By Joshua Burd
A wave of acquisition and divestment activity is reshaping the life sciences industry — and its real estate needs — resulting in demands for new office space and a surplus of lab inventory.
A new report reminds us that New Jersey is seeing many of those changes firsthand.
The national report, prepared by JLL, highlights the activity in more than a dozen U.S. submarkets. Among their findings over 68 pages, researchers call the Garden State “a prime example” of how consolidation is disrupting the way pharmaceutical firms use space.
On the one hand, M&A activity drove the largest office deal of the year in New Jersey. Allergan, which has been both a buyer and a seller in recent years, now plans to combine several locations into a new 431,500-square-foot headquarters at 5 Giralda Farms in Madison.
But changes in the pharmaceutical industry have left the state with excess lab space at many of its former research complexes and elsewhere. The report found New Jersey has about 6.7 million square feet of rentable lab supply, with a vacancy rate of 17.6 percent, while many other well-regarded locations saw vacancy in the single digits.
Dan Loughlin, an international director with JLL in New Jersey, said it’s a case of New Jersey continuing to be attractive as a headquarters location, but less so “on the innovation and discovery side.”
“The commercialization of the business is still very strong here,” said Loughlin, who specializes in life sciences, noting the attraction of New Jersey’s labor pool, quality of life and transportation access. On the flip side, he said, the state is “lagging behind” places such as the Boston-Cambridge, San Francisco, Seattle and others when it comes to being a research hub.
This disparity appears to count against New Jersey when compared to other metropolitan areas. In its annual Life Sciences Outlook, JLL ranked the state 10th out of 16 clusters in the U.S., one behind Westchester County and one ahead of New York City.
And while the state rose from the 12th position in 2015, its “cluster score” in the report is brought down by factors such life sciences employment growth, venture capital funding and average asking rent for its facilities.
For instance, Greater Boston, the top-ranked area, saw 38 percent of all U.S. venture capital funding in 2015, while New Jersey’s share was about 2.7 percent. For lab space, asking rents in Greater Boston were about $70 per square foot, versus $10.38 and $17.55 per square foot in northern and central New Jersey, respectively.
With large pockets of older lab space, the JLL report notes that New Jersey’s strength is as a corporate address. The state is home to headquarters or operations for 13 out of the 20 largest pharmaceutical and life sciences companies, according to JLL.
The state’s office market continues to reflect that strength. Through three quarters of 2016, three of the 10 biggest office deals were done by pharmaceutical companies changing their headquarters, including Allergan’s lease in Madison, Daiichi Sankyo’s 305,530-square-foot lease in Basking Ridge and Mallinckrodt Pharmaceuticals’ 155,000-square-foot deal in Basking Ridge.
“That reiterates the impact that this particular sector has on the northern and central New Jersey office market,” said Stephen Jenco, JLL’s director of tristate suburban research. “Those are significant deals that helped drive this activity.”
Despite the discrepancy between corporate office space and research, experts with JLL said there are still plenty who view the Garden State favorably from an innovation standpoint. Loughlin said that state-of-art laboratory spaces in Nutley and Bridgewater, left behind by Hoffman LaRoche and Sanofi U.S., respectively, are drawing strong interest as those campuses are being repositioned.
Bob Ryan, a JLL senior vice president, also noted that former Big Pharma executives who succeeded in New Jersey before have formed other research ventures in the state. And he pointed to one of the more high-profile tenant requirements last year, from Nestle Health Sciences, which ultimately chose Bridgewater for a new 180,000-square-foot R&D facility.
“They did a global search for their headquarters and thought that central New Jersey was the most viable location for them to set up shop,” Ryan said.