As the life sciences industry works to solve the greatest public health disruption in a generation, it is also helping to reinvigorate the New York real estate market. Public and private investment is flowing into building an ecosystem to make New York – already strong in the sector – one of America’s premier life sciences hubs.
Many challenges face this reinvention of New York’s real estate industry, including physical barriers, such as the difficulty of retrofitting buildings to accommodate the unique needs of life sciences enterprises. Other challenges are fiscal. But tax and other incentives – financial, economic and even societal – can offset some of the challenges and make entering the field a smart investment for the right real estate owners and developers.
The opportunities presented by the life sciences industry were explored during a recent Marks Paneth virtual seminar, “How Life Sciences Can Drive New York’s Real Estate Reinvention,” hosted by Neil Sonenberg and Michael Siino, Co-Partners-in-Charge of the Marks Paneth Real Estate practice.
There is an optimism spreading throughout the New York City business environment, Sonenberg said in opening the seminar, with the real estate industry supporting that optimism.
Nowhere is this more apparent than in the partnership between real estate and the life sciences industry, which is opening new avenues for investment into New York.
Sonenberg noted that public and private investments is creating a “renaissance in making New York a premiere hosting hub of the life sciences.”
New York City and Its Life Science Opportunities
The life sciences industry has been a growing force in New York real estate for some time, and there have been notable real estate and life science projects and tenants on the books, particularly since public investment increased in 2016.
New York is a geographically enviable area given its proximity to the services, transportation, educated workforce and facilities needed for life sciences’ vital work.
Location is still key. Even within New York, certain areas are suited for different purposes.
Andrea Himmel points to a “cluster effect” in which life science tenants attract like-minded industry innovators, either within an area of the city or even within a single building.
Karen Heidelberger notes that life sciences entities are drawn to academia and research institutions. “It’s really important that scientists are close to their educational labs as well as connected to their start-up companies” that emerge from these institutions, she said. “Being in far regions makes it somewhat difficult.”
Beyond academia, the advantage of being within the heart of the nation’s financial capital draws life sciences companies to New York. Everybody wants to be close to the investors, and Manhattan is where banks and private investors are.
Heidelberger and Himmel both believe New York will soon rival Boston as a life science hub, mostly because the talent is here, as is access to capital. However, they believe a challenge looms in that there is too much money chasing a small asset class, and deal flow may be hampered by competition.
Himmel noted that New York is seeing a record number of venture capital funding for life science start-ups, supporting the argument that for real estate development in life sciences to flourish, attention must be paid to the entrepreneurs driving life science and tech start-ups, beyond the traditionally large players. For instance, in recent history, most important pharmaceutical breakthroughs have occurred at the start-up company level, she said.
A Worthy but Pricey Investment
While the field is growing, the initial investment in life sciences facilities can be daunting. New construction or a build-out to accommodate the specific requirements for life sciences is very expensive.
However, significant tax and investment credits are available to help the committed owner/investor to offset costs involved in repurposing buildings for use as labs, incubators and other space. These large investments of capital enable investors to access benefits such as bonus depreciation that become available when massive improvements are made to existing buildings. Added to that, Shneyder said, is the build-from-scratch model. In these cases, a cost segregation study can help yield accelerated tax deductions by having engineers “take apart” the building to its components.
“I’ve been working with many real estate investors entering the life sciences sector. It’s a very exciting and a new opportunity for many,” Shneyder says. “There is accelerated depreciation available on assets such as equipment and others, which can ultimately provide savings opportunities in terms of tax deductions.”
Tax benefits for life sciences projects can accrue to shareholders/members at all points on the spectrum, including owners, developers and tenants.
Many other elements come into play that help determine the best course for a real estate repurposing, including:
- The right contractors must be involved. It is vital to have skilled and experienced professionals at the outset of planning.
- The ability to build flexible structures and modular design is imperative. This is especially true when dealing with incubators.
- Life science companies need specific skill sets for the development of drugs, or medical devices, or of digital IT. They need real estate companies to understand how a life science enterprise operates. It is common to see early-stage companies built by academics who don’t understand the business side.
- Incubator companies need advisory services like valuation or access to experts. The idea is to surround the small scale with the big. Innovation from small companies is what drives investment from big firms.
Heidelberger pointed to her firm’s building project known as CURE. Its goal is to bring together healthcare and life science companies of different sizes, maturities and specialties to benefit from each other. “Fostering an ecosystem where both large and small companies learn and innovate together is invaluable,” Heidelberger says.
For both Heidelberger’s CURE. building and Himmel’s life-science focused buildings, the need for graduation space for growing start-ups is another consideration. With space in New York at a premium, that makes room to grow – as well as flex and modular space – key. Flex space also helps reduce the risk of shorter-term leases, making it possible to reframe space for different tenants.
Both believe that adequate space is paramount, but that beyond the pure square footage requirements, there is the need for usable space specific to the industry. That means sufficient floor strength, expanded landings, high ceilings, interstitial space for mechanical and much more. It means freight handling, and all fresh air HVAC systems for labs. These conversion costs can be very high.
Shneyder says that advance planning and consideration in how assets are presented to uncover tax positions and yield deductions is critical to making the process more affordable from the tax stance and financially worthwhile.
Institutional investors provide mortgages, but restrictive financial covenants can be onerous and potentially dangerous to a project long term. Incorporating a professional accounting review as part of the planning process can help uncover the best course of action for everyone involved. “Working with the lender on financial covenants might ultimately save you some money in the long run and will yield the right approach, making it a little more beneficial for your investors as well,” Shneyder adds.
In planning, Heidelberger noted that not every building can be retrofitted. Deerfield Management searched for more than three years before finding the right building, then invested a year-and-a-half into reconstructing.
“A dedicated life science building cannot be fitted to just any build,” she says. On a larger scale, building out a full life sciences ecosystem in New York also requires serious financial investment, and public funding is critical for creating the environment to build the sector.
Outside Funding Spurs Life Sciences Real Estate Advancement
Investments from Economic Development Centers (EDCs) and other sources have proved critical to the growth in New York’s life sciences landscape.
“New York is very committed to growing its Life Science industry, so the EDC has committed $1 billion to help tenants thrive,” Himmel says. The EDC’s LifeSci NYC initiative earmarked $1 billion to build appropriate infrastructure, additional workspace, and a diverse pipeline of talent. Heidelberger points out that the city’s diversity is a key driver in making New York a pivotal area for bringing together the right people and research to innovate and develop treatments for cures.
Additional sources of money include direct corporate investment, R&D investments, private equity, and state and federal funding from, for instance, the National Institutes of Health as well as a $500 million investment from New York state. These are enabling the real estate and life science industries to offset some of these build-out challenges.
The ideal is to connect this industry through better or renewed use of space. The connection is fueled by the pipeline of products and services from growing start-ups; as well as the pipeline of talent that is so drawn to New York City. All the speakers agreed that there is a huge upside in the connection of R&D and industry because, as Himmel pointed out, taking just the example of pharmaceuticals, there are hundreds of untreated diseases that need attention that represent opportunities for investment growth. Drug evaluation and research will drive R&D to unlock growth in life sciences that in turn shortens time to market. A cycle is created that benefits all participants from inventees to investors, to real estate firms, landlords and tenants, and, of course, to all of us whose lives are made better through continuous discovery and innovation that is provided by the life science industry.
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