: So it’s all going to trickle out of Dallas for this area?

[00:15:43] Kyle Miller: For this area, correct.

[00:15:44] Jessica Busch: Where are these spokes? And how is that going to impact those regions?

[00:15:48] Kyle Miller: So these spokes are really all over. You have Alabama, Alaska, California, Colorado, Florida Minnesota, Oklahoma, Washington, Wisconsin. Really, smaller towns, areas that already have some infrastructure there. There’s already either a research facility or a university.

There’s something located in those areas that will help to drive the researchers, the tenants for those. Those are the areas that, again, that money will be spread out from the three hubs indicated.

[00:16:17] Jessica Busch: This program is obviously very new, only being its second year, but we’re going to see this trickle down effect from this money across the sector in life sciences and I’m assuming time will tell what it’s actually going to do and how it’s really going to impact, but are you starting to see any changes with that, that funding coming in? Have you noticed anything different about priorities?

[00:16:39] Kyle Miller: The hubs and the spokes have just been identified recently. So we’re still very early in that stage. But the hubs themselves are very unique in what they are actually providing.

Dallas was named the customer experience hub for the agency. With that, it’s going to be really tasked with developing health solutions that are accessible and needed and readily adopted. Where does that come in? And where does that impact? Not real sure just yet but those indicators will drive from Dallas into those other areas where it fits best.

[00:17:12] Ron Pruzinsky: Yeah, and I can add with some of the ARPA funds and how that’s moving forward, I think some of our colleagues that actually are resided in the architectural and engineering field. We’re seeing some growth in the public side with some of the universities that we help support growth with not necessarily the, identified as containments, but what we would see in research or research and development for new medicines studies of existing disease, cancer being one of them and some of the other things that are out there.

We are seeing some of the ARPA funds hit it’s a slow process, obviously, because there’s an application That you have to go through and then just getting through the standard government red tape.

[00:18:02] Jessica Busch: Not to put words in your mouth, I’ll let you take it away in a second, but sitting here listening to you guys talk about the sector. Takeaways are stability, maybe with some sprinkling in of new funding. How would you phrase it? And what do you see short term, long term? How would your little crystal ball, if you had to get it out?

[00:18:23] Ron Pruzinsky: So I don’t see this being a short term solution for anything. I think one of the good things is partnering with the government and ARPA funding, especially when we start looking at the research.

Remember that we do research to better our lives and in our market, the healthcare, and the life science portion of that healthcare market, to better our lives is curing disease. With the federal government and the partnership with the ARPA funding, We’re seeing that roll into the universities and we’re seeing that roll into the public funding aspects of facilities to support the research or things needed for development or cures.

[00:19:05] Kyle Miller: No, I agree, Ron. I think in the overall the investment in life sciences. It had a heyday over the last few years, really caused by the pandemic, highlighting a real need and a deficiency in the country to where that investment doubled, in some cases tripled over the last few years. I think now the real sense is it’s getting back to more of a stabilized, long term, sustainable growth rate that will continue to grow and, should provide for those areas that, we really, have needs for in, healthcare and medical research pharmaceuticals and the like, so that investment will continue and it really does allow for those opportunities in, university space to increase research across the country.

[00:19:57] Ron Pruzinsky: You look at how much talent we have in the research and development and the sciences just here in the Dallas Fort Worth metroplex with the universities and things that we have out there that are willing and able to go into these, now newly developed life science, different types of labs, different types of research where, you know, I think we’re going to see, this payoff tenfold , I would say not necessarily in the short term, the next one to two years, but five years down the road, we’re probably going to see the investment paying off not only from a capital building type funding, but also a human capital aspect of new people getting into a market that has seemed to be, only for the the old and the older word that was out there.

[00:20:51] Jessica Busch: I say we call it. This was wonderful. I think we talked through a lot of topics that were top of mind for people and a lot of questions that were floating around. So I thank you both. We might have to continue this later, but Ron, thank you. Kyle, thank you. We will we’ll end it here, and we’ll talk soon.

[00:21:10] Ron Pruzinsky: Looking forward to it.

[00:21:11] Kyle Miller: Thank you.

[00:21:12] Ron Pruzinsky: Thanks, Jessica.

[00:21:13] Brad Ducey: If you enjoyed this episode of Construction Insiders, we encourage you to check out our website at cumming-group.com, that’s cumming-group.com where you can find our full knowledge library under the Insights tab. It’s all great stuff. We’re really passionate about it. We hope you’ll check it out. Thanks for listening.