Since the onset of the Covid pandemic, the narrative surrounding the life sciences sector has been characterized by conflicting dynamics. While the rate of innovation is on a rapid incline, leading to a surge in demand for novel therapeutics, medical equipment, and clinical technologies, the landscape is also marked by a decline in both public and private funding. This downturn has prompted many life sciences firms to reassess their strategies for securing future growth financing and addressing their real estate requirements.
The situation is further compounded by an oversupply of space, with a staggering 37 million square feet of lab space owned by investors currently in development in the U.S. in 2023—triple the volume under construction in 2019. The allure of market expansion during the pandemic era attracted a wave of investors to various life sciences projects, catering to an increasingly divergent market. As growth decelerates, major pharmaceutical corporations are shifting towards leasing rather than owning real estate, while smaller life sciences entities are vying for crucial research facilities on a smaller scale.
Similar to other industries, considerations such as location, amenities, and operational excellence are now more pivotal than ever. Operational consistency holds particular significance for life sciences enterprises, where any disruption, such as a power outage or equipment failure, can have severe repercussions, potentially eradicating years of research efforts.
Emergence of New Lease Models in the Life Sciences Field
With a heightened emphasis on operational efficiency, a novel approach to lease structuring has surfaced to delineate responsibilities clearly among property owners, operators, and lessees.
Traditionally, this arrangement involved a modified triple-net lease, where tenants and owners shared financial obligations for the property to some extent. However, as the life sciences sector transitions towards smaller footprints, increased tenancy, and incremental growth, a fresh leasing approach is evolving to help life science tenants address the evolving demands of innovation.
For instance, a life sciences lessee might seek to install specialized equipment within the building’s infrastructure, such as a humidification system crucial to their work but potentially disruptive to overall operations. While reaching an agreement on mitigating the impact of such systems in a single-tenant lease is relatively straightforward, complexities arise in a multi-tenant setting where various companies require different levels of access to building systems, especially if one tenant occupies a significant portion of the space.
Access to power is another pivotal aspect of lease negotiations. Should a tenant leasing half the space have access to 50% of the building’s power? How should priority access to power be allocated among tenants, and is this stipulated in their leases? Managing power consumption across individual lease allocations and the property manager’s role in monitoring these allocations to ensure equitable distribution among tenants are critical considerations, as unwinding multi-tenant agreements post-implementation is challenging.
Emphasis on Core Principles
Property owners are displaying a willingness to introduce more innovative lease terms to facilitate deal closures. However, expertise in the life sciences domain and a deep understanding of prevailing trends are indispensable for ensuring the long-term success of a building and portfolio.
While the spatial requirements in life sciences are evolving, the foundational principles remain unchanged. Proximity to other life sciences entities remains a crucial factor, facilitating the transformation of research endeavors into market-ready solutions. Additionally, amenities, which have been a focal point in the life sciences realm for decades, continue to be significant for lessees aiming to attract top-tier talent.
As property owners vie for smaller tenants and shorter lease terms, addressing the complexities of multi-tenant properties becomes increasingly vital. Nonetheless, there lies a significant opportunity for property owners to forge new mutually beneficial agreements that support their life science tenants in advancing science, technology, and innovation in an ever-evolving landscape.