Aging Baby Boomers, Advancing Technology Spur Demand for Biotech Facilities

It’s no secret that the nation’s demographics are changing. The largest generation in the country’s history, the baby boomers, are getting closer to retirement (or at least they were until the economy collapsed). By 2025 there will be nearly 64 million Americans 65 years or older, 18 percent of the population, compared to less than 13 percent today, per U.S. Census Bureau estimates.¹U.S. Census Bureau, “Table 2. Projections of the Population by Selected Age Groups and Sex for the United States: 2010 to 2050 (NP2008-T2),” 14 August 2008, http://www.census.gov/population/www/projections/files/nation/summary/np2008-t2.xls, (11 December 2009). This aging populace has made health care reform a major priority of the current administration, but it has also led to vast spending and research on life sciences applications. Life sciences run the spectrum from pharmaceutical manufacturing to dental laboratories to ambulance services.²Kevin Klowden and Benhamin Yeo with Ross DeVol, “The Value of U.S. Life Sciences,” A White Paper Exploring Competitiveness, Delivery and Challenges, April 2009, Milken Institute, http://www.milkeninstitute.org/pdf/USChamberLifeSciencesApril2009.pdf, (11 December 2009). General health care has been and will continue to be a growth industry (we will continue to need more doctors, nurses, and medical personnel), but the related, albeit much smaller, biotech sector has strong potential to be a future niche driver.

The technological advances made in studying the human genome are expected to open up a new wave of drugs and medicines to cure even the rarest of diseases. Research into preventive medicine could be a key contributor in reining in the nation’s soaring heath care costs. Another area of biotech outside of drug manufacturing and research is genetically modified food. St. Louis is in the forefront of this as Monsanto, along with the Donald Danforth Plant Science Center and Washington University, have created an industry cluster there. Unpredictable weather patterns have increased the need for drought- and insect-resistent seeds and plants. Alternative fuels such as biofuels are another sector of potential growth, and research is being done on the viability of algae and other plants as fuel sources. It’s clear that there are many areas of potential growth within this industry.

Biotechnology has various definitions,³Joseph Cortright, Heike Mayer, “Signs of Life: The Growth of Biotechnology Centers in the U.S.,” 2002, http://www.brookings.edu/ES/urban/publications/biotech.pdf, (11 December 2009). but in general, biotech research focuses on treating or preventing disease and understanding organisms at their molecular or cellular levels. The Biotechnology Industry Organization more broadly defines biotech as “the application of biological knowledge and techniques to develop products and services.” There is no all-encompassing biotech employment sector; instead, the North American Industry Classification System (NAICS) classifies these jobs as biotechnology research and pharmaceuticals and medicines. While not all of these jobs are truly biotech (mouthwash and vitamins fall into these categories too), it is the closest aggregate available.⁴Ibid.Kevin Klowden and Benhamin Yeo with Ross DeVol, “The Value of U.S. Life Sciences,” A White Paper Exploring Competitiveness, Delivery and Challenges, April 2009, Milken Institute,http://www.milkeninstitute.org/pdf/USChamberLifeSciencesApril2009.pdf, (11 December 2009).Bureau of Labor Statistics, Current Employment Statistics – CES (National), December 2009, http://www.bls.gov/ces/data.htm, (12 December 2009). Based on these job classifications, there were 429,700 people employed in these sectors nationally in 2008.⁵Biotechnology Industry Organization, “Biotechnology Industry Facts,” http://bio.org/speeches/pubs/er/statistics.asp, (11 December 2009).Battelle Technology Partnership Practice, “Technology, Talent and Capital: State Bioscience Initiatives 2008,” June 2008, see http://bio.org/local/battelle2008/, (11 November 2009). That is just 0.31 percent of national employment, but it is a much larger segment of the economy than Internet publishing and broadcasting and web search portals, which employed 80,000 at the end of 2008. Exhibit 1 shows growth in the biotech industry compared to overall national growth from 1991–2008 (indexed to 1990). While volatile, biotech growth has clearly outpaced that of the broader U.S. economy. Based on history, biotech has shown a diversifying quality for metro employment. The sector’s employment was countercyclical (to total employment) during the 1990s and, to a lesser extent, in the early part of this decade. The Biotechnology Industry Organization estimates that 180,000 were employed in this industry in 2006, while Battelle Memorial Institute estimates that 1.3 million were employed in the biosciences in 2006.

But despite the relative longevity of the biotech industry, only a handful of markets can really lay claim to being legitimate biotech hubs. The Brookings Institution defines the top nine biotech centers by CMSA (Consolidated Metropolitan Statistical Area), which are broader than PPR-defined metros, as follows: Boston and San Francisco (the biotech leaders, including Oakland and San Jose); San Diego, Raleigh-Durham, and Seattle (the biotech challengers); New York (including North-Central New Jersey and Long Island) and Philadelphia (the nation’s pharmaceutical centers); and Los Angeles (including Riverside and Orange counties) and Washington-Baltimore (other biotech centers, due to their large share of National Institutes of Health (NIH) funding and company headquarters).⁶Ibid.

Boston and San Francisco, considered the dominant biotech markets in the United States, were at the forefront of this industry back in the 1970s, thanks to their strong research institutions and highly educated workforces. Today they rank as top recipients of NIH funding and biotech venture capital (VC) spending. From 1995–2008, Silicon Valley and New England, with San Francisco and Boston as the pillars of those regions, received 43 percent of all biotech VC spending, according to PricewaterhouseCoopers (PwC). This trend should persist into the foreseeable future, because they continue to be anchored by strong research universities and colleges as well as by hospitals.

Such activity clusters are a competitive challenge for other cities lacking this critical mass. San Diego and Raleigh are the closest challengers, as they have a similar potential for clustering activity (good schools, biotech operations in place, well-educated and specialized workforce, etc.). But metros without a strong presence of research institutions and public policy to lure these types of firms will miss out on the industry’s growth potential. So although research in biotechnology is widespread, established biotech hubs have maintained their dominance in securing these funds, further cementing this industry to those key locations.⁷Joseph Cortright, Heike Mayer, “Signs of Life: The Growth of Biotechnology Centers in the U.S.,” 2002, http://www.brookings.edu/ES/urban/publications/biotech.pdf, (11 December 2009).

Biotechnology has been a key beneficiary of VC spending in the last 10 years (1999–2008), attracting investment of more than $7 billion. That tally ranks fifth of the 17 categories tracked by PwC. However, over the five years ending in 2008, biotech ranked only third for VC capital flows, with nearly $4 billion, after software and industrial/energy. In addition, biotech continues to grab a larger piece of the VC pie. This support, along with the priorities set in Washington, bode well for growth. In the American Recovery and Reinvestment Act, $9.5 billion was allocated for spending by NIH for biomedical research, while another $2.5 billion was allocated to the National Science Foundation for research. These funds dwarf what the VC has spent in biotech over the past decade, and ancillary benefits and job growth in key biotech hubs along the coasts should be expected. But growth is likely to come from more than just the coasts. Exhibit 2 shows VC spending and NIH allocations (for 2007, the last year of complete data tallies) per capita, based on PwC’s VC regions. VC spending is concentrated in the top biotech hubs (which bodes well for job growth and new company startups), while NIH funding is spread out far more evenly (which bodes well for increased development of new facilities and hiring at local colleges and universities and research institutions).

So which property types will win out if biotech is the next big thing? Biotech is not a true traditional office story, since these firms require specialized space, but medical office and other specialized office space will benefit. It’s not really a warehouse play, either, as these innovations are not easily stored in warehouses. Apartment investment, however, will benefit from the household formation that quality jobs and ancillary impacts of this expanding industry bring. Retail is also a winner, as retail demand is broken down to bodies-times-dollars (biotech jobs are higher-paying than average). Metros like Boston and San Francisco are not fast-growth demographic markets, but they are high-income markets. And with further specialization into emerging industries and cutting-edge technology such as biotech, retail sales growth should benefit. The trickle-down effect of high-paid jobs requires service workers (restaurants, retail stores, etc.) and will also fuel retail sales growth.