Broker Marcelo Garces

In the last several years, Washington’s life science industry has seen its strongest growth in a decade, marking a 13% surge in employment between 2014 and 2017. With more than 1,100 life science companies, Washington is quickly becoming a national leader in biotech, medical devices, and digital health, according to the 2019 Life Science Washington Economic Impact Report.

Vibrant clusters of firms in Seattle, Bothell, Redmond and Bellevue account for a high concentration of Washington’s industry strength. It’s an exciting time to witness this growth, and at Kinzer, we get a real-time perspective on how it affects local development.

Kinzer Broker Marcelo Garces specializes in the life sciences vertical. We asked for his insight on what this rapid expansion – and a constrained supply of appropriate space – means for life science companies in the immediate and long-term futures.


Limited space calls for strategic, long-term planning

Vacancy is virtually non-existent for 2nd generation lab space in Seattle. This is space, often previously used as office or in shell condition, that has been converted to a lab with the addition of specialized plumbing, hoods, benches, and other pieces of infrastructure. Depending on their needs, a new tenant can usually take advantage of 60-80% of this infrastructure.

Costar analytics surveys performed by Kinzer put the total vacancy for built-out labs and spaces indicated by landlords as willing to be converted to labs in Seattle at 3.1 percent. Bothell has quite a bit more total vacant space that can be converted to lab, but only around 18,000 SF of available, built-out lab space.

The vast majority of vacancies in both our Bothell and Seattle analyses are shell or office spaces that landlords noted they were willing to convert into lab.

Vacant built-out lab space in Bothell totals less than 18,000 SF. However, Bothell has more total space that could readily be converted to lab, compared to Seattle. Data from Costar; visualization by Kinzer Partners. 

The lack of readily-available lab inventory puts pressure on life science companies to strategize for their real estate needs well before a move or an upgrade.

In most cases, Marcelo says, the biggest expense in a company’s relocation is the capital expenditure on their lab needs.


Expansion vs. relocation

Considering the exceptionally tight market, Marcelo recommends that life science companies start considering whether to renew their lease or find a new space at least 18-24 months before their lease expiration.

“They’re going to want to find the right answer and lock in the rate far ahead of time,” he said.

An 18-24-month runway gives the tenant time to find a suitable alternative if they choose not to renew their lease. Relocating generally takes longer for life science companies compared to standard office-using tenants. Designing, reviewing and building-out the specialized plumbing, electrical and benches needed in a lab takes extra time.

Starting the exercise early also lets landlords know that a tenant is serious about potentially leaving, increasing the tenant’s leverage in negotiations.


To build or to negotiate?

Relocating and building out a new space may be appropriate in some cases, but it’s not the only solution for clients.  Apart from a limited supply of labs, the high costs of lab customization and rental rate escalations are a some of the reasons a company might decide to renegotiate with their landlord rather than pursue a new space.

“More than 70% of our deals are lease renewals and expansions in the tenant’s current space, because most of the time that’s what makes the most sense to our clients,” Marcelo said.

Negotiating with a current landlord can save biotech tenants quite a lot of money; the current dearth of available laboratory spaces means that clients who relocate almost always have to pay for a custom-built lab. Even updating existing lab space is costly, as tenant improvements for labs can run at roughly $200 per foot–nearly double the cost of updating most conventional office settings.

Rents for suitable spaces in Seattle have grown 4-8 percent per year since 2012. Data from Costar, analysis by Kinzer Partners.

 

Planning pays off
Average rents for lab space in Seattle have been growing at a rate of 4-8 percent per year since 2012. By negotiating a rate directly with the landlord early – say a year ahead of time or earlier – tenants can secure a much more competitive rate than if they waited until, say, six months before their lease expiration.

Marcelo has seen this happen with great success, as with a client who started comparing lease options 18 months before their lease expired. By choosing to extend the lease, the client was able to negotiate a new rental rate that was 61% lower than market rates.

What should new and growing biotech companies consider if they plan to establish themselves in the region’s competitive life science market? There’s no one-size-fits-all solution, but the key points above can apply to most companies looking for a new or improved lab space: tenants on the move should know that a competitive landscape may limit their options, but early negotiation on an existing lease can provide surprising and satisfying results.