Boston and the Bio Revolution
The world finds itself in a precarious state as individuals, businesses and economies struggle to assess the impact of the COVID-19 pandemic. With developed countries such as the UK posting a contraction of -20.4% in GDP for the month of April and the U.S. unemployment hitting 14.7%, the scope and speed of disruption to the global economy is without modern precedent. The silver lining lies in the potential for transformative changes across industries and a meaningful shift in the competitive landscape.
With the last decade being dominated by big tech names such as Google, Apple, Facebook and Amazon, the pandemic has quickly ushered in a new paradigm with the Bio Revolution. A record of nearly $6 billion in VC funding has gone towards the life science industry in Q1 2020 alone, while over $117 billion of government stimulus has been allocated to the sector. Adding further support is the convergence between biological innovations and technology with things such as automation, machine learning and A.I. McKinsey estimates that the direct annual global impact of the Bio Revolution over the next 10-20 years is $2-4 trillion. With benefits extending well beyond healthcare and backing from both the public and private sectors, this industry is undoubtedly poised to take center stage.
The birth of the Life Science industry dates back to 1978 when Genentech, now a part of Roche, first successfully extracted a human gene. This was 2 years after professors from Harvard and MIT challenged the city council of Cambridge, MA on a ban on DNA experimentation, the origin of life science research. Successfully claiming victory, this established a supportive regulatory environment and a home for life science in the city of Boston.
It is a city with 7 nationally ranked universities and over a dozen teaching hospitals. It’s consistently the #1 recipient of NIH funding with $2.7 billion awarded in 2019 and a flood of VC capital in excess of $6.8 billion across 174 deals last year alone. It has one of the lowest unemployment rates across the country, currently 3% vs. the national average of 4.4% as of March 2020. With an annual average household income of $91,781, Boston has no shortage of exceptional talent and is a city rooted in education, innovation and progress.
Kendall Square in East Cambridge is the nucleus with which the Boston life sciences industry centers itself around. Dozens of biotech, healthcare, technology, venture cap firms and research institutions, such as MIT and Harvard, exist within a few square miles. Cambridge has over 14m SF of lab space, with approximately 1.4m more coming online in the next 3 years. If you include Boston’s urban core, namely the Seaport and Fenway district, along with the northern and western suburbs within the 495 belt, there’s over 300 biotech, healthcare and technology firms, representing approximately 36% of Boston’s total employment, and 30m SF of total lab space with 3m additional SF outside of Cambridge coming due by 2024, all with a mere 3% vacancy rate.
With Life Science providing a solid foundation for employment and wage growth in the region, other Healthcare related industries such as hospitals, ambulatory services, outpatient and private practices, have proven to be counter cyclical in nature. With 98 hospitals in the state and 20 within Boston and the surrounding suburbs, the sector has consistently posted 3% annualized job growth in M.A. over the past 5 years. The combination of an aging population and the sudden impact of COVID should provide further support going forward. According to the Center for Labor Markets and Policy, the tech bubble along with the GFC resulted in massive job losses across the country with the ensuing recessions that followed, yet between 2000-2012, the healthcare industry in the Commonwealth State added 142,000 jobs whilst all other industries lost 180,000.
According to the Boston Planning and Development Agency Research Division, the greater Boston region is home to more than 4.8 million people, representing approximately a 10% growth rate since 2010, with roughly 35.2% being owner-occupied households. One can only deduce, then, that the city is largely comprised of renters. With an average median home price of $655,000 in 2019, an increase of 6.4% YoY, and an even greater increase of 9.4% YoY for condo’s, averaging a median price of $700,000, affordability remains a significant driver of the rent vs. own debate. And whilst cities like New York and Chicago saw drops in residents age 25 to 34 last year, it was quite a different story in Boston which posted population gains across the millennial cohort, a group which fundamentally prefers more flexible, experiential living found in rental communities and now accounts for more than 25% of the city’s residents.
Although Boston’s economy has kept pace or exceeded other comparative metropolis’s, its housing needs have not. Unlike most other states, Massachusetts is a “home rule” state which gives land use control to municipalities, relying on each town for long-term housing development planning. With over 50% of the housing stock in the Greater Boston region predating 1960, 1-2% rental vacancy rates on average and significant upward pressure on pricing, in 2017 the State passed the Housing Choice Initiative to assist local governments in expanding housing production, with a goal of permitting 135,000 new units by 2025, by providing new grants, coordinating technical assistance across various housing agencies, and promoting regulatory innovation. The Metropolitan Mayors Coalition further supported additional supply by setting a target of 185,000 new units, yet according to The Boston Foundation, to accommodate the anticipated growth, the region would need to produce approximately 320,000 units by that same time. In year one of the initiative, permitting was slower YoY in 2018 but has since picked back up, permitting 32,637 units in 2019. With the onslaught of COVID-19, construction delays will significantly impact existing development plans and deliveries, leaving a large gap in supply in order to achieve the City’s 2025 goals and creating an even more dire housing picture for the region.
Commercial real estate prices in the U.S. more than doubled in the last decade, due in part by the significant capital inflows into the sector, making it difficult to find truly great buying opportunities. Sponsors rushed to put money to work, pushing cap rates to historically low levels, in an effort to get back to market to raise larger funds. In a real life game of Risk, real estate investing simply became an aggregation play. Brokers walked bids up while Sponsors shifted underwriting to get deals done using leverage to juice returns rather than creating real value at the asset level. What no one could have modeled out was the swift and sudden force of the global economic shutdown, effectively wiping out billions in value across every industry, setting off a cascade of insolvencies. With a flood of government support, individuals, companies, municipality’s and entire economies, who otherwise would be bankrupt, will now tread water for as long as possible. However, with so many structural changes in the market, industries such as hospitality, travel and leisure, student housing, senior housing, and to an extent some pockets of office and residential will have a long road ahead. Incumbents will need to invest heavily to stay in the game, significantly impacting all decision making across their portfolios going forward whilst new entrants will have the ability to start fresh, force change and redefine value.
