Interviews William Hartman, Vice Chairman, CBRE

0:00 Speaker 1 Good morning. This is Mike Stola for the Stolar Real Estate Report on the Cat’s Roundtable. What is life science? You hear about it, but you don’t know what it is? What is it confined is what type of buildings do you do? What kind of tenants do you have? I really don’t have any idea of life sciences, so I

0:17 brought the expert, the vice chairman at CBRE, Bill Hartman. Mister life science, tell me the definition of life science.

0:26 Speaker 2 Well, it goes in many different directions.

0:28 Speaker 1 That’s why we’re here to you.

0:29 Speaker 2 But at its cure, at its core is the cure of disease, and that can take many forms. I mean, if you look at what’s happened over the last twenty years, you have companies like Gilead producing a cure, not a treatment, but a cure for HEPSI. Five million people with a chronic disease now living healthy lives. So it’s all about

0:51 the patient and delivering cures. And recently you’re seeing companies like BMS and Mirk with their new oncology drugs that are changing the landscape for people. When you get a diagnosis for cancer, your life changes. And so the result of that research that’s done in labs around the world, at institutions, at biotechs, at pharma companies, is changing how

1:18 we deliver cures to patients globally.

1:22 Speaker 1 So what buildings do we use for life science? So they’re pretty well, especially in the metropolitan area.

1:29 Speaker 2 So we’ll keep it to the metropolitan when it goes globally. I mean, you need very robust facilities that include HVAC that is multiple of what you would have in an office. You have running twenty four to seven. You have power that’s double what you would see in an office building.

1:45 But there are similarities that you have big, high ceilings and amenities that have become very important both of the office users and as well to the lab. And you’ll see examples of that, whether it’s at the Cure on three forty five Park or twenty five West End Avenue or the Alexander Center. They’re all very concerned with the

2:05 work environment. And the beautiful thing about the labs is you kind of have to be in the lab to do your work, unlike in the office sector, you can work from home or frankly from anywhere. In other cases.

2:17 Speaker 1 I mean, the first major entity to come in was Alexandria, Okay, on thirtieth Street and First Avenue, New York Avenue over there. Now, they were supposed to build another building. What happened on them?

2:30 Speaker 2 So I think the timing just hasn’t been right right. I’m pretty sure they were ready to go before the pandemic. The pandemic hit and all you know, the game just changed. And I know they have plans to kick it off again.

2:45 I don’t know that they’ve announced it yet, but they’re balancing that smartly with the demand, and I suspect they’ll probably come out in the next year or so.

2:54 Speaker 1 What about the repurposing of office buildings and other structures for lab space.

3:00 Speaker 2 So that’s very challenging as converting office to residential, which is a big issue these days. We probably looked at every building available for sale in New York over the last decade, and very small portion of them will actually work as a conversion, and mostly because you need high ceilings, heavy floor loads, a lot of power, and most of

3:26 the buildings did not sort of meet those criteria.

3:30 Speaker 1 Now, you quoted recently in an addition speaking to me on the phone, is that we’ve had the worst two years in life science, business what do you mean by that and what does the future look like?

3:42 Speaker 2 So from the business perspective, very little capital raised. So that’s painful because we all follow the money and then the money eventually will turn into real estate demand. The demand on the real estate side has diminished. So if you look at the major markets west in San Francisco, San Diego, those markets, the demand there has probably been

4:05 cut by seventy percent, and it’s at a time when there is huge, huge inventory coming online in Boston, there’s fifteen million square feet of space coming online in San Francisco eight So at the backdrop of that diminished demand and increased supply, it’s a pretty challenging time all around.

4:24 And the same dynamic has happened here in New York. The demand is lower and the building supply actually could be considered a good thing because New York has always had a hard time delivering lab space to the users.

4:37 Speaker 1 Here who’s financing and providing equity for the lab space business?

4:44 Speaker 2 So it’s unlike when Alexandria first started building here, the capital was not as robust it is now. I mean, Alexandria is a huge, huge company now. BioMed Reality was by Blackstone they’re very well capital The other players have different capital sources throughout, and the smaller, less well capitalized companies have raised capital and listen, in the last prior

5:12 to the pandemic and during the pandemic, the demand for life science product was through the roof. The cap rates are lower than office and it was a very very hot product. Obviously that’s changed at this point. But so the capital is robust right now, it’s a little bit trickier, not unlike the office.

5:30 Speaker 1 Now where’s the capital coming from? Is it domestic? Is it private equity, is it the stock market or so?

5:38 Speaker 2 Or interestingly, it’s both private equity, public markets and philanthropy. So it’s a bit of a mix.

5:49 Speaker 1 So let’s talk about certain recent projects.

5:52 Speaker 2 The Southbeast project fantastic, Well, we looked at buying that like five times over the last decade, and finally they were able to put a deal together with our associates here at cbre Wild Cornell, who had been in the market looking for space for quite a while, put together very creative deal for probably a half or two thirds

6:12 of that building. And so the rest of what happens to that building will also probably be lab or some type of Medical. So that deal is just absolutely fantastic. And they always wanted to stay right near campus. And if you talk to any of those institutions, they’re scientists do not want to have to walk more than a

6:31 block to get to their lab, so that location works really perfect for them.

6:35 Speaker 1 That’s interesting. Now, NYU did certain dealers last year.

6:40 Speaker 2 Correct, Yes, and they weren’t quite as lucky. They did a deal in Long Island City and in labs they did a deal at Cure, So there scientists will have to walk a little bit, but it’s you. It’s still great, great space for them to operate in.

6:55 Speaker 1 Speaking about Long Island City, most of the lab projects have been in Manhattan, and I think there’s one of us on Brooklyn. But what’s happened to the opportunities in Low Island City in this business?

7:07 Speaker 2 So if you need space Long Island for a lab user, and maybe you’re a young company with not great credit and not a lot of resources, it’s a great place because the rents are thirty to fifty percent less than Manhattan prices, the accessibility with the transit as great as you know all throughout New York that’s the case. So

7:28 it offers a different type of product than Manhattan. So that’s that’s very helpful for the ecosystem here.

7:34 Speaker 1 Now, what is the current rents today for lab science?

7:37 Speaker 2 So it depends on this condition of the space. But in Long Island City you can be anywhere from sixty dollars to ninety dollars per square foot triple net. And then in Manhattan you’re going to look at one hundred and ten to two hundred and thirty dollars per foot triple net.

7:50 Speaker 1 Okay, last year I think was ninety eight dollars, so you expect it to go by twenty percent.

7:55 Speaker 2 No, so those are a specific That one hundred and twenty was specific to a certain buildings. So on average, I don’t expect the rents to go up in the in the next year.

8:05 Speaker 1 Do you see foreign investors coming to invest in life science here?

8:11 Speaker 2 I think they’re always looking at it. So the answer there is yes, and there’s a handful that focus on it. It’s a very specialty type of item, so the the interest is, you know, you have to really develop an expertise to start investing in there. So it’s it’s not as widespread as the office.

8:29 Speaker 1 Now. New Jersey was once a leading farma place. Has the farma industry from New Jersey come to New York.

8:37 Speaker 2 To some extent? It has it more often went to And I can name, you know, three or four senior executives from Pig Pharma who are no longer in Jersey, but most likely and more often they’re either in San Francisco or Boston.

8:54 Speaker 1 So those are the leading spaces.

8:56 Speaker 2 Yeah, those markets are the most robust. But New York is come a long way, and you know we still have a long way to go though, clearly.

9:04 Speaker 1 So what major projects do you see taking place in twenty twenty four and twenty five.

9:10 Speaker 2 It’s called the leasing up the buildings that were already that are already built and sitting there waiting for the ten work.

9:14 Speaker 1 It’s the vacancy right then, Oh.

9:16 Speaker 2 It’s it’s depending on how you define it, it’s twenty five thirty percent overall, it’s a it’s a big number.

9:22 Speaker 1 That’s significantly higher for the life science of the period. So I think life science is alive. It’s going to continue. And I’d like to thank Bill Hartman for being here today. Thanks Mike