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Podcast: Life Sciences Real Estate Market Trends: Conversation with Joe Marconi, Bain Capital Real Estate 


Time to Listen: 27:58 Practices: Real Estate Investments & Transactions

In this Ropes & Gray podcast, real estate partner Rich Gordet and associate Tom Wechsler discuss current and future trends in the life sciences real estate market with Joe Marconi, a managing director at Bain Capital Real Estate. In the interview, Joe shares his views on life sciences real estate demand drivers, the state of the life sciences market, potential downside risks and other topics. 

Life Sciences Real Estate Podcast


Tom WeschlerTom Wechsler: Hi everyone, and thank you for joining us on this Ropes & Gray podcast. I'm Tom Wechsler, a real estate senior associate based in New York. And I'm here with Rich Gordet, a real estate partner based in Boston. Rich and I are very excited for today's discussion of current trends in the life sciences real estate market. We are joined today by Joe Marconi, managing director at Bain Capital Real Estate. Joe has extensive experience in sourcing and underwriting life sciences real estate investments at all stages of development as well as stabilized assets. This podcast is being released as part of the Ropes & Gray real estate practice report and associated webinar released on June 29, 2021 discussing the evolution of global real estate investment in life sciences. With that brief introduction, I hope everyone enjoys today's conversation, and I will hand the conversation to Rich. 

Richard GordetRich Gordet: Greatthanks, Tom. And thank you, Joe, for joining us for this conversation. Let's kick it off with a question on what are the current demand drivers for life sciences real estate? 

Joe MarconiJoe Marconi: Greatthanks, Tom and Rich, for having me. It's exciting to talk about the life science space that we've been in. On your question, Rich, current demand drivers, both the pace of scientific discovery and the level of funding for life science companies are at an all-time high. The success of the life science industry during the pandemic has further ignited support for the life science companies and their related discoveries. The pandemic shined a bright light per se on the importance of life sciences and the related companies really for the survival of our country and even the world. VC funding alone has grown at about 25% over the last five years, and this has led to increased scientific discoveries and the pace being faster than they've ever been before. The ability to produce at least three vaccines for the COVID virus in less than a year is truly an amazing feat and demonstrates the progress that the industry is making in discovery. It also shows the FDA and the associated approval process is becoming more efficient and can react quickly when needed. 

Rich Gordet: When you say funding, Joe, do you mean private funding for these companies, or are you also focused on government funding? 

Joe Marconi: I would say the funding sources include venture capital, private equity, as well as the government funding and NIH-type grants as well as pharmaceutical companies and their own internal R&D or partnering with startup entrepreneurial-type scientists and companies. 

Rich Gordet: Great. With respect to R&D, do you see a shift from the larger pharmaceutical company R&D being predominant to smaller distributed emerging company R&D? 

Joe Marconi: Yes, and I think that this is really where the magic started happening20 years ago, there was really only one modality for drug discovery, which is chemistry and chemistry-based drugs. It was easier for these large pharmaceutical companies to create large R&D labs in secure locations where they would mix chemicals looking for new cures for whatever may be out there. The big technological advances that were happening and the first one that really changed the game was when we mapped the genome, and this was able to really advance the next modality, which was biologicswhich was antibodies and hormones. And that really completely changed the game. This took the science to a cellular level and really increased the specialization that was required by scientists to perform the discovery. What this did was it pivoted how drugs and therapies were being created from internal R&D processes at these large pharmaceutical companies to the top knowledge clusters around the country and the world, such as the Cambridges and San Franciscos, where all of this science was happening at the universities and at the hospitals by these scientists who were very focused in these discrete therapies and modalities. Therefore, the pharmaceutical companies had to shift part of their focus from internally to trying to access this talent that was working on this. This also allowed really private equity and venture capital to come into the game and start to fund these early-stage companies in the higher-risk part of the discovery process. And then allowed the pharmaceutical companies and the biotech companies to focus on really where their strength is, which is the commercialization side of the business, and come in and either acquire a partnership with these specialized companies as they got further along in the approval process and got closer to commercialization, where they could see the true size of the target market. Now, fast forward into the last five yearsmore modalities have emerged, including cell and gene therapy, and CRISPR and mRNA, all these new ways to deliver and create drugs, which, we're now moving into six to ten levels of modality and has just started to impact the need for real estate and the advancements in those science. 

Rich Gordet: Great. Given this shift maybe from the big pharma R&D and these new modalities and then how that's developing too, with even more new modalities, is it useful to think about the life sciences sectors or the asset class by categorizing the investing into different subsectors? 

Joe Marconi: We tend to think more along the lines of where the company is along their discovery process and bucket those companies or tenants into cohorts, because that discovery process really defines on how the space is being used and where the space needs to be. And so where we spend the majority of our focus is in what I call the "basic research," which is these locations that are close to the center of the clusterto these knowledge centerswhere the discovery is happening, their higher level of wet lab space, but they may not be as large of a footprint. The tenant company may only need 10,000, 15,000, 20,000 square feet, not 100,000, 200,000 feet. 

The second in the cohort, or if you want to call it the “subsector,” is as those companies get to the size and focus of the commercialization side of the business, which generally has a larger footprinta larger component of officethe employee base is not as highly focused on the science and discovery side, it's a broader employee base. So these factors impact the way they think about space and location, and it's less dependent on where the heart of the cluster and the density and the knowledge center is, but more about there's a cost function that comes into play and the availability of where this broader employee base may be located. 

The third classification that we've focused and think about is the manufacturing side of the business, and this also touches, really, both of the other processes. There's a piece of manufacturing that's important in that early basic research and discovery stage, as well as obviously when we get to the commercialization. But that is much more, as you would think, it looks and feels like a manufacturing plant, but there's clean rooms. It feels more warehouse-y in the way that it looks, but there’s certain segments within that manufacturing that needs to be closer to the R&D, that's the earlier stage part of the manufacturing process. And then the other piece of that cohort is, again, larger in scale and also looking for some price efficiency, and so that may be further out from the cluster, or in some cases doesn't even need to be around the cluster, but needs to be in a high-power, lower-cost-of-occupancy location. 

Rich Gordet: Given all the focus, and obviously there's lots of attention and focus on life sciences real estate, and clearly the past year with the pandemic has focused a very bright and positive light on this asset class, but like all things, what do you see as the downside risk of life sciences real estate? As I said, with all things, it's hard to believe there can always be an upside forever. 

Joe Marconi: Sure. You'd love to think that, but the industry obviously is probably more efficient than people give it credit to sometimes. So we're always thinking about a demand shock. If I look at where the science is, where discovery is, the supply out there, there's not enough supply for demand. So I really try to focus more on demand shocks that may impact the growth of the sector. If governmental risk comes into play here, drug prices are changed due to a strike of the pen in Washington, it may create less attractive returns for venture capital, and so the level of funding and support behind these early-stage companies starts to disappear and slows down the growth of the industry. I personally believe that doesn't stop the growth—it’s more of a pause because the pharmaceutical companies and the biotech companies, more than half of their pipeline now is being focused on what's going to be coming out of these small startup companies. And if the VCs aren't there to fund them and create the growth, somebody's going to have to do it or the pharmaceutical companies are going to have problems. So there's a high likelihood that they will step down the risk factor and actually fund earlier stage in these companies so that they can continue to feed the pipeline of drugs and therapies that they have. And they've taken that level of risk as they did 20 years ago when they did everything internally. 

I think that the life science industry is different than a lot of the other companies, and I say “tenants,” in this startup world. There's the larger portion of the entrepreneurs are scientists, and their primary drivers in life is to cure cancer or cure the next big thing—it’s not necessarily to create the next unicorn. So whether the valuations and the growth of these companies allow for unicorn-type status or whether they allow for something much smaller than that, they're going to keep doing what they got in the business to do, and that's find cures. And that's unique because the underlying driver of their desire to find those cures, supported by the secular aging of America and the advances in technology is going to keep the pump primed. It's just all about who will be the funding source to create that growth, whether that's the pharmaceutical companies, venture capital, or government in general. The other potential risk out there from a demand shock is, "Do we have enough employees that fit the profile of the scientists to grow these companies?" That's always going to be a question. There's a big portion of that will be served through immigration, and as well as obviously through some of the great universities here in the country. 

Rich Gordet: You mentioned the tech industry and industries that are other entrepreneurial-type industries. Have you yet seen in the development of the life sciences industry that same kind of turnover of companies in comparison to tech? 

Joe Marconi: Again, it's a little different than the tech world. The growth of a tech company and their success can be seen quite quickly, where in the life science world and the industry, it takes several years to develop therapies and develop drugs, and these venture capital companies, private equity companies understand that. And so funding rounds have grown and to support these companies along this five- to seven-year or longer process of discovery, and so they're clearly stickier tenants. There's a lot of infrastructure that goes into their space, and so the turnover rate is not nearly as great as you would see in the tech world or in other companies. We're obviously quite early in this growth, but that's where we are today. 

Rich Gordet: Speaking of growth, there's clearly been a lot of growth in the industry, and you mentioned that there's not enough supply for the tenants and users out there who are looking for space. Is the real estate industry creating an oversupply five years down the road because we're building based on the demand drivers of today? And as you said, the modalities and the science is evolving at such a rapid rate—are we also not able to look into the crystal ball far enough to see what the real need for space is down the road? 

Joe Marconi: When you get that crystal ball shined up, Richlove to take a look in thereclearly that risk exists. The real estate industry has a history of overreacting to demand—that clearly is going to be there. Quite honestly, it's why we focus incredibly intently on location and where those tenants want to be, where those companies want to be, and not just in a big, broad, macro sense. One of the mitigating factors to this is that we are very early in the discovery phase, in this new modality world. If you think about the tech world in the early or late '80s or late '90s or so, when advancements started moving along what they called the Moore's Law, an exponential curvethis is happening in the life science world at even a faster pace. In 2001, sequencing of a genome cost nearly $100 million. In just six years, that dropped to under $10 million. And over that next seven years, it's dropped to less than $5,000. That's a meaningfully faster gain than Moore's Law would have predicted, so that just demonstrates kind of where we are. We're just hitting that exponential inflection point, and the level of science and discovery that's going to come from that is I believe more than we can imagine right now. But there will be push and pull. Some companies will fail. New discovery, new modalities will make companies in discovery stage have to either pivot or shut things down. But there's some versatility to the IP that these companies are developing, and it's why these key clusters, the Cambridges and the San Franciscos of the world, are very important, because there's so many different specialties: cancer, cardiothoracic. The IP that these scientists have discovered, if the original indication either is not working or gets superseded by some other modality, being in a cluster or a market where there's other indications and therapies, and the depth of knowledge around that allows them to pivotthat's really critical to these clusters being important. So, the risk is there. We underwrite as if it's happening tomorrow, but I look at the demand drivers and I feel like we've got good support behind us. 

Rich Gordet: You've mentioned “clusters” quite a bit, and I know it's a term of art used in the industry. Let's dive a little bit more into that, about, really what is a cluster, a life sciences cluster? What are the attributes that make up a life sciences cluster? And also, is there potential to create the new life science innovation districts outside of the established markets like Boston, Cambridge, and San Francisco? 

Joe Marconi: Clustering has benefited multiple industries out there, and the life sciences space is probably the most well-known and documented one of this. What's important to them is having a high-level of academic IP in the market—that’s universities, research institutions, hospitals, a high-level of venture capital, NIH funding where it exists already, because the infrastructure's in place to evaluate companies and move things forward down that. Markets where there's a high-level of talent existing and constantly being created—that’s PhDs, doctors, etc. And an ability to actually create the density, to create this clustering effect so that companies can collaborate with each other as well as find talent to grow as they hit certain milestones. 

The other thing that is critical, which I've mentioned in the previous question, is having multiple specialties. The broader the spectrum of diseases that have expertise in a market, the more opportunities there are for these scientists to continue to create and to continue to do what they love and find cures for the most difficult diseases in the world. There's not a lot of places like thatCambridge in Boston and San Francisco had a lot of that ecosystem in place and now have gotten a meaningful head start. And there will be others—there’s other markets out there that have a lot of these conditions. San Diego obviously has them also, and the growth is obvious down there as well. If you asked me, "Do I think there's emerging markets out there that'll be 30-40 million square feet like the Bostons and San Franciscos are?" I think it's hard to replicate these conditions that are here in this ecosystem along with the kind of head start that was there by both those cities, but that doesn't mean that these companies aren't going to have good clusters and life science industry support in there, and I think that's good for the industry. I think we need to have a broad variety of clusters around the country in lower-cost markets of the country in areas where there may be a deeper specialty. They may be clusters of three, four, five million square feet, even upwards of 10 million square feet, and I think that's great for the U.S. economy and the continued support for the innovation in this sector. So I think there will be plenty of very strong clusters. It's hard for me to see replication of a Boston or a San Francisco, or even San Diego, but there will be several of them that will be great supports for the industry in general. 

Rich Gordet: Great. Thinking about just in clusters and what's going on there, and setting aside the actual real estate for where the tenants will live, what are the other constraints on trying to grow these more maturethese existing and larger clustersand being able to continue the growth and expansion of, say, a San Francisco or a Boston Cambridge? 

Joe Marconi: One of the biggest challenges that the San Franciscos and the Bostons, and the San Diegosto somewhat of a lesser extentis the cost of living in these markets. They're expensive markets. As they continue to grow, as the clusteringeven more specifically in Boston because all of these knowledge centers are really around Kendall Square in downtown Bostonit creates a really intense clustering that drives obviously housing pricing, that drives commute issues, all of these things. Those are going to be big challenges for these mature clusters.Tto be quite honest, it's why it's a good thing to have additional clusters around the country that will emerge and be supportive of the industry, because it'll allow continued growth on the whole for the industry. And unless these big cities, mature markets can really resolve that issue, they're going to start to feel some impact from these new clusters coming and level the growth out a little bit. 

Rich Gordet: We've talked a lot about the U.S.how do you view the international life sciences real estate market? 

Joe Marconi: Our focus is primarily in the U.S., and we're following international markets to a lesser extent today, but I would say the UK is clearly the furthest along. There's a great cluster forming and an ecosystem in the London area around Cambridge and Oxford that is going to have great discovery there. China is massively focused on life science and the government obviously can help move things quicker there than in other areas, so that's going to be another area where there will be real growth and real discovery. The benefit these international clusters have is that they're going to be able to look back at the U.S. and see how these ecosystems developed, how they interact, and hopefully translate some of that to their own markets, and allow for probably faster growth than the U.S. did—just learn lessons. 

Rich Gordet: Well, that's great, Joe. Unfortunately, I think that's all the time we have for today. We really appreciate your time and sharing your thoughts on an industry that's both important for real estate investors, but perhaps even more importantly for our world today and is keeping us all healthy. 

Joe Marconi: Absolutely. Thanks again for inviting me. It's really wonderful to be part of an industry where your tenants are actually changing the world on a day-to-day basis so quickly and with such great impact. So it's a lot of fun. 

Tom Wechsler: Well, Joe, thank you so much again for joining us—we really appreciate your time and all the insight. And for our listeners, thanks again for tuning in. If you're interested in additional information on the topics we discussed today, as I mentioned earlier, our real estate Ropes & Gray group recently released a report on a lot of these topics and others called Beyond the Lab, talking about the evolution of global real estate investment in life sciencesyou can find that on our website at www.ropesgray.com. Just a reminder to everyone, you can always subscribe to our Ropes & Gray podcast series on Apple, Google, and Spotify, and other places. Thanks again to Joe and to everyone for listening today.

For more information or to contact Joe Marconi, please visit his bio on Bain Capital’s website.

BainCapital and Ropes & Gray

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