Subleasing helps solve lab space shortage

By BOB MOONEY
Teutsch Partners

How is the growing Seattle biotechnology community coping with the lack of laboratory space in the area? Everyone from start-up biotech companies to established research centers are looking for alternative solutions.

Most new business enterprises can lease office or warehouse space and be relatively flexible in meeting their specific space needs. Start-up biotechnology companies must either spend significant amounts of their coveted capital to construct laboratory facilities or compete with well financed, growing organizations like the University of Washington or Immunex Corp. for what little laboratory space becomes available.

However, there is virtually no vacant, high quality laboratory space available right now.

Two recently purchased facilities and one facility currently under construction are the only near-term options: Alexandria Real Estate Equities, a real estate investment trust (REIT) specializing in acquiring laboratory facilities for lease, purchased the former Fred Hutchinson Cancer Research's building on First Hill in 1996 and recently acquired Bristol-Myers Squibb's former research buildings in Seattle. The Virginia Mason Research Center is in the midst of constructing a new state-of-the-art laboratory facility at 9th and Seneca, known as the Benaroya Research Center at Virginia Mason.

All three buildings are currently marketing laboratory space for lease in the near future; however, the space is not currently available.

The other option is for start-ups to have sufficient initial financing to construct lab facilities. This is where venture capital comes in. There is stiff competition for start-up biotechnology companies looking to obtain financing. Hot new technology companies have a much greater chance of being financed if they can work with less capital.

Even though the Seattle area stable of venture capitalists is growing, competition for those funds extends beyond the Puget Sound region. Local scientists are competing on an international level for funding. The mega-financing of new companies like Corixa Corp. or Rosetta Inpharmatics with $15 million to $25 million are far and few between. Historically, there is only one of these every few years. This creates limited opportunities for smaller start-ups and a unique atmosphere for well-financed, mid-sized, growing companies.

One of the most limiting factors for starting a new biotechnology research company is the cost of constructing a laboratory facility. Quality laboratory space (BL-2 type) construction runs approximately $175 to $250 per square foot compared with $25 to $30 per square foot for office space.

The higher costs are the result of mechanical and electrical requirements, which can account for as much as 60 percent of the tenant improvement costs. Laboratory researchers require components such as tissue culture labs, molecular biology labs, equipment rooms, freezer space, hot rooms, cold rooms, vivaria, back-up emergency power, glass wash/autoclave and office space which typically total at least 20,000 square feet.

This alone costs a new company approximately $4 million; salaries and equipment are additional costs. Most start-ups are financed with funding between $2 million and $5 million and can only afford to rent a small amount of bench space for a staff of five to 10 people. Thus, they cannot afford to construct these needed components.

Laboratory space that does become available typically leases for over $40 per square foot, including utilities. This creates an excellent opportunity for the well-financed research organizations that can leverage their position by constructing additional lab space.

Constructing larger facilities provides economies of scale, reducing the cost on a per square foot basis. The significant demand for existing laboratory facilities virtually removes the risk of carrying vacant space and allows the company to plan for future long-term expansion, again at a lower overall cost per square foot.

An excellent example of this scenario is the Benaroya Research Institute at Virginia Mason being developed by Teutsch Partners. This is the only speculative laboratory project to be developed in the greater Seattle area and probably a marks new trend.

The Virginia Mason Research Center (VMRC) opted to take advantage of this market situation by building two additional floors of lab space beyond what VMRC needs for itself. This provides VMRC with several benefits: First, it reduces the overall cost of the project per square foot. Second, the costs to VMRC are reduced because of the high demand for available laboratory space. Third, it provides VMRC with long-term expansion options in 15 to 20 years. These benefits have allowed the not-for-profit VMRC to build more space than it would normally have been able to afford.

There is so much competition for laboratory space in the Seattle area, that some mid-size and larger biotech companies are quietly discovering the advantages to subleasing their laboratory space.

The benefits go beyond just rent and reduced costs. Savvy biotechs understand the extreme difficulty start-ups have obtaining laboratory facilities and thus leverage the demand for bench space to gain technology.

Two local companies have leased space within their labs to other firms in exchange for gaining technology which is complementary to their own research. That young companies are willing to give up some of their technology to get lab space indicates how badly the space is needed.

There are pluses and minuses to leasing out lab facilities. Confidentiality of new ideas and/or existing research is an obvious concern. Many research companies do not allow outsiders within their lab. Cross contamination of scientific experiments is another potential detriment. However, proper controls and design of mechanical equipment in addition to regimented control of laboratory practices can help.

For many successful biotechnology companies, the rent from leasing lab space alone would not provide enough incentive in comparison to the typical "burn rate" and cash requirements to build labs. Successful companies covet their cash. However if they can gain technology in exchange, it's a huge win.

Copyright © 1998 Seattle Daily Journal of Commerce.