There is a chill being felt through the financial markets, especially surrounding technology and continued speculation about just how deep and prolonged a funding downturn may be.
While all tech sectors have slowed and many firms struggle with venture capital funding, life sciences still appears to be a solid long-term bet many investors are willing to make. A number of recent funds dedicated to biotech firms or lab and related real estate have shown that, despite a first-quarter dip in funding from last year’s record high, there is still quite an appetite for this asset class.
“We are a long-term fund betting on the long-term growth of this industry for which we’ve never had more conviction,” Breakthrough Properties co-founder and CEO Dan Belldegrun told Bisnow in an interview.
Breakthrough, a joint venture of Tishman Speyer and Bellco Capital, has raised a $3B fund to directly invest in life sciences real estate across a global portfolio, which it says is the largest fund of its kind in history.
Courtey of Breakthrough Properties
Dan Belldegrun, CEO of Breakthrough Properties
Breakthrough, which launched in 2019, already has 4.6M SF of projects in the pipeline across the U.S. and UK, and it announced Monday its first project in Philadelphia, a 200K SF ground-up development site next to the University of Pennsylvania.
Bisnow spoke to Belldegrun about the fund’s approach and strategy, the state of the market and where he sees opportunity beyond the biotech strongholds on both sides of the Atlantic.
Bisnow: How are you evaluating and choosing markets to make investments in from the latest fund? I know a lot of things are ongoing projects, but in a general sense, how are you evaluating opportunities here?
Belldegrun: We do a lot of market research on opportunities. There’s, of course, the key clusters that are widely known by the industry, San Francisco, San Diego, the UK. But our perspective at Breakthrough is that the science happening now and over the next 10 years is going to happen in a number of different markets around key academic centers where there’s talent. The expansion will not only be more broad nationally but really internationally. We’ve structured Breakthrough as a long-term hold fund, in order to really invest not only in the existing clusters today but to take bets on markets that we believe will become emerging, strong life science markets.
Bisnow: Tell me about some of those markets. I read somewhere about Breakthrough making bets in Europe, outside of the Golden Triangle and Cambridge. What are you seeing in some of these emerging markets, especially in the U.S.?
Belldegrun: One of the markets I would point to is Philadelphia. It’s a market in the U.S. that we’re very excited about. There are a lot of venture capital dollars going into Philadelphia. It’s become the hub for cell and gene therapy with a lot of innovation, particularly in the cell and gene therapy space. The technology from Moderna’s mRNA vaccine for Covid was largely produced through research out of UPenn. So you have a great academic institution, you have a lot of talent, you put a lot of growth in biotech around key sectors like cell and gene therapy. Another announcement we made as well is in the Oxford, UK, market. It’s another market that has great academic talent, lots of research. But we believe that infrastructure remains a bottleneck for innovation in some of these key markets because you don’t have the right lab space to support the innovators and the companies.
Bisnow: Do you see opportunity in the next tier of markets? North Carolina, Houston, Chicago, LA, all these get thrown around, and with the amount of capital at your disposal, you could really enter some of these markets and radically shift them and really elevate them from being a tertiary market to something more.
Belldegrun: I think the short answer is we are studying them all, and we do hope to make more bets on these markets as we build our internal conviction. But as we take a long-term perspective, we think a lot of the key markets that you just noted are going to do burgeoning life science clusters. And it’s really driven by talent, by academia, by research and the companies that are being created in those ecosystems.
Bisnow: You position Breakthrough as being supportive of all types of spaces. By that I mean, you’re planning ground-up, new construction, conversions and flex lab space for startups. Do you have any sense or indication of how you would allocate resources across those categories?
Belldegrun: We believe the best ecosystems are one that encompass early stage startups, mid-stage growth companies and established anchors. Our goal at Breakthrough is to create ecosystems and campuses that encompass all of those companies. We think that creates the most dynamic places for people to work, to collaborate and to grow businesses. So part of our effort to do that has been to launch our StudioLabs. Our first facility in our Torrey View campus in San Diego, which is really designed to accommodate hypergrowth biotech companies, often venture-backed, who are looking for private, shorter-term, pre-built spaces.
Courtesy of Breakthrough Properties
A rendering of Torrey View, a future Breakthrough Properties project in San Diego.
Bisnow: You can go from a hypergrowth startup to having your own campus as a very successful commercialized biotech firm, and it all happens within a Breakthrough building.
Belldegrun: You need to be able to accommodate the entire life cycle of biotechs if you really want to help and support their businesses and their ambitious missions. Creating spaces that work for the entire spectrum of companies is our goal. We do that with specific programming and onboarding teams that really know how to operate those spaces. In addition to the real estate and the operations perspective, it’s about services. And part of what we’ve done at Breakthrough is build through Bellco Capital with industry leaders for a number of big venture funds, Big Pharma and academia groups who can all support companies with mentorship and access to capital.
Bisnow: There’s been a market slowdown, no doubt. The market in general, the tech market more specifically and biotech even more so. And you see venture capital drying up now, of course, that is shrinking from a record-high year. How do you read this in terms of both the length of this downturn and then that impact on the real estate market and what it means for what Breakthrough is doing?
Belldegrun: You need to look at it over the trailing few years, inclusive of 2022, to understand the cash position of these companies. So firstly, last year, $90B was invested in the life science sector, via private and public channels. So, historically speaking, a lot of biotechs have a lot of cash, and that cash is being used for research. So you’re continuing to see well-capitalized companies, which requires more space. So, from a capitalization perspective, particularly if you look at Big Pharma, which has a historic amount of cash on hand of over $500B, you have a lot of need for more research and more programs, which translates into demand for space.
But without a doubt, looking at the last 12 months, but more specifically the recent downturn, you need to take into consideration what impact that will have. And I think as we look at our own strategy at Breakthrough, there’s a number of factors that we take into consideration to make sure that we’re protecting from that downturn by investing in best-in-class locations, Class-A locations that will continue to receive demand from well-capitalized companies even if there is a downtick in demand.
Two, it’s about analyzing the clients behind the company very carefully before leasing. In the past 24 months, a lot of companies could receive funding. We believe only the best companies with the best science will get the funding going forward. So, using our capacity to underwrite credit, to understand the science, will be a key fundamental to making sure you’re protecting your portfolio going forward.
Bisnow: You were looking for $1.5B for this new fund, and you got $3B, a massive example of the geographic reach of this sort of investment opportunity. How do you see this as both indicative of investor appetite for it now and perhaps the long-term shift of how the market’s viewing life sciences real estate?
Belldegrun: The success of this raise comes from a few places. One, it’s really a first-of-its-kind joint venture between Tishman Speyer, which brings world-class real estate expertise, together with Bellco Capital, a life science investment firm that really understands the sector. That combination of real estate and science is a differentiating factor for Breakthrough in the markets, and I think that really resonated with investors.
Secondly is looking at the fundamentals of the biotech sector and Breakthrough being an opportunity to take a bet on the long-term growth of this industry, across markets, across different therapeutic areas. We are exclusively focused on the sector because we have deep conviction in the long-term growth fundamentals of the industry, and our investors have taken the same bet by investing with Breakthrough.
Bisnow: Could you tell me more about your views on the European market? Many U.S. investors and groups have placed a lot of money in the UK over the last six months, and Breakthrough feels like it’s also looking further afield into continental Europe as well.
Belldegrun: Europe is behind the U.S. But if you look at the European markets, the basic science in Europe is extremely strong. What is lacking is the access to capital that you have in the U.S. But you’ve seen a lot more risk capital start flooding into Europe. You’ve seen a lot more biotech entrepreneurs building companies in Europe and keeping them in markets in Europe.
We believe that trend is going to continue, and there will be continued and sustained growth in the primary European markets. And similarly, there’s very limited infrastructure to support those companies. So the combination of long-term growth and limited supply creates a great opportunity in certain markets. If you look at the UK, for example, where we’ve invested in Cambridge and Oxford, in 2021, there was £4.5B invested into the sector. That is a record for the market, with a previous record being £2.8B.
We think Amsterdam is a really exciting market where we actually have a project. The European FDA, called the EMA, moved to Amsterdam as part of Brexit. That’s a market that we believe in a lot. A lot of good science in and around different markets in Germany, in France, in Switzerland. Our teams are working with the local Tishman Speyer teams around Europe, who have been operating there for decades, to identify opportunities for Breakthrough to expand.