Inside Life Science Real Estate: 10 Questions with Experienced Lab Space Owner and Developer, Jay Atkinson
Developing and operating life science real estate requires a different approach than traditional commercial real estate. From specialized building systems and laboratory infrastructure to the needs of early-stage biotech companies, successful lab space demands a deeper understanding of both the building and the science happening inside it.
To get an owner and developer’s perspective on the market, Labspace Directory spoke with Jay Atkinson, Founder & Managing Principal of Paceline Investors about what makes life science real estate different, how tenant needs have evolved, what early-stage companies are looking for in their lab space, and where the life science landlord model may be headed next.
1. Why did Paceline Investors choose to enter the life science development business?
We entered the life science development business as an extension of our work with Research & Development (R&D) buildings and tenants throughout the San Francisco Bay Area.
We found that R&D and life science buildings require a deeper understanding of building systems and tenant needs than more commodity-oriented real estate. That complexity creates an opportunity for a thoughtful property owner or developer to differentiate itself by understanding both the physical requirements of the building and the operational needs of its tenants.
2. Who is your typical life science tenant, and what stage of growth are they in?
While we work with large-scale companies, our most typical tenant is a recently funded startup ranging from seed funding through a Series B venture round.
Companies at this stage can particularly benefit from an experienced, thoughtful property owner who understands their industry, recognizes the complexities of laboratory building systems, and has a project team with robust experience in both lab build-outs and operations.
3. Is there a typical lab build-out you provide for tenants?
Yes and no. Every building is different, both physically and locationally, but we do have programmatic goals that we aim to deliver, particularly in our ready-for-occupancy suites, based on positive market and tenant feedback.
In multi-tenant lab buildings, we look to create a variety of suite sizes that can accommodate companies at different stages of growth. Within each suite, we aim to provide one fume hood for every 5,000 rentable square feet, along with movable lab benches and ceiling-mounted power lines that allow for flexible laboratory configurations.
We also incorporate a mix of open and finished ceilings and thoughtfully designed office space. Each lab building includes a backup generator, redundant mechanical capacity, and upgraded power.
The objective is to provide infrastructure that supports laboratory operations while giving growing companies the flexibility to configure their space around their specific scientific needs.
4. What criteria do you use when evaluating prospective life science tenants?
For prospective tenants, we evaluate the management team and its background, along with the company’s proposed scientific and commercial goals.
We also need to understand the company’s financial backstop relative to the investment we are making in its physical space. Life science build-outs can require significant landlord investment, so evaluating both the organization and its ability to support its real estate commitments is an important part of the process.
5. Have companies successfully graduated from your life science incubator into dedicated lab space?
Yes. We have successfully migrated groups that began operations at our life science incubator, Bad Ass Laboratories (BAL), into their own dedicated spaces as they achieved greater organizational maturity and success.
We also have a symbiotic relationship with the incubator. BAL can provide a transitional home for companies while we build out their future spaces, allowing them to continue operating during the construction process.
One advantage of BAL’s business model is that it is incorporated as a nonprofit focused on creating physical homes for new scientific ideas without the pressure of a predetermined term or an incubator taking equity or warrants in the venture.
That creates a pathway in which an early-stage company can begin in a shared life science environment and transition into dedicated laboratory space as its needs evolve.
6. How has demand for lab space changed since before the pandemic?
During the pandemic and the corresponding lower-interest-rate environment, the lab space market experienced a significant increase in demand as venture capital was attracted by the promise of scientific and commercial business plans and potential breakthroughs.
The innovations and breakthroughs behind that investment are real and substantive. However, the higher and escalating interest-rate environment of 2022 and 2023 placed greater pressure on business plans to demonstrate scalable success.
That has been harder for many companies to achieve, but the underlying scientific discovery and innovation remain real, significant, and promising.
7. How does Paceline Investors differentiate its life science property portfolio from the competition?
The capital investment decisions we make across our portfolio have typically resulted in more significant investment in building systems and system redundancy.
For a life science tenant, those investments can be particularly important. Reliable infrastructure helps protect intellectual property and provides greater confidence that a building’s operational capabilities will not limit a company’s scientific endeavors.
Rather than viewing laboratory infrastructure simply as a building requirement, we see it as an important component of supporting the tenant’s underlying work.
8. Do you require or take equity in the life science companies you lease to?
No. We have made a conscious decision not to take equity in our tenants because of concerns about diluting their incentives and creating potential conflicts of interest.
For many of these companies, we would love to have an equity position given the work they are pursuing, but we have deliberately chosen not to structure our landlord-tenant relationships that way.
9. How are artificial intelligence and automation influencing the life science industry?
At this point, artificial intelligence and physical automation appear to be manifesting themselves in two different but substantive ways.
First, biological research is increasingly flowing through the prism of machine learning, where variables involving DNA structure and compounds can be evaluated iteratively through the computational power of a machine - faster and more robustly than a human being could evaluate them independently.
Second, lab research and therapeutic production are being evaluated for potential automation as a way to streamline the time required for certain processes and create more consistent outputs.
These impacts are still in a nascent stage, but they appear promising and significant.
10. How do you expect the life science landlord business to evolve?
Cyclically, it appears that the life science landlord business will revert to a smaller population of developers and owners actively engaged in the sector compared with the spike in participation during the work-from-home environment, when traditional office buildings became less populated and valuable. At the same time, we expect the model of landlords contributing more capital upfront to create ready-for-occupancy or quicker-occupancy lab space to continue. When life science companies successfully raise their desired investment capital, they often do not want to wait eight to twelve months for their future home to be completed. They are looking for faster occupancy so they can move forward with their business plans. For landlords and developers, that means the ability to provide thoughtfully designed, well-equipped laboratory space on a shorter timeline may continue to be an important differentiator.
Key Takeaways
Atkinson’s perspective highlights an important distinction between life science real estate and more traditional commercial property: providing lab space requires more than simply providing square footage.
For property owners and developers, succeeding in the sector requires an understanding of the specialized infrastructure laboratories depend on, the financial and operational realities facing life science companies, and how those requirements evolve as organizations grow.
For tenants, the right lab space can provide more than a physical home. The right combination of infrastructure, flexibility, operational reliability, and an experienced property team can help create an environment that supports a company as its science and business evolve.