The explosive growth of the global life sciences sector and the real property needs it entails have captured the attention of commercial real estate investors of all stripes. According to CBRE’s US Real Estate Market Outlook 2020, from 2014-2019, life sciences real estate (inclusive of medical office), accounted for an annual average investment of $18.7 billion—an astounding figure. Now, the tragic outbreak of COVID-19 has transformed this burgeoning real estate asset class from one of excitement, to one of existential importance.
As medical professionals, public health experts, and government officials grapple with the duration and magnitude of the pandemic, a key takeaway has emerged: namely, the centrality of commercial real estate—and in particular, life sciences real estate—in addressing the crisis. Although COVID-19 has certainly disrupted the real estate world, it has also, paradoxically, generated a novel opportunity for the industry and its evolution. With creativity and adaptability, commercial real estate investors are situated to simultaneously maximize the utility and value of real property while contributing to the best-case resolution of an extraordinary societal challenge.
For owners and operators contemplating how to enter the life sciences real estate space and permanently or temporarily position or reposition assets to respond to the present medical emergency, we have outlined some of the crucial intersections between commercial real estate usage and the implications of COVID-19.
Temporary Repositioning of Commercial Real Estate Assets
The unexpected and prolific nature of COVID-19 has spotlighted shortfalls in the U.S. healthcare infrastructure and obligated governmental officials to marshal real property resources in non-traditional ways to battle the immediate ramifications of the pandemic.
Although public health institutes have varied in their projections about the toll of COVID-19 on the U.S. populace, modeling performed by the Harvard Global Health Institute and other organizations has revealed that existing U.S. hospital capacity is insufficient to support eventual need. As a result, this anticipated shortfall has compelled governmental officials to devise solutions through the innovative transformation of real property. For instance, in New York, where that state Governor’s estimated that hospital beds would need to double in a period of only 45 days, a massive convention hall was converted into a temporary hospital. Also facing a shortage, Massachusetts restyled its flagship convention center as a field hospital in Boston, while a sports arena in Worcester underwent a similar metamorphosis. And many other states have similarly adopted inventive approaches to surmount hospital capacity obstacles.
Housing for Healthcare Workers
The COVID-19 outbreak has been neither uniform in geographic acuteness nor timeline. Certain localities have suffered more severe eruptions on a more accelerated basis. This reality has squeezed existing medical personnel in earlier-afflicted cities, creating a pressing demand for healthcare reinforcements. A large influx of medical personnel redeployed to distressed locales has generated considerable—and flexible—lodging needs. With the hospitality sector experiencing a slowdown due to travel restrictions and social distancing, several marquis hotels in New York, Chicago, Los Angeles and other major metros have made rooms available to healthcare workers. The Airbnb platform has also lent itself to this cause, aspiring to provide interim accommodations to over 100,000 frontline responders according to the company.
The administration of COVID-19 tests is undoubtedly an important factor in successfully confronting the pandemic. Not only from a public health perspective, but also from the standpoint of remobilizing U.S. economic activity. After convening a multidisciplinary group of experts, the Rockefeller Foundation recently released its “National Covid-19 Testing Action Plan” to propose a COVID-19 testing framework consistent with safely reopening the U.S. economy. The plan recommended that the U.S. exponentially increase its COVID-19 testing capability by a multiple of 30 over the next 6 months.
Given the transmissibility considerations involved, condensed and enclosed locations are not ideal for COVID-19 testing; thus, drive-thru testing has emerged as a safer, more practical alternative. But these sites require expansive physical grounds, in many cases beyond what medical complexes can spare. Accordingly, several prominent retailers who are experiencing much less traffic than prior to COVID-19 have opened—or pledged to open—drive-thru testing sites in their parking lots to help the U.S. meet its testing objectives. It will also be interesting to see how employers implement testing as part of getting back to work.
Beyond securing the necessary acreage to establish drive-thru testing sites, other facets of life sciences real estate are essential to instituting an adequate COVID-19 testing system. Given the sheer volume of tests that are needed in a condensed time frame, manufacturers and laboratories have reoriented their focus to producing COVID-19 testing kits. And in order to adequately disseminate the testing kits for administration, a nationwide distribution network reliant on logistics real estate is vital.
The Role of Life Sciences Real Estate in a Permanent Solution
The foregoing examples illustrate the urgent imperative to creatively reassess the optimal use of real property in the near term to help tackle the circumstances of the present moment. Although significant, these items deal with more immediate measures to counteract and alleviate the infliction of COVID-19. In the end, the lasting solution to the pandemic resides with therapeutics and prophylactic vaccines; in layman’s terms, a cure. The fundamental components of life sciences real estate will prove integral to this endeavor.
Clearly, an effective prophylactic and/or therapeutic vaccine will not engineer itself. Research and development will take significant time—ambitious forecasts suggest a prophylactic vaccine will materialize in 12 to 18 months—and necessitate considerable space. Furthermore, the right kind of space is foundational to a fruitful R&D process.
Biotechnology companies cannot simply sign a coworking agreement and commence research in a shared workspace environment. Nor can they lease a floor in a high-rise office tower or purchase a vacant warehouse and automatically deem it a sanctioned laboratory. Like much of the other subject matter that occupies life sciences companies, R&D related to COVID-19 is a precarious and highly-regulated affair. Engaging with infectious pathogens that may be associated with airborne transmission—such as SARS-CoV-2 (i.e. the virus that produces COVID-19)—requires special laboratory space characterized as “Biosafety Level 3” (or “BSL-3”). The federal government promulgates detailed design, locational, and operational guidelines for BSL-3 laboratory space that must be complied with in order to satisfy the BSL-3 standard.
Some information indicates that the U.S. may not possess the requisite BSL-3 laboratory space to most efficiently discover a cure to COVID-19. In a recent piece in STAT, the managing partner of a life sciences investment fund claimed that a lack of availability of, and access to, BSL-3 laboratory space has impeded the fund’s portfolio companies from expeditiously pursuing their COVID-19 interventions. According to the author, “[t]he cost and availability of these labs have been the single biggest bottleneck in researching and testing critical vaccine and diagnostic technologies. While the more than 200 BSL-3 labs may seem sufficient on paper, the actual number of suites that can be rented by third-party researchers is extremely limited. Not surprisingly, these suites are in high demand and thus very difficult to access.” As such, additional investment in and development of laboratory space—particularly, BSL-3—could be needed in the context of a COVID-19 cure.
Although the discovery of a therapeutic and/or prophylactic vaccine is a complex and laborious undertaking in and of itself, the identification of a vaccine is not the end of the COVID-19 curative equation. On a macro level, a vaccines fails to achieve its purpose if it remains unavailable to large segments of the population.
Bill Gates opined in The Washington Post last month: “But creating a vaccine is only half the battle. To protect Americans and people around the world, we’ll need to manufacture billions of doses.” In other words, the efficacy of a vaccine is directly correlated with the percentage of the potentially vulnerable who can avail themselves of that vaccine, and in the case of a global pandemic like COVID-19, a successful outcome implies that billions of individuals have access to it. And as Gates noted, several of the most promising vaccine candidates can only be produced through unique manufacturing facilities. The Brookings Institute speculated that mass production of a COVID-19 vaccine “will require billions of dollars and a coordinated use of financial instruments, including grants, concessional loans, and advanced purchase commitments.” Irrespective of the financing regime ultimately employed, all factors point to the necessity of a large-scale capital investment in biomanufacturing infrastructure to supply the target universe with a COVID-19 vaccine once established.
The Supply Chain and Logistics Real Estate
The intrinsic function of logistics real estate is indispensably linked with combating COVID-19 – both in the immediate and long-term. Seldom does a news cycle elapse when one does not hear or read about PPEs, N95 masks, ventilators, or testing kits. In order for this critical equipment to reach healthcare professionals, the medical supply chain must capitalize on warehouses, distribution facilities, fulfillment centers, and other industrial property to initiate, intermediate, and conclude safe transit. And once a COVID-19 vaccine is in mass circulation, logistics real estate and the supply chain will play an instrumental role in its circulation to the world’s population to eradicate the pernicious impact of the disease for good.
Describing the current business climate as atypical would be a glaring understatement. The commercial real estate industry has been thrust into truly uncharted waters, with the legal, regulatory, and operational landscape shifting by the minute. Compounding the existing uncertainty are the several layers of governmental authority involved, in some instances issuing divergent—and even, conflicting—directives for a given locality or sector.
These unprecedented times necessitate unprecedented guidance. Fusing its leading Life Sciences and Real Estate Industry practices, Goodwin’s PropSci initiative possesses the experience, resources, and technical know-how to advise commercial real estate participants through all elements of the COVID-19 situation. And once this chapter has concluded, Goodwin’s PropSci initiative stands ready to counsel capital partners, operators, and developers alike in the next phase of opportunity in the life sciences real estate space.
Andy Sucoff and Eamon Welch are attorneys with Goodwin.