Robert Khodadadian – Commercial Observer

The life sciences development boom in New York City picked up steam in 2022 as the real estate market is pulling out of the pandemic slump, and the city’s capacity for further expansion of labs and incubators is significant. Less than 4 percent of NYC office space — about 1.9 million square feet — is currently developed for life sciences use, and deals are rapidly filling the pipeline. Life sciences inventory is projected to more than double — to 4.64 million square feet — by 2025.

The percentage of life sciences space that is leased is growing rapidly, reaching 433,000 square feet in 2021, nearly triple the level of the year before, and occupancy rates have jumped from the low teens to nearly 50 percent this year.

In 2021, life sciences venture capital and National Institutes of Health (NIH) funding both reached all-time highs in NYC, at $1.39 billion and $2.76 billion, respectively.

Even with the pace of development, New York City is still behind well-known hubs such as the San Francisco Bay Area, Boston and the North Carolina Research Triangle. But a confluence of circumstances, combined with significant public and private investment, has put NYC on the life sciences map.

All the assets

New York City is a hot spot for life sciences development because it has the assets the industry is looking for — universities with strong research programs, highly skilled professionals, hospitals, public transit and a diverse labor pool. It also has another key asset — a resident population of venture capital and private equity funders looking for investments. The increase in use of artificial intelligence in diagnostics couples well with the innovation that can be achieved in New York City. The early-stages companies are interested in having a presence and are looking for a location where they can thrive.

On the physical inventory side, the city has millions of square feet of space ripe for redevelopment that is suitable for life sciences purposes. Don’t think classy, glassy high-rise office buildings. Think warehouses, because life sciences companies have unique needs such as 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, and not every building can be retrofitted. Don’t count out multifloor buildings, either. The development boom has given rise to more architectural and engineering advances. The research spaces and laboratories are becoming more prominent in high-rise buildings as well.

Many other elements come into play that help determine the best course for redeveloping a building for life sciences use, 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 sciences companies need specific skill sets among employees for the development of drugs or medical devices, or for digital IT. NYC is surrounded by colleges and universities that have the talent.
Life sciences companies need to identify to real estate investors what is involved and what is necessary to operate a life sciences enterprise.
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.

High costs and incentives

As a result of the specialized physical needs of life sciences companies, the buildout allowance costs are significantly higher for life sciences uses than for typical office uses. While a typical buildout allowance for an office may be around $400 per square foot, buildout costs for life sciences space can be more than three times that amount. Enticing venture capital and private equity funders to make those investments requires assurance that the tenant companies will perform well enough to provide a healthy ROI.

While it takes a significant amount of money to convert a building for life sciences use, the costs can be offset by tax benefits such as bonus depreciation and deductions. Certain capital-intensive costs such as qualified improvements may be eligible for an immediate tax deduction via bonus depreciation. Bonus depreciation is a tax incentive that allows developers of qualified property to immediately deduct a portion of the qualified property’s cost. This immediate deduction can result in significant tax savings. Qualified property is defined as property with a recovery period of 20 years or less and includes construction, renovations and acquisitions. Bonus depreciation for applicable assets is set at 80 percent if the property is placed in service in 2023 and is scheduled to gradually decrease in the coming years. There are avenues to achieve higher deductions by utilizing proper and timely tax planning related to depreciation of assets.

Additionally, there may be some assets such as the HVAC equipment, which is a large expense for any building, that may not be adequate for a life sciences building and thus would need to be abandoned. The abandonment of such assets, however, brings an additional deduction for the property owner, for the total value of abandonment.

Benefits specific to NYC

Through the LifeSci NYC initiative, New York City’s Economic Development Corporation (EDC) offers sources of money such as direct corporate investment, R&D investments, private equity, and federal disbursements from, for instance, the National Institutes of Health.

In 2021, the city’s investment in life sciences development, which began in 2016 at $500 million, was doubled to $1 billion through LifeSci NYC. In August 2022, the EDC announced that City College of New York will receive $15 million, while Mount Sinai Health System will receive an $11.6 million grant.

Additionally, NYC is investing in new wet lab space, while making available existing spaces for early-stage companies. The city has already participated in bringing new state-of-the-art life sciences spaces online, including:

Launching BioLABS@NYULangone, with 50,000 square feet of renovated and fully equipped laboratory and office space.
Partnering with King Street Properties to build Innolabs, a 260,000-square-foot life sciences building in Long Island City.
Announcing a $50 million investment in BioBAT to expand the existing 250,000-square-foot space for additional life sciences use.
Partnering with Deerfield Management to redevelop a 12-story building in Manhattan’s Flatiron District into a life sciences campus called CURE to provide office space, wet labs and programming to support startups.

The city has opened or announced the opening of 1.7 million square feet of space to date and anticipates bringing 10 million square feet of wet lab space online over the next 10 to 15 years.

Additional incentives are offered by the New York City Industrial Development Agency (NYCIDA). NYCIDA aims to lower the cost of capital investment to increase business growth. The NYCIDA has a specific life sciences program dedicated to incentivizing life sciences companies and developers of related spaces through multiple tax benefits, including:

Real estate tax reductions: Land and building taxes may be abated for a term determined by NYCIDA necessary to incentivize the development of life sciences space. A phase-out of the benefit begins four years prior to the last year of the term and increases by 20 percent until the taxes are increased to the full amounts.
Mortgage recording tax reduction: Mortgage recording tax relating to the project’s financing may be reduced.
Sales tax exemptions: The 8.875 percent sales tax on materials used to construct, renovate or equip facilities may be waived.

 

These benefits are available to companies seeking to enter into long-term lease agreements and planning to construct or renovate space for their own operations or to lease to third parties.

Role of venture capital

The biggest source of private funding for life sciences companies is venture capital, with $1.39 billion invested in 2021. The need for life sciences research and new products is great, as the nation has seen during the past three years with the COVID-19 pandemic. But the products coming out of life sciences labs are not just pharmaceuticals and vaccines. That Impossible Burger you chowed down on at lunch came out of a life sciences lab. If that doesn’t sound appetizing, consider that Impossible Foods Inc., the company that developed the Impossible Burger, has raised more than $1.3 billion in funding.

While most of the companies filling the lab spaces and incubators being developed in NYC are considerably smaller, it’s a fair bet some of them will become household words. The convenience of having multiple life sciences companies in one building will yield to collaboration, which will bring better results. The role that NYC and its growing life sciences ecosystem play in their success will help build the city’s emerging identity as a major life sciences hub.

The life sciences development boom in New York City picked up steam in 2022 as the real estate market is pulling out of the pandemic slump, and the city’s capacity for further expansion of labs and incubators is significant. Less than 4 percent of NYC office space — about 1.9 million square feet — isRead MoreChannel, life sciences, More, BioLabs@NYULangone, City College of New York, Economic Development Corporation, King Street Properties, LifeSci NYC, Mount Sinai Health System, National Institutes of Health, NYCIDA  Commercial Observer Read More 

Robert Khodadadian has long had a simple philosophy about selling real estate. The way he sees it, there are approximately a million buildings in the city, and the broker that gets to sell any one among the multitude that will hit the auctioning block at a given moment is, sometimes, simply the person who happens to pitch their services to the right seller at the right time.

Robert Khodadadian, properties, ground leases, ground lease, off market, investment sales, khodadadian, Commercial Real Estate Sales, Commercial Observer, Retail For Lease, Commercial Observer,

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