For commercial real estate professionals working with companies in the biotechnology industry, it is an interesting and challenging time of change for some of their clients. Many emerging companies in this sector have reached, or are quickly approaching, a critical turning point in their life cycles as new drugs or devices are approved for commercialization, and move out of the development pipeline, where they may have been for years.

Understanding — and anticipating — this rapid evolution is critical for commercial real estate practitioners who are called upon to help biotech firms find, build or convert the space they need as they transition into the corporate world.

Commercialization requires emerging biotech companies to change gears almost overnight and move away from their familiar and rather insular entrepreneurial mode, which may have defined their operations for many years, to operating in a true corporate environment. And for a company that has never before commercialized a product, this is a significant shift, for it is often the first time they have had to think “corporately.” 

Suddenly, decision-making procedures and policies become more structured. Everything is viewed from a more corporate perspective, with an emphasis on coordinated planning. This new way of thinking, of course, greatly affects a biotech company's approach toward leasing, purchasing or developing real estate.

When a biotech company is in its entrepreneurial mode, it is likely that all key staff operates in one location. During this time, decision-making can be spontaneous. If, for example, a group of researchers believes they need an additional 6,000 square feet of lab space to accommodate a specific function, the director of the program might simply walk down the hall and ask the CEO for approval to find that space.

However, once a company's product becomes commercialized, this go-and-grab attitude toward real estate is exchanged for a more strategic approach, with a focus on the company's long-term growth. Now, instead of just saying “yes” or “no” to this kind of request, the CEO may say, “I want you to go back, take a look at this proposal, and tell me why it makes sense for us from an overall corporate perspective.”

Proactive thinking is also essential for real estate professionals who want to successfully meet the demands of their biotech clients, because they must anticipate — often years in advance — the sector's real estate needs in their market. That's not easy. Biotechs are the ultimate startups, and even venture capitalists funding these companies during the scientific discovery stage know they are taking a big gamble on the future success of drug or device still in development. So, like venture capitalists, real estate practitioners must constantly plan and hedge. They must determine how to bring to market an infrastructure supply suited for biotechs at exactly the right time.

A company may be humming along for years in its scientific discovery mode, sustaining an active pipeline with several products at different development or trial stages. Then, something happens that quickly transforms the company: a product fails to get approval or suffers some kind of significant setback, or perhaps, more positively, it gets put on an accelerated approval track.

Some biotech products run into trouble even after approval, however; recent examples include the arthritis drug Vioxx and the painkiller Bextra, which were both pulled from the market due to increased risk factors for some consumers. Any of these situations can change, in an instant, a biotech's workforce needs and thus, its overall real estate strategy.

Therefore, a commercial real estate practitioner who is serious about addressing the needs of the biotech sector has to watch what is happening with the various biotech pipelines — and work to genuinely understand the work of companies in the industry — for it is critical to planning for future real estate dynamics in their market. This may include the demand for specialized space, such as labs, but more often, a biotech on the rise desperately seeks traditional office space.

Once a product does get the green light for distribution to consumers, a biotech company's general management and administration, information technology, finance, and sales and marketing needs will immediately increase. An entirely new workforce is created through hiring or partnering — or sometimes, through merger or acquisition. Regardless of how the expanded workforce ultimately takes shape, however, the new, corporately minded biotech will need quick access to more traditional office space.

People unfamiliar with the biotech industry might think that the sector is only about chemistry, biology and high-capital laboratories that require a significant amount of expertise to develop. That's likely because the activities of those types of biotech companies tend to get a good deal of news coverage. The public wants to know who is working to develop new treatments and hopefully, cures for illnesses such as AIDS, cancer or rheumatoid arthritis.

With all this attention on the more “newsworthy” side of biotech, it is easy to overlook the segmentation in the industry itself, which is important for real estate practitioners to recognize. The most significant difference in the sector is between companies that make drugs and those that make devices. Drug companies require lab space, much of which is highly specialized.

However, device companies are similar to technology manufacturing firms outside of the biotech industry — their operations are not unlike those of semiconductor companies. So, meeting the real estate needs of a device company may not be as challenging as accommodating those of a drug company. Of course, the commonality between the segments is the need for office space.

In the San Francisco Bay Area, for example, the biotech sector wields major influence over the local real estate market, especially since the high-tech market took a nosedive. At least half of a typical biotech's real estate portfolio is office space, and that, unlike laboratories, does not have to be specifically tailored to the needs of the biotech community or meet certain regulatory or environmental requirements. Thus, the majority of biotech companies seeking office space are happy to move into existing buildings in their market instead of developing new offices.

Remember, those who fund these companies have been putting their capital into the product development pipeline for many years now, and perhaps, too, backing the development of highly specialized laboratory space, which could have cost as much as $500 per square foot to build. So it is likely they don't want to spend more money than necessary on real estate intended for basic corporate functions such as sales or finance, at least not during this transitional time for a biotech company.

So, once a biotech firm takes off, a sales force demand is created, which could mean the addition of hundreds of workers devoted solely to that purpose. For example, Ernst & Young Real Estate Advisory Services recently worked with a biotech firm in the Northeast that had to immediately hire 300 workers to support the rollout of one new product. Although it's common for an old hand in the sector, such as pharmaceutical company GlaxoSmithKline, based in Research Triangle Park, N.C., to become involved with another company's rollout through a partnering arrangement, it does not change the reality that a new sales workforce devoted to that product appears on the scene. Those individuals must be put somewhere — even if they only work out of an office part-time — and are to be located preferably proximal to corporate headquarters and commercial channels with which they must have constant interaction.

It is logical to think that commercialization might make biotech companies think about stretching out beyond markets already known as hubs for the biotech industry, such as the San Francisco Bay Area, San Diego, Boston or North Carolina's Research Triangle. However, even though things are getting a bit crowded in those areas, biotech companies want to be in or near to these general industry clusters because that is where the synergy is.

They want to be part of communities that understand and encourage the biotech industry, such as campus environments near hospitals or universities. They want to be close to companies they can partner with — quickly — to help them maintain or grow their development pipelines, or help with manufacturing or distribution of an approved product. Biotech firms also like to stay close to those who supply the capital to fund their research and operations. And most of all, they want constant access to perhaps the most important thing of all: intellectual capital.

Biotech firms want to be able to attract and retain the best and the brightest employees, such as good researchers for development, medical professionals to help run clinical trials, and sales and marketing professionals who are industry experts. Even though the cost of living is notoriously steep in markets like the San Francisco Bay Area, these places continue to keep and attract a large pool of intellectual capital for biotech firms. Generally, people in the biotech industry are passionate about their work and will go wherever it is they feel the can be on the leading edge of discovery. There is a saying for this in the biotech community: “They come for the science.”

When commercialization launches the growth of a biotech company, there are significant changes to the discovery side of its operations. That's why it is so important for a biotech to be operating in a community with the right kind of intellectual capital present. The laboratory and scientific teams who were involved in the discovery of a product tend not to be the same teams who support the commercial product. Even the laboratory space used for development might now be unsuitable for supporting a commercialized product. Therefore, a company may need to hire new, dedicated teams for quality assurance and testing, and also, testing of other applications for a drug or compound, which, if successful, can be very lucrative.

Commercialization of a drug or device is a real tipping point for a biotech company, and outsourcing of manufacturing and distribution functions is almost unavoidable for an emerging biotech, which simply cannot handle these massive operations. In a moment, a company can shift from making relatively small quantities of material — test batches — for trial phases to manufacturing billions of dollars worth of drug product for the marketplace. Because they cannot handle these tremendous tasks alone, at least, not initially, biotech companies often turn to third-party vendors or providers.

So, while commercialization dramatically changes how a biotech operates, its real estate needs are not as complicated as one might imagine. The real trick for commercial real estate professionals is anticipating when these companies are going to need additional space and where. That may mean thinking ahead several years and predicting opportunities. But opportunity may not be about finding a new office building for a biotech company or developing a brand new research and development facility. It could simply be the challenge of helping these newly born corporations to commit the right growth to the right location at the right time — which may happen at a facility they already have.

It may sound obvious, but to do business successfully with the biotech sector, you must know your client. Become acquainted with companies operating in the area, understand what they are trying to accomplish, and how they plan on getting there. Find out where their products are in the development cycle, because a biotech company's real estate needs will be predicated on that. Also, be aware of other local companies, such as suppliers or manufacturers, which provide essential services to the biotech community. They have real estate needs as well.

Christopher Steele is a senior manager for Ernst & Young's Real Estate Advisory Services practice and is based in Boston. Darin L. Buchalter is a managing director with Ernst & Young's Real Estate Advisory Services practice and is based in the firm's San Francisco office.  Both authors provide corporate real estate advisory and portfolio strategy services to major corporations across the United States and globally.

 The views expressed by the authors do not necessarily reflect those of Ernst & Young LLP.