After decades of consolidation by Big Pharma, demand for modern lab and diagnostic space in New Jersey is on the rise, fueling rent growth and pushing some developers to consider new laboratory projects.
By Steve Lubetkin
After decades of consolidation by Big Pharma, a host of smaller, younger life sciences companies have found space at legacy research sites throughout the Garden State.
Experts say the market for that space has begun to tighten, fueling rent growth in recent years and pushing some New Jersey developers to consider new laboratory projects.
According to Shawn Straka, a managing director with Cushman & Wakefield, the average asking rental rate for the state’s lab and research buildings has grown by 73.1 percent since year-end 2014, to $22.86 per square foot, with annual average growth of 9.7 percent during that time. He expects rates to grow further this year, as activity remains strong and several deals are close to fruition despite the slowdown caused by COVID-19.
Several buildings have drawn interest, he said, including a 66,000-square-foot manufacturing facility at 7 Clarke Drive in Cranbury, where C&W recently represented Outlook Therapeutics in a lease termination. That cleared the way for a lease with Wuxi Biologics, which was represented by JLL. Straka also pointed to 95 Greene St. in Jersey City, a 340,000-square-foot office building that Thor Equities is converting to life sciences space, and a proposed 164,000-square-foot lab and R&D project in Nutley at Prism Capital Partners’ ON3 campus.
“We’ve had companies from Boston, where the market is very tight and expensive, coming to New Jersey to look at space,” said Straka, who is based in C&W’s Morristown office.
In recent years, startups and spinoff companies in New Jersey have found space at campuses that once belonged to Sanofi, Hoffmann-LaRoche and others, which developers have repositioned and transitioned to multitenant use. The state, with nearly 18 million square feet of lab space, remains a destination for such companies due to its highly educated workforce and its top-notch research universities, medical schools and hospitals, even as larger pharmaceutical firms have merged and downsized.
Look no further than the flow of research dollars: According to a report by C&W, between 2014 and 2018, Rutgers and Princeton universities took in nearly $740 million in grants from the National Institutes of Health, money that attracts scientists to New Jersey and fuels demand for lab space.
“I’d say the majority of the companies that are taking space are less than 10 years old,” Straka said. “The trend is that we see somebody comes out of Big Pharma, they start a new company, either grows or gets acquired and they continue to grow within the central northern New Jersey market. The challenge is once they establish their roots and start hiring people as they continue to grow, it becomes harder to relocate.”
Many of those deals have proven that younger biotech and pharmaceutical firms place a premium on collaboration. That has steered them toward facilities that lend themselves to close cooperation with strategic partners, including many of the sprawling campuses that are now multitenant environments.
“Many years ago, independent pharmaceutical companies did their own research and their own development of their own drugs,” said Edwin Cohen, a principal at Prism Capital Partners. “What has happened over time is more and more collaboration has started occurring. It didn’t just happen. It started a number of years ago — perhaps as long as a decade ago — where you see a tremendous amount of collaboration between pharmaceutical companies, biotech companies, medical device companies, even academics and clinical practitioners.”
Prism has built such a model at ON3, the site of the former Hoffmann-LaRoche campus. Straddling Nutley and Clifton, the 116-acre complex houses the two-year-old Hackensack-Meridian School of Medicine at Seton Hall University and Seton Hall’s nursing and health sciences schools. The site is also home to the bio-fabrication company Modern Meadow, which opened a 73,000-square-foot laboratory in 2017, and a National Health Institute-designated clinical research center operated by Hackensack Meridian Health.
Meantime, Prism says Quest Diagnostics is on track to complete a 250,000-square-foot diagnostic testing facility at ON3 in 2021. The developer last year also announced plans for a new 164,000-square-foot lab building at ON3.
“We see lab settings that are a lot more collaborative, we see lab and office paired together where that kind of collaboration is key,” said Chris Cornick, director of business development for Gilbane Building Co., which is serving as the construction manager for the Quest project. “More and more companies were asking for those labs to be flexible.”
Multitenant settings have remained attractive to those seeking lab and R&D space in New Jersey. In late March, Thor Equities Group announced that it had leased 101,500 square feet at the New Jersey Center of Excellence, a nearly 800,000-square-foot lab and office complex in Bridgewater, to PTC Therapeutics. The deal came eight months after the biopharmaceutical company took 185,000 square feet at the former Bristol-Myers Squibb Co. campus in Hopewell, with plans to use part of the 33-building, 1.14 million-square-foot complex for research and supporting gene therapy production.
Still, those space options are becoming increasingly scarce, experts say. With lab vacancy at 14.3 percent, C&W noted that New Jersey has a limited pipeline of new developments for research facilities, even as small and midsized biotech and pharma companies continue to expand. The firm also pointed to the state’s growing focus on “the growth of the R&D and innovation-based sector, which should bode well for the life sciences industry in general as firms look to either grow, relocate into or move within New Jersey.”
As Cohen noted, purpose-built life science research space from the days of Big Pharma was high on the list for redevelopment or redeployment, but is becoming harder to find.
“There will be some, but I don’t think anywhere near enough to satisfy the demand that we will see forthcoming over the next decade or more,” he said. Prism is speaking to several potential users for its 164,000-square-foot lab and R&D building at ON3, he said, ranging in size from one full floor to the entire building. The developer would start construction with a commitment for one full floor of about 40,000 square feet, he added.
Other developers are working to meet that demand, despite the higher cost and complexity of building out lab infrastructure. Earlier this year, Thor Equities completed its $94.5 million acquisition of 95 Greene St. in Jersey City, a former Colgate-Palmolive manufacturing facility that later became an office building, which it plans to reposition as a hub for life sciences users.
At the time, brokers with JLL said the buyer was “committed to a multimillion-dollar capital investment program repositioning the building to a ‘lab-ready’ condition, enabling expedited delivery of tenant lab improvements and speed to market.”
Thor Equities was clear about its view on real estate that is tied to life sciences and R&D, touting the upside last fall when it acquired the New Jersey Center of Excellence in Bridgewater from Advance Realty Investors and CrossHarbor Capital Partners. The New York-based developer said it was planning tens of millions of dollars in improvements to expand amenities and add more than 1 million square feet of laboratory space, in hopes of attracting additional companies.
“We have recognized the demand for research and development space has intensified and that there is a shortage of space in the New Jersey area,” Joseph Sitt, Thor’s chairman and CEO, said at the time. “The Center of Excellence already boasts an impressive roster of tenants and we plan to add more square footage to accommodate the demand.”
For Thor, Prism and other developers that are seeking to build R&D space, flexibility is key. Cornick noted that many smaller life sciences companies “really need to be able to pivot on a dime” in conjunction with approvals or other actions by the U.S. Food & Drug Administration.
With Gilbane now working on several projects for research and pharmaceutical clients in New Jersey, Cornick also sees some overlap between traditional office space and life sciences special requirements.
“A significant amount of the office leases are related to life science or pharmaceutical-type companies, and some of the significant leases that have happened in the last 12 to 18 months are those type of companies,” he said. “They are going into traditional Class A, Class B office buildings without infrastructure, and the building systems and bones are not what these dinosaur campuses were that were designed specifically for life sciences. So you’re seeing a four-story office building where the top two floors are being taken by somebody who needs to retrofit a building and put in a significant amount of infrastructure to make it a lab setting.”
Users will also continue to look for spaces in which they can collaborate, a concept that is not entirely new for the drug industry. As Cohen recalled, some 50 years ago, Roche established the Roche Institute of Molecular Biology on what is now the ON3 campus.
“They teamed up with somebody who was part of the National Institutes of Health to create the basic science at the Hoffmann-LaRoche facility, which lasted for close to 30 years,” Cohen said. “And they brought a couple of major drugs to the market, including Valium.”