Despite economic headwinds in 2023, life sciences development still a bright spot in Chicago

Chicago’s life sciences industry could in 2024 be one of the few bright spots in the city’s struggling office market. A flurry of new leases signed by expanding research firms, along with record-setting amounts of federal grants flowing to local biotech startups, has developers anticipating strong growth in the sector, enough to kick-start new towers dedicated to life sciences.

“Chicago to me is a really vibrant, fresh place,” said Frank Cassou, CEO at CycloPure Inc., which just agreed to relocate its headquarters from the suburbs to 2430 N. Halsted St. in Lincoln Park, the former Stanley Manne Children’s Research Institute. Developer Sterling Bay purchased the site in 2018 and revamped it into laboratory space.

CycloPure sells water test kits and created a chemical process that removes cancer-causing “forever chemicals” from drinking water. It plans to greatly expand its workforce and needed new, up-to-date lab space in a location that employees, including many Chicago residents, could reach without long commutes.

“It really improves your quality of life if you can get to the office in 15 minutes,” Cassou said.

Developers like Sterling Bay, Trammell Crow Co. and others say the vast amount of new, advanced lab space they built, especially in amenity-rich neighborhoods such as Lincoln Park and Fulton Market, means Chicago can finally capture jobs created by research firms incubated at the University of Chicago, Northwestern University and other local schools, startups that typically left for life science hubs in Boston or San Diego once they outgrew university laboratories.

“That’s something we’re seeing across our portfolio,” said Morgan Baer-Blaska, Trammell Crow vice president for Midwest operations. “The legitimacy of this market has been proven over the last year.”

Trammell Crow in 2020 opened the 14-story 1375 W. Fulton St., phase one of Fulton Labs, the company’s 725,000-square-foot life sciences campus, and it’s now about 98% leased, she added.

Belay Diagnostics just expanded at Fulton Labs a few months after signing a lease in August. The company created a molecular testing platform that detects brain and spinal cord cancers and took another 6,100 square feet at 1375 W. Fulton St., more than doubling its footprint.

Three other biotech firms recently opened new lab spaces at Sterling Bay’s 2430 N. Halsted St., including Seq Biomarque, which plans to develop a cost-effective screening and diagnostic test for Alzheimer’s disease. Germany-based genetic researcher CeGaT Corp. opened its first U.S. location, and EVOQ Therapeutics, a firm incubated at the University of Michigan, will develop new therapies for autoimmune diseases.

“Being in a neighborhood that offers access to dining, entertainment and daily conveniences fosters a work-life balance that helps us attract and retain top-tier talent,” Seq Biomarque CEO Satish Menon said in a prepared statement.

It’s not all good news for Chicago’s life sciences sector. Soaring interest rates and other economic headwinds led venture capital firms to grow cautious in 2023, slowing down new funding for life sciences and curtailing industry growth nationwide, and that’s helped keep vacancy rates high at the newest buildings.

“The life sciences sector is not immune, of course, to economic pressure,” said Jonathan Metzl, executive managing director at the commercial real estate firm Cushman & Wakefield.

Sterling Bay finished early this year 1229 W. Concord Place, a 320,000-square-foot riverfront tower for life science firms, at its Lincoln Yards site on the North Side, but it doesn’t have any tenants. And Trammell Crow completed the 425,000-square-foot 400 N. Aberdeen St., the second phase of Fulton Labs, in 2022, and it’s about 30% occupied.

Mark Goodman & Associates planned to continue the Fulton Market construction boom by creating a 16-story life sciences tower at 400 N. Elizabeth St., but earlier this year decided to put the project on hold, and now plans to develop apartments instead.

The vacancy rate for life sciences in the Chicago metro area hit 26% by September, far above the 11% national average and eclipsed only by New York City’s 30% vacancy rate, according to a report from Cushman & Wakefield.

Metzl attributes Chicago’s high vacancy to bad timing. The city’s building boom coincided with interest rate hikes and the drop-off in venture capital funding, but venture capital firms are starting to loosen up, and in 2024 may once again pour millions into local biotech companies.

“There have been a lot of conversations between local companies and venture capital funders excited about Chicago,” Metzl said. “So, we believe we’ll see in the near term a rise in the number of leasing deals announced.”

Venture capital funding for Chicago-area biotech firms year-over-year fell 37% in the first half of 2023. But in the past few months, some local companies scored massive new private investments, including Evozyne, a molecular engineering firm at Sterling Bay’s 2430 N. Halsted St. building, which raised $81 million, and plans to use the funds to develop new drugs and therapies.

The other major source of new funds for Chicago-area firms are grants from the National Institutes of Health, and unlike private investors, the NIH never slowed down, said JLL Senior Managing Director Paul Giannopulos. The NIH passed out $1.1 billion to Chicago-area life sciences firms in the first three quarters of 2023, a record pace, with programs housed by Northwestern University and the University of Chicago accumulating most of the funding.

Giannopulos isn’t worried that some Chicago life sciences buildings are empty, he added, since the researchers tinkering in small labs today could soon grow into full-fledged pharmaceutical firms and occupy large amounts of space.

“You don’t have an instant success overnight with someone coming out of a university that says, ‘I need 40,000 square feet,’” he said. “We just need a little bit of time for these groups to grow.”

Developers need a variety of available spaces for their life sciences tenants, said Baer-Blaska, because they are far more dynamic than ordinary office users. Small labs with five or six people can quickly balloon in size if they hit a milestone, such as securing a patent for a new drug, and need to ramp up production. Trammell Crow frequently sees small firms graduate from incubator spaces and occupy up to 10,000 square feet, and then take over a full floor.

“That’s something we’ve seen across our portfolio,” she said.

And now that 1375 W. Fulton St. is nearly full, the company expects to start filling up 400 N. Aberdeen St. in the coming year, and is getting ready to break ground on a 660,000-square-foot life sciences and office tower nearby at 1105 W. Carroll St.

Trammell Crow is also developing Evanston Labs, a 10-story building in downtown Evanston near the Northwestern University campus, and Hyde Park Labs, a 14-story building with laboratories and offices for the University of Chicago and other biomedical researchers at the corner of 52nd Street and Harper Avenue.

The Aberdeen building landed key tenants this year, Baer-Blaska added, including the Illinois Institute of Technology, which took a full floor, and the Chan Zuckerberg Biohub Chicago, founded by Priscilla Chan and Facebook’s Mark Zuckerberg.

“We’re seeing a ton of activity,” she said.