Brokers, landlords taking on challenge of Boulder’s life-sciences real estate market

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When technology company Trimble listed for sale its building at 2300 55th St. earlier this year, the deal was too good for Tod Brainard to pass up. Trimble had purchased the 60,030-square-foot space in 2019 for $12.16 million, invested another $12 million in upgrading it — then put it on the market without ever moving in.

Brainard is a partner and chief investment officer at Boston-based Tritower Financial Group LLC. His company purchased the building in June for $21 million, with Trimble taking a $3 million loss. Because of the substantial improvements Trimble made to the facility, it can easily be converted into lab space.

That’s exactly what Tritower is doing. It’s branding the 55th Street building along with two properties on Sterling Drive as Boulder Labs, adding more than 100,000 square feet of lab space to Boulder’s red-hot life sciences real estate market.

This rendering of 5305 Sterling Drive shows what it will look like after it has been redeveloped from office to life sciences lab space. It will be branded, along with 5300 Sterling Dr. and 2300 55th St., as Boulder Labs. (Courtesy CBRE Capital Markets)

“Trimble put a ton into it,” Brainard said. “We felt it was a good value. We feel that building could convert easily into lab space. It has all the attributes of a lab building.”

The new space is badly needed. Boulder County has always been a hotbed of life sciences research and development, but demand for lab space is now at an all-time high, with available supply virtually nonexistent. According to a report released in June by commercial real estate broker CBRE Capital Markets, the Boulder area has about 2.6 million square feet of life sciences lab space with just a 0.5% vacancy rate. The report states 33 companies are seeking an additional 1.5 million square feet of space in the market.

“Technically, there is zero complete life-sciences space available,” said Becky Callan Gamble, CEO of the commercial real estate brokerage firm Dean Callan & Co. Inc. “It is a very frothy market.”

How frothy? Demand has increased by more than 87% this past year, according to the CBRE report. Recent times have seen deals such as Tritower’s $99 million sale in January of the Pfizer Inc. campus at 3200 Walnut St., a nearly 50% profit over what it paid for the space in 2018.

Ventilation ducts that pull air from inside a large room to outside can be seen in a building at 2300 55th St., which is being upgraded with laboratory-ready space, on Aug. 4 in Boulder. (Timothy Hurst/Staff Photographer)

Japanese drug maker AGC Biologics has established a major foothold in the area. In June 2020, it purchased the former AstraZeneca and Amgen plant at 5550 Airport Road in Boulder and began a 126,000-square-foot expansion to the nearly 180,000-square-foot facility. Last month, AGC also announced that it would buy the 622,000-square-foot former Novartis plant at 4000 Nelson Road in Longmont, investing more than a combined $100 million into the facilities.

Irish medical device manufacturing giant Medtronic sold its Gunbarrel campus for $36.5 million in December 2020, just as it was beginning to develop its new massive 42-acre, 400,000-square-foot campus in Lafayette.

Boulder-based LightDeck Diagnostics secured last month a $35.1 million contract from the U.S. Department of Defense to increase production for its rapid COVID-19 antibody test. It’s looking for about 60,000 to 70,000 square feet of new space to supplement its existing facility at 5603 Arapahoe Ave., which will focus solely on research and development, said Chris Myatt, chief innovation officer for LightDeck.

Demand is likely to only increase and to continue to far outpace the amount of supply on the market. Development restrictions in Boulder such as the green belt, the more than 38,000 acres of city-owned open space where building is prohibited, and height limit of 35 feet for new buildings will further serve to constrain the supply.

“I think life sciences are here to stay,” Gamble said. “We have such an incredible research university with a highly educated population. It’s very attractive to start a company or relocate here. It’s hard to determine how much more demand is coming. Boulder does not have an unlimited land supply. We do not have an unlimited ability to create this product. We have a natural cap on how much product we can have in Boulder.”

That raises the question: How can more life sciences lab space be brought to the Boulder market if building more new product from scratch is not realistic?

The answer may be in a trend that has started to emerge over the past year: upgrading and redeveloping existing office space into life sciences lab space. According to the CBRE study, about 540,000 square feet of office space in the Boulder area is currently planned to be converted into labs. That will not be sufficient to meet the demand, but it does signify that landlords and tenants are seeking creative solutions to the supply issue.

“For those landlords who have really deep pockets and a good risk tolerance, given the demand for users in the marketplace, this can be really attractive,” Gamble said. “It’s not for every landlord to do.”

This is the approach that Tritower is taking with its buildings at 5305 and 5300 Sterling Drive, which it purchased for $14 million in March. Tritower is upgrading those facilities from traditional office space into tenant-ready lab shells. That involves extensive improvements to nearly all aspects of the building’s infrastructure: more power, new roofs, autoclaves, bigger elevators, pH neutralization systems, hood vents and other HVAC upgrades.

This rendering shows what 2865-2885 Wilderness Place will look like when renovations have been completed. Owner Element Properties is redeveloping the former office building into life sciences lab space. (Courtesy of Element Properties)

Boulder developer Element Properties LLC is taking a similar approach with two other east Boulder buildings, 2865 and 2885 Wilderness Place, which total more than 45,000 square feet.

Element principal Chris Jacobs said his company usually focuses on traditional office space, but decided to branch out into life sciences with these buildings during the pandemic.

“We knew from our leasing brokers that the creative office market had slowed down in terms of activity whereas the life sciences and biotech market had stayed the same or expanded,” he said.

Pfizer is converting much of the office space in its research and development campus into lab space.

When LightDeck Diagnostics finds a new building, it will be doing substantial buildout and infrastructure improvements, which is not something that the company has done in the past, Myatt said.

“What we’d always done in the past is we’d take a warehouse space and put in soft-sided clean room facilities,” Myatt said. “That is so much cheaper than building out. We’ve always been scrappy and cheap.”

In the case of LightDeck’s new building, their upgrades will be covered by the DoD contract.

Gamble, whose company represents numerous property owners in the Flatiron Park complex, said that area has about another 150,000 to 200,000 square feet of office space that could potentially be converted into labs.

This approach won’t work for every office building. Not every landlord has the up-front capital or the risk appetite for such a move. And Gamble said that single-story flex buildings convert to a lab more easily than multi-story office buildings. When it does work, benefits are obvious.

This rendering shows what 5300 Sterling Drive will look like when it has been redeveloped. Owner Tritower Financial Group is renovating this building, along with 5305 Sterling Drive and the former Trimble building at 2300 55th St., as Boulder Labs. (Courtesy of CBRE Capital Markets)

Brainard said that the Sterling buildings will be move-in ready about six to eight months before a new-construction building would have been. Additionally, when developers convert the buildings, it saves the companies from having to invest their own capital into the facility.

“Companies typically want to invest in people, not infrastructure,” Brainard said. “Our tenants will have to spend less than they do typically [on upgrading their buildings].”

Deals like this, where landlords give generous tenant improvement packages, are common in other top life-sciences markets such as Boston, San Diego and San Francisco, but are relatively new to Boulder, Brainard said. With Boulder Labs, Tritower is trying to change that.

“We are trying to bring a rental package to Boulder that didn’t previously exist,” Brainard said. “The other big markets in the country typically do it differently.”

Of course, landlords charge higher rent in exchange for upgrading facilities for their tenants. Typically, life sciences rent in Boulder is about $40 to $50 per square foot. That is far cheaper than San Diego and San Francisco, where rent can be as much as $100 per square foot, as well as Boston, where it can reach $120 per square foot.

The difference, Brainard said, is that those Boston tenants who pay $120 per square foot have gotten about $200 per square foot worth of infrastructure and building improvements from their landlord. In other major life sciences markets, tenants usually find that to be a worthwhile tradeoff.

“We’re not going to be bringing $120 per square foot rent to Boulder,” Brainard said. “We will be asking for higher than average, but we are also delivering a better product.”

Bike racks line a hallway in the building at 2300 55th St., which is being redeveloped into laboratory-ready space. (Timothy Hurst/Staff Photographer)

Why have deals like this not been more common in the Boulder area in the past? The nature of many life sciences companies, which are often startups with no profit or product, can make landlords hesitant to invest a significant amount of capital to improve a building for a tenant that might go under in a couple of years.

“It’s capital-intensive and credit-security-intensive because so many of those companies are in growth mode or startup mode,” Jacobs said. “They don’t have 10 to 20 years of history to get those kinds of tenant improvements.”

As Element Properties prepares to lease its buildings on Wilderness Place, which will be tenant-ready later this month, it’s seen interest from potential tenants both with and without credit. Jacobs said that in addition to asking for higher rent to cover its investment, Element will also likely seek a corporate guarantee or additional deposit to help mitigate risk.

For Tritower, Brainard said that the creditworthiness of Boulder-area life sciences companies is less of a concern, citing the case of Array Biopharma.

“They burned through about $750 million before they got their drug approved,” he said. “That’s a lot of guacamole. I would argue they were a non-credit tenant for 25 years before drug approval. These are not credit tenants. We understand that.”

Tritower bought Array Biopharma’s building in 2018 for $52.3 million. In 2019, Array was acquired by Pfizer for $11 billion. Tritower then sold the building for $99 million. Of course, not every life sciences company has that trajectory.

“Unfortunately the failure rate will be quite high,” Brainard said. “However, there will be other tenants to backfill the lab space if they go dark. If a tenant goes bust, our phone starts ringing off the hook with other life sciences companies of equal credit who want the space. There’s a deep bench of tenants who step up for space. There is some hope involved with this, but it’s a modest amount.”

Given the high demand and low supply in the Boulder market, there may well be numerous companies who would happily take a vacant space that already has many of the needs of life sciences companies. However, landlords would still likely have to invest capital to customize the space from tenant to tenant.

“There are so many things, from humidity to clean room level, that you would not be able to reuse,” Jacobs said.

Even so, commercial real estate is in high demand and low supply across most of Boulder’s industries. Brainard said that if Tritower can’t find the life sciences tenants who want its tenant improvement packages, the company is confident that a tech company would take the space.

“Vacancy is a valuable commodity if you wanna put fannies in seats,” he said. “We believe so strongly in the Boulder market.”

Indeed, that seems to be the common sentiment. Boulder remains a desirable place for life sciences companies to operate and for their employees to live. Its natural constraints on new construction will always restrict supply.

“We’re just seeing the beginning of the interest in and demand for life sciences space,” Gamble said. “I don’t think we’re anywhere near the peak.”

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