Biotech on Spec

[ By Douglas Howe & Shawn Parry ]

The 9th and Stewart Life Sciences Building in Seattle is the result of more than five years of planning, design and construction. Seattle is now home to more than 200 biotech and biomedical companies.

When the dot-com office market was still booming, Touchstone decided to venture into biotech building development. While profiting from the outstanding office market and the single-digit vacancies then, the company wanted to create another niche for itself. In 1999, the regional biotechnology industry had a small cluster in Bothell and was scattered about the Seattle market in adaptive re-use buildings. For most developers, biotech wasn't even on the radar screen, except for the occasional build-to-suit. But Touchstone believed that Seattle's biotech and biomedical industry was growing and would continue to grow.

Seattle, now home to more than 200 biotechnology and biomedical companies, is one of the top five biotechnology centers in the nation. Research work performed by institutions such as the University of Washington, Fred Hutchinson Cancer Research Center and the Institute for Systems Biology have given rise to several well-known companies, including Icos, Corixa, Immunex (now Amgen) and Zymogenetics. The industry promises to create new jobs and evolve into a major employer, helping to replace the manufacturing and resource-based industries that once dominated the local economy.

As Touchstone became committed to this "new" industry, it determined that it would have to provide these companies with an experienced development team that understood their business and their specialized building needs. So, prior to planning any specific development, they traveled to the major biotech markets to see firsthand what the existing facilities offered - what worked and what didn't. They toured buildings in San Francisco, San Diego and Boston, meeting with users, developers, researchers, engineers, brokers and investors.

The more Touchstone learned and understood, the more questions they had. Biotech buildings have rigid structural frames to minimize microvibrations in the building. They have high floor-to-floor ceiling requirements to allow the piping and ductwork to be installed. The buildings need boilers, chillers and sophisticated HVAC equipment. They are large power users and there are infinite specialized requirements, such as hazardous material storage, vivariums (animal research areas) and clean rooms. Each individual company had unique and individual needs.

So the question became, could Touchstone develop and build a speculative biotech building and attract investment capital? As the company set out to refine biotech buildings into a generic building product type that would work for various lab users, it came to the realization that this would be nearly impossiblejust the kind of challenge Touchstone enjoys.

Above-standard tenant improvements can be up to $200 per square foot for biotech buildings.

An Underwriting Challenge In addition to the complexity of the structure itself, underwriting biotech tenants presents a formidable challenge. Most users, other than big pharmaceutical or public research institutions, would not be considered credit tenants. Biotechnology R & D companies are privately-funded research entities attempting to achieve approval for commercially successful new drugs. This process can take five to 10 years and cost nearly half a billion dollars or more for each success or failure. Many large tenants that have been in business for 10 or 15 years have never made a profit. Most have never had a drug achieve final FDA approval, let alone produced a commercially viable blockbuster product.

The key to underwriting a tenant's "creditworthiness" is to have a third-party industry consultant perform a thorough review of the tenant. One focus is on the quality of the science, patents and technology and where they are with clinical trials and FDA approvals. The expectation is that one of the drugs in development will be a winner in the foreseeable future. Other measurements include the quality and track record of top management, venture capital partners and key investor sponsorship and cash on hand to fund operating losses for up to five years. In addition, the anchor tenant must fund all above-standard tenant improvements (which can be up to $200 per square foot), and enhance the lease with a letter of credit covering a full year's net-net-net (NNN) rent and operating costs. With these criteria being met, the landlord's risk is tolerable and financing can be secured. The 70 percent pre-lease anchor tenant, Corixa Corporation, met these criteria. Touchstone was successful in attracting Prudential Real Estate Investors as a co-investment partner and Pacific Life Insurance as the construction lender.

Touchstone decided that 15 feet was the optimum floor-to-floor height. This accommodates a wide range of tenant types.

Creating an Institutional-Grade Building
The challenge from the outset was to determine how to design and build a biotechnology building at a cost that could be leased at market rates in order to secure project financing. There was no clear building standard for this type of product - Touchstone had to create it, providing all the functional capabilities of an institutional-grade building at a cost closer to that of a commercial office building: $400 versus $250 per square foot.

Design started on spec, knowing that a few large tenants in the market could be attracted to this project. With no tenant-driven specifics, the building had to appeal to as broad a range of biotech users as possible. One of the key lessons research revealed was that biotechnology users have unique needs. Each company is engaged in a different science and has different infrastructure requirements, so Touchstone tried to assemble the common threads. In the end, the company created the infrastructure, redundancy and flexibility able to accommodate a variety of users - both now and in the future.

The building frame was one of the first challenges. Many institutional-grade biotech buildings are low-rise concrete structures, and existing buildings in the adjacent biotech R&D cluster neighborhoods were only two to four levels. But to maximize the floor area ratio in urban downtown Seattle, Touchstone had to build vertically. Additionally, many biotech tenants want a facility with low vibration characteristics. Again, concrete works well for this application, but it takes longer to build and it also adds a premium to the cost. In the end, Touchstone chose a hybrid structural frame, offering the best of both worlds.

The company designed a concrete core and a substantial concrete shear wall, but between those two components, the number of steel columns and steel beams were increased, effectively locking the two concrete elements together. The result is the cost effectiveness and speed of steel construction, with the ability to provide a "central core" area on each floor of less than 2,000 micro inches per second (MIPS) vibration standard. Structural columns were placed at a module of 31-1/2 feet on the perimeter of the building. This allows for lab bench setup of 10-1/2 feet each, an average bench standard.

At 11 stories, this is likely one of the tallest biotechnology facilities in the country. A below-grade vivarium with a 20-foot floor-to-floor height anchors the building. The at-grade first level incorporates the building loading dock, hazardous waste storage for tenants and the security and engineering offices, as well as 4,500 square feet of retail space and 10,000 square feet of leaseable lab space. Three levels of above-grade parking enhance security for the vivarium and tenants and afford better views to upper level tenants on floors five through 11.

There was considerable debate over floor-to-floor heights throughout the design process. Some argued that biotech can be built in a 12-foot to 13-foot floor-to-floor; others said you need 16 feet to 18 feet. Touchstone came to the conclusion that 15 feet was the optimum floor-to-floor height. This accommodates a wide range of tenant types, facilitates the mechanical contractor's installations and allows tenants to change research within their space without having to remove all of the existing utilities.

Another hot topic was the HVAC equipment. Every tenant had different air requirements, from the number of air changes per hour to the types of filtration systems. Since Touchstone could never accommodate every tenant's needs, the company designed the building to facilitate the installation of the tenant's own air handling equipment on each floor - whatever it needs to be. The shell includes two 400-ton chillers with expansion space for another 800 tons, providing flexibility and redundancy. The south side of the building has a 35-foot wide louver system -- the full height of the tower -- that is completely removable, allowing the tenant to install, upgrade, modify and expand equipment as their science and research changes, as well as accommodate future tenants' requirements.

This "spine" actually became an architectural feature of the building. Intake air enters through the removable louvers and exhaust air is relieved out another side of the building on a floor-by-floor basis. This significantly reduces the space needed for vertical shaft risers. Fume exhaust is handled in vertical shafts terminating on the roof in a fan "farm" grid system. The building systems were sized for up to 20 air changes per hour throughout the premises.

The innovations at the 9th and Stewart Life Sciences Building go on and on. There are multiple generators and redundant boilers, with room to expand; power to supply 40 watts per square foot; and specialty "rooms" for tenants' uses. The building sets a new standard for high-rise speculative biotechnology development.

The project's high-quality, high-tech design also allowed 9th and Stewart to become one of the pilot projects for the U.S. Green Building Council's Shell & Core LEED program. The building will achieve Silver certification. By using highly efficient equipment and incorporating creative systems solutions, the company was able to accommodate environmental considerations as well as enhance both the project's overall value and continued efficiency.

Waterless urinals, low-flow fixtures and high-efficiency irrigation systems reduced water use by 45 percent. The innovative energy system design allowed energy performance to be improved by 27 percent - an anticipated combined annual savings of over $23,000, or over one dollar per square foot per year in operating expenses.

Lessons Learned
A project of this scope and complexity does not come without tremendous obstacles. Although the 9th & Stewart Life Sciences Building project created a magnitude of challenges, the techniques, methods and process are similar to other Touchstone projects. Some of the lessons learned are:

• There can be profitable "niche" commercial development opportunities in any market.
• Do your homework and thoroughly research the industry.
• Be clear as to what your development objectives are from the outset - building performance standards, project budget, construction timing, etc.
• Build a strong design, development and construction team and challenge them to create innovative solutions that meet your project objectives.

The 9th and Stewart Life Sciences Building is the result of more than five years of planning, design and construction. The success of this project came from years of research work and planning and the dedicated development, design and construction teams who kept going when it seemed that there were no solutions to the challenges. The building was completed on time and under budget and at an overall cost similar to that of a comparable commercial office building.

Recently named NAIOP's 2004 "Technology Building of the Year" and "Real Estate Deal of the Year," as well as SIOR's 2004 "Office Development of the Year," the 9th and Stewart Life Sciences Building achieved Touchstone's objective of providing institutional-quality lab space to the biotechnology sector at competitive market rates.

Douglas Howe is president and Shawn Parry is vice president of Seattle-based Touchstone Corporation. Touchstone has been a commercial office and retail developer in the Seattle/Puget Sound area for over 20 years, specializing in urban infill projects.

For more information

Touchstone Corp.