REAL ESTATE CYCLES

There have been two major real estate cycles in the history of biotechnology. In the late 1970's, Genentech and Biogen left the universities to found their own homes in South San Francisco, CA and Cambridge, MA respectively. As these companies and their peers grew, they created demand for new research facilities. This growth phase eventually reached a plateau and subsequently declined as venture capital for new start-ups grew scarce towards the late 1980's. In the declining phase, construction of new facilities slowed down and older buildings were re-used as supply exceeded demand.

Over the past 10-15 years, this cycle has been repeated, beginning all over again with strong growth throughout the 1990's. At the beginning of 2001, Cambridge alone had about five million square feet of industrial laboratory space, all occupied, and had just passed a moratorium on the construction of new space. This was done, much like in the early 1980's, so that regulators could re-assess the development priorities of the community. Regulators wanted to ensure that the community was not over-built and that there were not many empty buildings detracting from the economic vitality of the area.

However, there was an unplanned effect from that building moratorium. At the time, all available space was leased and there were no options for companies looking for space. It created a "landlord's market" and rents reached an all time high, some higher than $70/sf. Soon thereafter, the moratorium was lifted, new development regulations were enacted, and building began once again. The space was built in anticipation that demand would continue to exceed supply. Instead, the economy entered a downturn and demand for space declined as many companies downsized and the industry consolidated, leaving many spaces empty or underutilized. In 2003, real estate became a buyers market as dozens of vacant facilities, some with hundreds of thousands of square feet of beautifully built-out lab and office space, stood empty. In two short years, the rules changed as rents dropped to as low as the mid-$20's/sf. To fill their buildings, landlords often had to agree to fund tenant construction.