This is the last in a three-part series examining the interplay between genomic hotspots and the real estate markets that serve them. This installment covers the trends experienced by the genomics sector in four cities in Britain and Germany.
LONDON, Nov. 7 – In 1999, when RiboTargets needed more laboratory space, the then two-year-old company was lucky enough to find 25,000 square feet in a new technology park in Cambridge, UK.
But the anti-infectives developer was also smart. Knowing that the real-estate market, particularly for companies performing chemistry and biology, was becoming increasingly tight, RiboTargets decided to take an option on another 26,000 square feet.
Today, the company, which expects its workforce to increase to nearly 90 employees by the end of the year, up from a mere 30 in 1999, is chuffed with its foresight.
“We were aware of the need to look ahead,” said Susan Lowther, RiboTargets’ finance director. “Companies like ours are on a rapid growth path and you don’t want to waste money on bricks and mortar. You don’t want to have to build your own building.”
For companies wishing to open shop in European biotech hotspots such as Cambridge, London, and Munich, the struggle to find affordable, well-equipped buildings can be time consuming and frustrating. Ultimately, the search can also lead to expensive outcomes that put a big dent in the pockets of early- and mid-stage companies trying to control spending as they ramp up their product lines.
In cities where demand greatly exceeds supply, some experts say that companies often wind up spending nearly 30 percent more for space than the market would command if those two market forces were in balance.
While the reasons for strong demand in particular cities—good local scientific institutions, a pre-existing cluster of companies, proximity to an international airport, and access to financial institutions—tend to be the same around the world, the reasons for the shortage of available space often differs from city to city.
Take Cambridge. This city, which houses esteemed academic and research centers like the Wellcome Trust Sanger Institute, the European Bioinformatics Institute, and Cambridge University, is the uncontested capitol of British biotech. But real-estate experts say that developers are still wary of putting up buildings there suited specifically for companies conducting chemistry and biology.
“Developers think a laboratory as an investment is too risky,” said Robert Alston, who runs a tech-centric real-estate brokerage firm in Cambridge that bears his name. “They don’t understand the strength and depth of the market and they worry that if tenant A liquidates there won’t be a tenant B.”
To be sure, outfitting a building to accommodate biotech companies can be an expensive and complex proposition that serves a limited market. Whereas an office building typically has ceilings that are roughly eight feet high, a laboratory that needs special drainage facilities as well as room to house large machines for, say, nuclear magnetic resonance spectroscopy, could easily demand ceilings that are nine feet to 10 feet high.
In addition, labs often need special air-handling facilities, designated elevators to move toxic chemicals and reagents through the building, and separate passageways so that company employees can get from lab to lab without having to change in and out of protective clothing. Special areas for toxic waste disposal are also a must.
Naturally, all of these specifications drive the cost of building laboratory facilities way up. Compared with an office building, which typically costs £1,000, or $1,445, per square meter to build, Alston estimated that it would cost £2,000 to £2,100 per square meter to build a biology lab and £2,800 to £3,000 to construct a chemistry facility. One square meter is a little smaller than one square yard.
But, Alston notes, with demand being what it is, landlords can command stiff rents for such space.
“I know some clients who would pay £45—$65—a square foot to secure the right building,” said Alston, adding that tenants in standard office space typically pay £20 pounds per square foot annually in rent. By comparison, rent in Montgomery County, Md., a prominent biotech settlement, can cost as high as $40 per square foot.
Alston also noted that a creative developer could benefit from a British tax law that allows for a 100 percent tax allowance for any investment a scientific company makes in constructing science-friendly buildings.
“If they structure themselves to have a subsidiary company that develops these types of buildings, they could claim the allowance,” he said.
Twist of Fate
London, which has only about 60 biotech companies compared with 160 in Cambridge, is known for its expensive, high-end real estate and tight market. Biotech firms looking to open there can expect to pay no less than £50 per square foot.
For years, companies that were spun out of London’s universities had to leave town in order to find available and affordable real estate in some of Britain’s smaller cities. As a result, some companies with employees who refused to leave London ended up folding.
“Imperial College is spinning out two companies a month,” said Simon Tarpey, director of the London Biotechnology Network, a private, not-for-profit effort designed to support the city’s scientific infrastructure and community. “The companies don’t want to move away from their founders, plus all the money is here.”
Founded in June 2000, the London Biotechnology Network is now helping to develop five incubators and two science parks in London. A “happy coincidence” has also helped to boost the initiative’s activities, Tarpey said. Over the past couple of years, several of London’s hospitals and universities have merged, freeing up space already built to accommodate scientific endeavors.
“All the development we’re doing is on the land owned by universities, hospitals, or laboratories,” said Tarpey. “Because of the mergers, they have free buildings and land and getting commercial biotech in there will give them a revenue stream.”
Within the next two to three years, Tarpey is hoping that the number of biotech companies residing in London will double to about 120.
The Spillover Effect
Two years ago, the founders of Mermaid Pharmaceuticals were caught in a pinch. They wanted and planned to open their company in the German biotech capitol of Munich, where about 20 percent to 25 percent of the country’s estimated 400-500 biotech firms are located.
But the market wouldn’t allow it. With real estate and labor in such short supply, Mermaid’s founders decided to make a compromise and hightail it to Hamburg.
“We actually founded the company in Munich but we found it difficult to get reasonably priced and well-equipped real estate there,” said Mermaid’s president, Alexander Crawford. “We wanted another major city that also had a much better labor market. It’s proven to be a good decision.”
While Hamburg has a few notable biotech residents, such as Sequenom and Evotec Biosystems, this northern German city has so far been unsuccessful in attracting the multitude of biotech firms that have been drawn to the country’s government-endorsed regional biotech centers, a number of which receive strong financial backing and incentives to draw young science-based companies. But a spillover effect is helping to give cities such as Hamburg a boost.
Recently, developers built a 6,000-square-meter facility known as the Center for Innovative Medicine in Hamburg and they are currently working on an additional 9,000-square-meter space that is expected to open in 2002.
Residents of the facility, which was previously a home for elderly blind people, say it does have its quirks. The rooms are small and the building’s structure does not lend itself to easy expansion. Nevertheless, companies like Mermaid, which uses model organisms to develop new therapeutics, say the building and its surroundings also have their advantages.
Rents, which weigh in at between 26-27 Deutchmarks, or roughly $12 to $12.5, per square meter, are on the low end of what a company could expect to pay in Munich, where demand for office space is four times the current supply. And, with an airtight labor market in Munich, Hamburg’s large and well-trained applicant pool makes the city an attractive alternative to employers.
Taken together, these factors might just help Hamburg and other off-the-beaten-path cities to find their place on Germany’s biotech map.
“The Center for Innovative Medicine is not as perfect as the biotech park in Martinsreid [Munich],” Crawford said. “But demand was sufficiently high—it is overbooked.”