Q2-2018-BiotechReport

METRO BOSTON Q2 2018 | BIOTECH REPORT

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

ASKING RENT ($/SF)

UNDER CONSTRUCTION (SF)

3.2%

682,306

$40.57

1,260,795

1

303 Congress Street | Boston, MA 02210 | 617.457.3400 | www.NAIHunneman.com

Q2

BOSTON / SUBURBAN LAB

2018

TOTAL INVENTORY (SF) 5,773,263

TOTAL VACANT (SF)

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

155,703

2.7%

195,624

282,003

Boston

7,709,620

639,344

8.3%

66,296

248,664

Suburban

TOTAL

13,482,883

795,047

5.9%

261,930

530,667

2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 TRENDS • Biotech firms continue to cluster outside of Cambridge. This has benefited demand for space in relief valve markets like Watertown, Waltham, Bedford, and Brighton. Second quarter net absorption totaled 261,930 square feet in Boston and the suburbs combined, and vacancies declined to 5.9%. The future remains bright for life science hubs outside of Cambridge as demand for lab space far outstrips supply. While tenant preferences will remain focused on Kendall Square, the lack of space and frothy pricing will push growth out along Route 2 and the Route 128 Corridor. • Move-ins from Dana-Faber Cancer Institute at 360 Longwood Avenue (83,550 SF) and Proteostasis Therapeutics at 80 Guest Street (29,836 SF) and the completion of the fully-occupied 40 Guest Street drove much of this quarter’s absorption in the Boston lab market. In the suburbs, Aileron took occupancy at the LINX in Watertown, and Visterra relocated to 275 Second Avenue in Waltham. Such robust activity points to growing lab clusters beyond the Cambridge borders. • Massachusetts’ Metrowest region continues to expand its prominence as a life science hub. Marlborough-based CeQur is planning to grow its footprint following the acquisition of a diabetes device from Johnson & Johnson, while Alira Health is planning to double its lab space at 1 Grant Street in Natick (reaching 13,000 SF). WuXi Biologics announced plans for its first U.S. facility, which will encompass 70,000-100,000 square feet at the Worcester Biomanufacturing Park. LakePharma, Inc., Replimune, and Astellas recently announced expansion plans in this region as well. • Drug manufacturing operations are moving to suburban locales with accessibility to R&D operations in Cambridge. High costs and a non-existent inventory have led firms such as Alnylam and Moderna Therapeutics to establish manufacturing facilities in the Route 128 Corridor. In fact, Moderna will opened its 200,000-square-foot Norwood-based manufacturing facility in the third quarter of 2018. King Street Properties is throwing its hat into the ring as well. The Cambridge-based life science real estate owner purchased the former headquarters of the MetroWest Daily News on New York Avenue in Framingham. They plan to create a life science hub at the site with Replimune Group anchoring the project. Expect this trend to continue as scientists and other R&D employees desire direct access to production operations. • M&A activity remains healthy in Boston and the suburbs. Otsuka Pharmaceuticals announced plans to acquire Waltham-based Visterra for $430 million in an all-cash deal. That said, Visterra’s operations will remain in Waltham. New Jersey-based Catalent is acquiring Boston-based Juniper Pharmaceuticals, and will maintain the 7,000-square-foot Boston office at 33 Arch Street. Bio-Techne Coporation plans to acquire the Waltham-based Exosome Diagnostics for $250 million in cash as well.

Net Absorption NET ABSORPTION

100 200 300 400 500 600 700

SF (000s)

-300 -200 -100 0

2013

2014

2015

2016

2017

2018

Boston Suburbs

FUTURE SUPPLY Future Supply

55,000 SF

55,000 SF

214,910 SF 214,910 SF

Available

Leased

CONTIGUOUS BLOCKS Contiguous Blocks

1

3

2

5

18

0K SF

25K SF

50K SF

75K SF

100K SF

2

EAST CAMBRIDGE LAB

TOTAL INVENTORY (SF) 9,911,857

TOTAL VACANT (SF) 64,114

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

0.6%

400,527

385,439

East Cambridge

TRENDS • Vacancies in Cambridge’s premiere lab market are essentially zero. Although rates inched up to 0.6% in the second quarter of 2018, there is less than 65,000 square feet of vacant space in East Cambridge. As has been the trend over the last two years, any available space is quickly leased here — in many cases through off-market deals. There doesn’t seem to be any clouds in East Cambridge’s forecast. Expect tenants to struggle to find space to accommodate their growth as tight fundamentals and higher rents will continue to characterize this market in the near-term. Lease rates are still rising, with higher-end space now in the low-$90s on a per-square-foot basis. • Consistent tenant demand has supported new construction in East Cambridge. Alexandria Real Estate’s 431,500-square-foot 100 Binney Street came on line this quarter. It is currently fully-occupied. The firm’s 164,000-square-foot development at 399 Binney Street will also deliver fully-leased during the second half of 2018. Tenants are paying top dollar for this space with base rents in the low-to-mid $80/SF, and TI allowances are roughly $200/SF. An office user, Philips North America, plans to occupy 80% of the first phase of DivoWest’s Cambridge Crossing development. With the remainder of the building currently under agreement, site work has begun on a second speculative building, which is scheduled to deliver in early 2021. • Expansions are dominating the East Cambridge Submarket. Ipsen Biosciences, after acquiring drug assets from Merrimack Pharmaceuticals, renewed its 69,500 square feet at 1 Kendall Square. The firm also maintains a location at 650 East Kendall, and recently announced plans to relocate its headquarters from New Jersey to Cambridge. Surface Oncology executed a 33,529-square- foot lease expansion at 50 Hampshire Street, and Magenta Therapeutics, currently located at 50 Hampshire Street, is subleasing more than 69,000 square feet from Novartis at 100 Technology Square. • Co-working for lab users is gaining momentum. Mass Innovation Labs has expanded rapidly throughout Cambridge and Boston, and now Alexandria Real Estate Equities is getting into the game. The company is expanding its Alexandria LaunchLabs and opening a 20,000-square-foot co-working space at 1 Kendall Square in East Cambridge. This move will provide much-needed lab space for biotech startups looking to set up shop in the ultra-tight Kendall Square market. • Funding momentum is strong among East Cambridge life science companies. Magenta Therapeutics and Avrobio raised $100 million and $99 million in their initial public offerings, respectively. Several major VC investments took place during the second quarter as well. Akero Therapeutics raised $100 million in convertible debt, CAMP4 Therapeutics raised $65 million in venture funding, and Constellation Pharmaceuticals grabbed $55 million in a Series C round.

Vacancy VACANCY

10%

600

500

8%

400

300

6%

200

4%

SF (000s)

100

0

2%

-100

-200

0%

2013

2014

2015

2016

2017

2018

Net Absorption

Vacancy

CONSTRUCTION TRENDS Construction Trends

800

700

600

500

400

300 SF (000s)

200

100

0

2013

2014

2015

2016

2017

2018

2019

Leased Available

NOTABLE TRANSACTIONS Notable Transactions

Ipsen Biosciences

Sage Therapeutics Magenta Therapeutics

Surface Oncology

InVivo Therapeutics

5K SF

25K SF

45K SF

65K SF

85K SF

3

Q2

2018

NIH FUNDING PER CAPITA FY 2017

$266 to $397 $99 to $266 $56 to $99 $26 to $56 $26 or Below

TOP 6 FUNDED IN 2017

ORGANIZATION

CITY

AWARDS FUNDING (IN MILS)

Massachusetts General Hospital

Boston

812 $394.5

Brigham and Women’s Hospital

Boston

571 $390.5

Harvard Medical School

Boston

415 $213.7

Boston Children’s Hospital

Boston

345 $157.6

Univ of Massachusetts Med Sch Worcester

Worcester

332 $154.4

Dana-Farber Cancer Institute

Boston

219 $144.7

4

TOP 5 U.S. CITIES NIH FUNDING FY 2017

Top Five U.S. Cities in NIH Funding FY 2017

Boston

New York

Seattle

Philadelphia

Baltimore

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

In Bils

NIH FUNDING BY TYPE OF INSTITUTION FY 2017

NIH Funding by Type of Institution FY 2017

MASSACHUSETTS NIH FUNDING FY 2017

100%

80%

60%

MA TOTAL $2,717

40%

% of Total Funding

20%

0%

BOSTON $1,989

Boston

United States

Independent Hospitals Higher Ed Research Institutes Private Companies Non-Profit

23 YEARS BOSTON RANKED #1 FOR MOST NIH FUNDS IN A ROW

5

Q2

MID CAMBRIDGE LAB

2018

TOTAL INVENTORY (SF) 5,260,009

TOTAL VACANT (SF) 25,000

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

0.5%

3,019

22,424

Mid Cambridge

TRENDS • Positive net absorption pushed vacancies down to a paltry 0.5% in Mid Cambridge. They have declined by 380 basis points over the year. There is less than 30,000 square feet of vacant space here, and all of it is in the sublease market. Tenants looking to expand here will struggle to find space, especially given that new construction is concentrated elsewhere in Cambridge. While rent growth has slowed, asking rents remained elevated in the mid-$70/SF. Look for fundamentals to remain tight and upward pressure on lease rates in the near- term forecast. • Similarly to East Cambridge, available space is quickly snapped up in Mid Cambridge. Takeda Pharmaceuticals was successful in leasing ARIAD’s former space at 26 Landsdowne Street, which is currently under renovation. Last quarter, Beam Therapeutics inked a deal for 38,203 square feet in the building. Fulcrum Therapeutics took down 28,731 square feet recently here as well. Other major leases signed this year include Abbvie’s 42,313-square-foot expansion at 200 Sidney Street, Mersana Therapeutics’ 34,324-square-foot deal at 840 Memorial Drive and Spero Therapeutics extension and expansion at 675 Massachusetts Avenue. The sheer lack of available space in Mid Cambridge will likely limit leasing activity and absorption in the near term. • Funding momentum is strong among Mid Cambridge life science companies. In the second quarter alone, Evelo Biosciences, Scholar Rock and Neon Therapeutics raised $260 million in their second-quarter initial public offerings. Unum Therapeutics, Mersana Therapeutics and Spero Therapeutics also filed IPOs within the last 12-18 months. A handful of major VC investments took place recently as well. Most recently, Beam Therapeutics raised $65 million in a Series A round, while Casma Therapeutics raised $55 million in a Series C round. • Traditionally, a relief valve for nearby East Cambridge, Sidney Street has evolved into a top-tier lab cluster in Mid-Cambridge. Anchored by BioMed Realty’s Sidney Research Campus, this corridor is home to 1.1 million square feet of lab space. Tenants like Agios Pharmaceuticals, Blueprint Medicines, and Abbvie maintain operations along the Sidney Street corridor. As of the second quarter, there were two availabilities here totaling just below 24,000 square feet of lab space. This represents a marked change from just three years ago when vacancies were in the 30-40% range following Vertex’s relocation to the Seaport. Voyager Therapeutics also recently renewed and expanded its leases at 64 and 75 Sidney Street; highlighting the area’s desirability among tenants. • Lease rates remain near peak levels in the Mid Cambridge lab market, but observations are limited due to the lack of available spaces. As a result, rents ended the second quarter in the mid-$70-per-square-foot range. Historically there has been a much larger delta between lease rates in this submarket and East Cambridge. As space has become scarce and Mid Cambridge’s status has grown, landlords have been able to push through outsized rent gains here. While peak growth is likely behind us, look for modest gains in the near future. 2017 2017 2017 2018 2018

Vacancy VACANCY

25%

20%

15%

10%

5%

5-Year Historical Average = 8.2%

0%

2013

2014

2015

2016

2017

2018

RENTS ents

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0

2014

2015

2016

2017

NOTABLE TRANSACTIONS Notable Transactions

Voyager Therapeutics

Voyager Therapeutics

Agios Pharma

Astellas

10K SF

15K SF

20K SF

25K SF

30K SF

6

WEST CAMBRIDGE LAB

TOTAL INVENTORY (SF) 787,860

TOTAL VACANT (SF) 55,789

TOTAL VACANCY RATE

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

7.1%

16,843

16,843

West Cambridge

TRENDS • With close to 17,000 square feet of positive absorption in the second quarter, vacancies declined to 7.1% in the West Cambridge lab market. Much of Cambridge’s available lab space is located here, with more than 56,000 square feet of space currently vacant. Fundamentals remain ultra-tight in both East and Mid Cambridge, and West Cambridge remains a key relief valve for these more established life science hubs. Look for continued movement into the market as space constraints and historically high rents push tenants out of Cambridge’s core lab markets. • Japan-based Eisai is relocating operations from Andover to the Alewife Research Center. The new drug discovery lab, totaling more than 48,000 square feet, will anchor The Davis Companies’ 227,000-square-foot 35 Cambridgepark Drive, which is slated to come on line in the third quarter of 2018. Reportedly, the remainder of this building is committed save two floors. • As lab space has become scarce throughout Cambridge, tenants have been willing to move further out from Core Kendall Square and this market. As a result, landlords have been able to push through stronger rent gains over the past few years, with lease rates rising by 30% since the end of 2014. With that said, fewer rent observations have led to some volatility in the data. Rates for space in West Cambridge continue to offer a step discount compared to neighboring submarkets. Existing lab space boasts a mid-to-high-$50s/SF price tag, while asking rents are in the high $60s/SF at 200 Cambridgepark Drive, which is not included in the current stats. While peak growth is likely behind us, look for modest gains in the near future. • Invesco Real Estate recently purchased a four-property portfolio in West Cambridge called the Quad, which encompasses more than 200,000 square feet of office, lab and flex space. The assets changed hands for $73 million or $364/SF, and will likely be repositioned to attract life science tenants to the growing cluster in this submarket. • The majority of Cambridge’s construction remains concentrated in East Cambridge, but West Cambridge could see some more action in the future. The Bulfinch Companies are planning to build out the remaining parcel at the Cambridge Discovery Park. The campus can accommodate up to two additional office/lab buildings totaling 250,000 square feet.

Vacancy and Net Absorption VACANCY AND NET ABSORPTION

100 150

50%

40%

-300 -250 -200 -150 -100 -50 0 50

30%

20%

SF (000s)

10%

0%

-10%

2013

2014

2015

2016

2017

2018

Net Absorption

Vacancy

ASKING RENTS Asking Rents

$60

$50

$40

$30

$20

$10

$0

2014

2015

2016

2017

NOTABLE TRANSACTIONS Notable Transactions

Eisai

Life Biosciences

Hydra BioSciences

Celgene

10K SF

20K SF

30K SF

40K SF

50K SF

7

Q2

M E T R O

B O S T O N

BIOTECH RE CAP

2018

Q2 NET ABSORPTION (SF)

YTD NET ABSORPTION (SF)

TOTAL INVENTORY (SF)

UNDER CONSTRUCTION (SF)

DIRECT VACANT (SF)

SUBLEASE VACANT (SF)

TOTAL VACANCY RATE

BOSTON TOTAL

5,773,263

125,000

120,669

35,034

2.7%

195,624

282,003

East Cambridge

9,911,857

764,000

33,702

30,412

0.6%

400,527

385,439

Mid Cambridge

5,260,009

-

-

25,000

0.5%

3,019

22,424

West Cambridge

787,860

226,885

49,780

6,009

7.1%

16,843

16,843

CAMBRIDGE TOTAL

15,959,726

990,885

83,482

61,421

0.9%

420,389

424,706

Route 128 North

1,220,676

-

22,973

16,149

3.2%

3,809

42,735

Route 128 Northwest

2,261,210

-

181,990

18,859

8.9%

(9,102)

(9,102)

Route 128 West

2,123,558

144,910

87,773

6,000

4.4%

111,601

96,326

Route 495 North

849,329

-

175,702

-

20.7%

(55,000)

(147,093)

South

276,159

-

3,757

-

1.4%

(3,757)

(3,757)

West

978,688

-

64,127

62,014

12.9%

18,742

269,555

SUBURBAN TOTAL

7,709,620

144,910

536,322

103,022

8.3%

66,293

248,664

MARKET TOTAL

29,442,609

1,260,795

740,473

199,477

3.2%

682,306

955,373

METHODOLOGY SOURCE: Co-Star, NAI Hunneman Commercial Company. PREPARED: June 2018.

DISCLAIMER: The above data is from sources deemed to be generally reliable, but no warranty is made as to the accuracy of the data nor its usefulness for any particular purpose. Average Rental Rates are asking rents on direct space. Vacant space includes both direct and sublease space.

LIZ BERTHELETTE | Director of Research 617.457.3306 | lberthelette@naihunneman.com