Everybody knows Moderna, Pfizer and AstraZeneca are the saviors we’ve been looking for. Not just of humanity, but of real estate, too. COVID-19 has emphasized the importance of pharma and biotech companies and the critical nature of their work. As such, the life sciences sector is proving to be an increasingly attractive, COVID-proof investment opportunity.
While some New York landlords are now playing catch-up, mulling the potential conversion of office product into life sciences use, Taconic Partners has a firmly established footprint in the space. A serendipitous transaction with the New York Stem Cell Foundation in 2016 created what Matthew Weir, a senior vice president at the firm overseeing its life sciences assets, describes as a “light bulb moment” as to the opportunities the sector held. Since then, Taconic’s been busy carving out a life sciences cluster on Manhattan’s West Side.
Weir recently explained to Commercial Observer why Taconic’s investments not only underscore a commitment to the sector, but also its unwavering belief in New York City.
Commercial Observer: Where did you grow up and how did you get your real estate start?
Matthew Weir: Not sure if you can see this [points to a photo of a sports stadium on his wall] but I’m a Cheesehead from Milwaukee, Wis., and that’s a poster of the stadium where the Green Bay Packers play. In terms of my start in real estate, I guess on some basic level, it’s in my genes. My grandfather was a home builder, and my father was a contractor. Through that lens, I was always fascinated by how things were built and then how they operated.
And then for me, and so many others in this industry in New York, a fascination with cities. That inspiration that you draw from seeing a skyline as you approach a city and then becoming almost obsessed with the energy of it all. New York has always had — and still has today, even with the challenges it faces — a magnetism to it, and that’s certainly what brought me here.
Was New York always the end goal for you?
I had always admired it as an outsider. Obviously, it’s the biggest, it’s the best, and I think there’s a certain inspiration to draw from that. It draws the ambitious, which is why New York City has such a rich talent pool no matter the industry; that magnetism and that desire to be around the best, and to compete with the best. I’ve stayed in the city throughout what is a very challenging time, and it’s because I and Taconic ultimately believe in New York. To me, it’s never been a question. It was always New York.
Was it the development side of the business that appealed, initially?
To say I had a fascination with how things are built is certainly true. Then, over time, I sought out a more comprehensive understanding of it all: how you underwrite it, finance it, build it, and then repurpose it. It’s something that’s a particular passion of mine and something that, historically, Taconic has done a significant amount of — taking something old and rethinking it, right down to how the systems operate. And that’s such a key component of life science properties. So, it’s really the whole picture that appeals.
Can you talk me through Taconic’s life sciences focus? How did it begin, and how has it evolved since then?
Historically, we have experience in identifying emerging sectors here in New York City. With respect to life sciences, it really started with one particular transaction back in 2016 with the New York Stem Cell Foundation. They were looking for their new proprietary stem cell lab and executive headquarters. That became 619 West 54th street, or our Hudson Research Center.
The experience of that transaction was our light bulb moment. Through understanding the challenge and need from the tenant side, we came to learn how we could create solutions, and that there were significant barriers to entry for creating lab space. You need the right zoning, you need the right floor loads and floor heights, certain mechanical equipment and systems are required, and there are challenges around installing those that you might face in certain buildings. We understood what the space needed to be, and how it needed to function.
So, we first learned the real estate side of it, but we then took a step back and said, “Are there others out there? Is this an industry that is ripe for growth in New York City?” It wasn’t something we were focused on previously, but fast forward to today, we’ve done 80,000 square feet of leasing transactions at Hudson Research Center and we’re swinging hammers to deliver the next 100,000 feet in the next 12 months or so. In addition, we’ve got 125 West End Avenue, which we are starting development on.
And, by the way, that’s not the end of it — we have several other potential transactions in the pipeline. We think New York City is ripe for significant growth from where it is today.
How much of a change do you see from that initial investment in 2016 to now, in terms of investors’ comfort with the space and lenders’ interest in the space?
Significant. I mean, pre-COVID, there was already momentum. You had these key markets that were red-hot with zero availability: Boston, San Francisco, etc. So, there was tremendous macro-level momentum, and activity — then came COVID. Clearly, now everyone is focused on the sector. Investors are looking to maneuver into that space and other COVID-proof spaces. Of course, vaccines and research has put the sector under an international spotlight, so it’s a really interesting time. We just completed a refinance at 619 West 54th Street, as you know. In addition, we’re in the process now of finalizing our equity and debt commitments for 125 West End Avenue. So, we did all of that in a six-month period.
I can say that there’s significant interest from institutional players today; a lot that have experience in the sector, but certainly some new entrants. New York is a market that investors want to be in, but there are challenges to that. We’re still at a very early stage for New York life sciences. There aren’t as many data points, there aren’t as many lease comps as the hub markets, but folks identify and recognize the fundamental demand drivers specific to life science. On each of those two assets, we saw quite a bit of interest from a whole host of institutional capital sources.
In the next five years, do you see New York expanding significantly from a life sciences perspective?
I look at it in a couple of ways. There have been certain challenges over the past 10 years, in terms of New York taking off. It always had those fundamental demand drivers, but it lacked the real estate. It lacked lab space for companies, and so they would go to other markets, or relocate to the extent they were founded here or based in our great academic or medical institutions. But, you’re starting to see the real estate solution for the first time of scale, outside of and subsequent to Alexandria [Real Estate Equities’ campus on the East Side].
There’s pent-up demand that’s built-up over a number of years, so I think you’ll see, relative to what’s there today, significant growth. I think you’re going to start to see a development of verticals or niches within life sciences that New York can really take advantage of, and become the center for those specific verticals.
Which niches do you have in mind?
We’re seeing this already today, but bio-manufacturing is a real, emerging vertical within the sector. I think there are, again, fundamentals that will allow New York to have that be its niche. If Boston is the undisputed hub for therapeutic development, New York has a real opportunity to become a bio-manufacturing hub.
In addition, I think where it really gets exciting is the convergence of digital health, digital therapeutics and technology. If you look at the diversity of New York’s economy, and you look at the growth of tech and TAMI [technology, advertising, media and information] over the last 10 years, once you see biotech emerge, you then can leverage a lot of that tech talent that’s here with the scientific talent. And, again, these are emerging fields of digital health and digital therapeutics. So, New York is well positioned to become a hub specifically in that convergence.
I think there’s a ton of runway for growth for pent-up demand that hasn’t been met for — you might argue — several years. And, then, as you start to look at the market maturing, I think you’ll see an emergence of those areas which New York can claim.
We’ve talked a little about 125 West End Avenue. Why did this acquisition make sense for Taconic? Were the property’s bones an obvious fit for life science redevelopment?
In terms of location, it’s 10 blocks north of the Hudson Research Center. So, number one, we had the advantage of seeing all of the activity deals that are currently pending at HRC and having the confidence to say the West Side of Manhattan is becoming a life science cluster. We love that location and we love that we now control a real critical mass of life science space on the West Side of Manhattan.
And then, number two, and you touched on this, the bones. It’s a former auto manufacturing facility, so it has large floor plates, tall ceiling height and major structural loads. It was formerly used for driving cars up and down and throughout the building. It was really those two factors that were first and foremost. The asset itself was very compelling and had all of the things that you look for to build a really first-class life science building.
So, you had its eventual use already in mind when you bought it?
Well, it’s about a three-acre campus and there are really three components to the campus. One is 125 West, and this is what we’re talking about for life science, then there’s an adjacent studio building, plus an adjacent lot with future development potential. So, we loved the flexibility over all of the pieces.
It just so happens that as we look at it today, and again, with COVID, you look at certain industries that have continued to grow notwithstanding the pandemic, and life sciences is, obviously, one of the top. But also, you look at the activity in studios and it’s been amazing. So, we happen to have a studio building adjacent to 125, and, in terms of future development plans for that, that’s still something we’re still evaluating. It could be a really compelling studio play, it could also be a very compelling add-on life science play, or clinical space, or translational, which means sort of a convergence, the bench-to-bed idea to take what you’re doing in the lab into the patient community. But we’re going to figure all that out in due time.
Are most lenders comfortable in terms of business plans for life sciences conversion at this point, or does a learning curve still exist?
I think much of the industry today acknowledges that there are some challenges relative to the traditional office model. The office model is: “Here comes a corporate tenant coming in, I can evaluate their credit, I’ll do a 10-year lease.” Well, with early-stage [life sciences] companies, the investment is significantly higher. And these are often companies that have no track record — they’re a new company and they’re venture-backed. You’re investing significant money into the real estate and the tenants that are coming in have a completely different profile. So, that’s where you have to really be confident and comfortable in operating that space, but the business plan does have tenant risks inherent in it, and you have to know how to underwrite that.
Lenders certainly acknowledge that that is an industry fundamental. There are still some lenders that are new to the evolution from an office model. We have been at this for many years now and evolved our thinking on this early on, but the unique challenges include the tenant profile and the significant upfront investment. So, what happens if tenants either grow out of their space or don’t hit scientific milestones? You need to solve for that.
I’m sure lenders also are leaning on you as a firm that knows what it’s doing in this space, and in the assessment of prospective tenants?
One hundred percent. When we tour lenders and investors through a space, we point out certain design or engineering moments. It’s very deliberate, and it’s in order to answer questions around the potential transient nature of tenants. If the [business] model is that you’re investing the same dollars over and over, maybe every three years, it doesn’t work [for life sciences]. So, you need to really know that and have solutions built into these spaces.
There are a number of lenders and institutional equity partners who know the business and who get what we’re doing. But, ultimately, they look to us to understand the operation, design and engineering of those spaces. And, right now, broadly speaking in the market, you are seeing an immense educational exercise that’s happening from every side: debt, equity, landlords that aren’t in the space that are looking at life sciences conversion as a strategy, brokers, service providers, you name it. It’s representative of the red-hot nature and interest in the sector.
But, like I said, Taconic has been doing this now for several years, and is fortunate enough to be well versed in the granular details of how to operate and plan with the nuances.
A lot of owners are looking at the life sciences sector in New York and saying, “Maybe I could turn this office building into life sciences.” Do you have any advice or words of caution for them?
It starts with a feasibility study, so, physically, what does your building look like? What are the limitations to delivering the absolute fundamental needs in terms of infrastructure? You then look at the broader market. And, again, that’s challenging to do today in New York; there’s not the same amount of data in terms of comps as there are in the office world, which, in New York, has been institutionalized and has matured for decades and decades.
And, then, this is where it’s a bit more of a closely guarded secret. There’s only a few landlords who are doing deals today who have lab experience.
The next big challenge is, how do you project forward growth, because we’re at the early, early stages in New York. Not every building will be able to do this. It’s very challenging. There are not only the physical challenges, but you also have to look at co-tenancy. So, if you’re a landlord with half of a building leased, do life science tenants want to coexist with white-shoe law firms? Those are definitely questions that landlords will need to answer, as you’ll no doubt see challenges there.
Then, there’s also zoning and other city restrictions. There are certainly significant barriers to entry, but we believe there’s significant growth opportunities here. Right now, we’re competing with a number of the other projects that are coming online, but our ultimate belief is there’s significant runway here. So, eventually, we’ll all be rooting for other projects to create that next line of sight into growth and continue to create that critical mass of life science here in New York City. I think we’re all on the same team with respect to that.
I think it’s so fascinating, though. New York used to be such a finance hub, then we saw TAMI, and now life sciences coming in. So, it’s a really fascinating evolution of the city, I think. And that’s ultimately Taconic’s fundamental thesis: Why have all these sectors been drawn here, to grow and flourish here? We would say it’s ultimately due to the fundamental premise that talent wants to be here.
Do you see the life sciences sector as a way to encourage a completely different wave of people into the city?
Absolutely. And something that always comes up, when folks want to speak about the sector, is that this is work you can’t do at home. You shouldn’t be doing chemistry in your apartment.
I sincerely hope nobody’s attempting it.
[Laughs] But I think there’s a much broader storyline here, right? For those of us who ultimately believe in New York long term, this is, perhaps, a generational opportunity, whether you’re a young person looking to locate here and find a housing opportunity that wouldn’t wouldn’t have existed at a certain price point pre-COVID. Same for office space. I think that’s a separate issue from what is already an organic and significant momentum in life sciences. We ultimately are committed here, and the opportunities are immense.