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The Race for (Smart) Space
The conventional wisdom used to be that Connecticut couldn't attract science and technology companies because it lacked tech-friendly commercial real estate. Now that we have the space, what happened to the companies?
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Business New Haven
4/14/2003
By: Lisa Micali
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Over the past five years state, city and local officials have been working diligently to attract and retain emerging growth
companies in the greater New Haven market. Marketing efforts such the state's industry "cluster" initiatives, "TecHaven," and "You Belong in Connecticut" were designed to increase awareness within and beyond the state's boundaries.
Moreover, business-friendly legislation has increased financing options for companies with critical technologies as well as providing additional R&D and property tax exemptions for high tech companies operating in Connecticut.
The result has been fertile soil for emerging technology companies in the region. But with the economy having soured, high tech and biotech real estate projects in the New Haven area have stalled as the shake-out in the funding market dominates potential deals and further groundbreakings.
The news, however, isn't all bad. The current dismal market should weed out the good from the bad, producing stronger companies with broader product lines or services, led by more experienced entrepreneurs who have weathered the shake-outs. And this is good news for developers who have put their projects on hold.
For years, Connecticut science and tech opinion leaders have complained about the dearth of suitable space in the New Haven area. But now that an adequate supply of laboratory space and high-tech space has become available, with additional space poised to come online in the fall of 2003, the country is at war, the economy tilting toward another recession, and space stands idle.
As well, downsizing at area bioscience and technology companies has hindered space absorption - and in some cases contributed to an increase in the amount of sublease space on the market. Regardless of the causes, the economy looks bleak for a rebound this year. Both locally and nationally, the tech and bioscience sectors have fallen out of favor with venture capital investors as early financing rounds are getting harder and harder to fund and the market for initial public offerings remains for all practical purposes dead - with no revival expected anytime soon.
The shake-out in the bio-IT sector is likely to continue, especially among young software companies and drug discovery firms, which have yet to convince potential investors and customers of the value of their products. And, those that remain in business have tightened their wallets and focused with renewed vision on their core businesses.
While venture capital investment is down, the reports aren't as dim as it seems. According to the annual "MoneyTree Survey" from PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association, venture capital investments in biotechnology and medical-devices companies combined to total $4.7 billion in 2002, or 22 percent of all venture investing - the lowest level since 1998.
Numbers in New England for 2002 show VC investments were down around $35 million from 2001 but the number of deals increased meaning more firms were being funded though with less cash than in previous years. The slow downturn in bio-IT financing since the VC boom of 1998-2000 was, as many observers pointed out, a necessary and healthy correction that eventually should bode favorably for both bioscience and technology.
In 2002, Connecticut-based technology and bioscience companies shared in the national tech sector's economic woes over the past two years as such companies in the region downsized, postponed or canceled major expansion projects.
The technology industry, too, lost more than 8,000 jobs in 2001 according to Cyberstates 2002, published by the AeA, Advancing the Business of Technology. Expect more of the same for 2002
and 2003, though numbers are not available yet says Anne Doherty Johnson, executive director of AeA New England Council, a national high tech trade organization based in Washington, D.C.
"Connecticut's tech industry weathered some tough times during the technology slowdown in 2001 as well as last year, experiencing a decline in employment, tech exports and venture capital investments," Johnson says. "However, Connecticut's technology economy is relatively strong, and the business environment should improve barring unforeseen geopolitical factors in late 2003."
Despite recent layoffs among technology and bioscience companies in the state, these industry sectors remain promising for Connecticut, says Victor Budnick, president and executive director of Connecticut Innovations Inc. (CII).
"Since most of the more established companies have substantial funding, they are weathering the recession and are focused on the long-term horizon," Budnick says. "Some of the less mature tech companies and biotechs are carefully managing their balance sheets in this uncertain environment, but there are new start-ups, such as Rib-X and Sopherion, that are getting funding and hiring people."
Budnick acknowledges, however, that some of the 27 biotech companies now in existence in the state may not long survive or will be forced to merge. But in terms of sheer numbers, he believes the biotech sector in particular has a very good shot at survival and coming through the current environment with renewed strength. "Of the 27 biotech companies in the state, I expect that number to at least double in the next three to five years," he says.
Some companies, though, such as Branford-based CuraGen Corp., have been profoundly affected by the marketplace's bitter new pill.
In November, the company announced the indefinite postponement of a new research facility it was building in Branford, as it was forced to pare its workforce by 25 percent - cutting some 128 employees - as part a corporate restructuring effort to reduce costs and focus on drug development.
Founded in 1993, CuraGen, with two facilities in Branford, planned on consolidating all locations into its new HQ. Last May, CuraGen had already said that it was going to delay the project for a year but it looks like construction may be postponed for another 12 months, according to company spokesperson Mark Vincent.
Given the youthful status of the region's biotechnology cluster and the risk inherent in fledgling biotechnology companies, developers have been reluctant to invest the large amounts of cash typically needed to develop new space. As a result, high profile developments such as the Acorn Technology Campus in West Haven and Hamden BioScience Campus in Hamden have been put on hold indefinitely as these developments, entirely tenant-driven, wait out the current downturn.
Last summer's groundbreaking for the Hamden BioScience Campus and BioScience Incubator came and went without anyone taking much notice. Now the project remains mostly inactive, according to Creighton English, a principal of the Hamden Bioscience Campus.
"Not much is going on," explains English. "We've had lots of interest in the space from biotech companies but deals keep falling through. Companies are struggling with funding issues in the current environment where lenders just aren't comfortable taking that risk."
Hamden's BioScience Incubator represents a strategic alliance between the University of Connecticut Biotechnology Center and Hamden BioScience Campus. Sited on 16.4 acres in Hamden, the facility is currently approved for 1,007,595 square feet of dedicated R&D space consisting of a three-phase Class-A development in a campus-like setting. Total improvements will include 732,099 square feet of rentable office and laboratory space, with another 26,245 square feet for a campus utility plant building and 249,251 square feet of parking space. The campus will have surface and garage parking adequate for 1,414 cars. Plus, a contiguous site is being prepared for a 60,000-square-foot incubator facility.
English remains hopeful about the project's future, but concedes he is at a loss as to when the market will improve. "I have no idea when we'll get going again," he says, "but hope springs eternal."
In New Haven, Pfizer Inc. in February announced plans to build a $35 billion state-of-the-art clinical research unit downtown. The 2.5 acre site between Park and Howe streets, is owned by the State of Connecticut, which previously identified the area for bioscience investment. In exchange for Pfizer's investment, the State, through the Office of BioScience, will impart the land to Pfizer. The new facility too, will be eligible for property tax abatements under the Enterprise Zone program. Construction on the 60,000-square-foot facility is scheduled to begin in the fall, and the research unit is expected to open in 2005.
Ballyhooed by local and state officials, the project marks a milestone in Connecticut's (and greater New Haven's) efforts to be recognized as a "hot spot" for bioscience companies. To date, 25 new biotechnology companies have been established in the New Haven area - 17 within the city limits - attracting more than $1.5 billion in capital, and employing a total of 1,300 people, according to Yale University's Office of Cooperative Research.
Science Park (now known as "Science Park at Yale") was the state's first technology "incubator." It has struggled for decades in fulfilling its mission of becoming a home to biotechnology and tech-related businesses.
How its new real estate developer, Lyme Properties, is rehabbing 270,000 square feet of new and renovated space at 25 Science Park featuring state-of-the-art laboratories as well as space for traditional office uses, R&D and a restaurant. Yale recently attached its name to the park, wagering that the Yale brand would attract more businesses to the facility. State, local and university officials hope the combination of Yale's name and Lyme's renovations will buoy marketing efforts nationally.
"The building at 25 Science Park is part of Lyme's $30 million, two million square feet of new and renovated space that will include research space, offices, restaurant and retail spaces supported by a pedestrian-friendly environment with plenty of free parking," explains Lyme project manager Laura Woznitski.
"We are gutting the unoccupied areas of the building while fitting out other portions of the building for laboratory and office uses. And we are well positioned to deliver newly constructed tenant spaces concurrent with the completion of the lab-ready base building."
Woznitski adds that Lyme invests in markets with an opportunity to control acreage in the early stages of a given industry segment. The 20-year timeline to complete the project, says Woznitski, will unfold according to market-driven requirements and resemble the biotech model in Lyme's Cambridge, Mass. home. Woznitski concedes that the biotech cluster in New Haven is in the early stages relative to other markets, but points out that, in the beginning, so was Cambridge.
Across town, Yale opened its new $176 million 457,000-square-foot lab and research center quietly in November. The building is part of Yale's commitment to invest $500 million over the next ten years to expand and improve its medical school's facilities, increasing lab space by 25 percent and enhancing its position as one of the nation's top medical schools.
And at the 300 George Street Technology Center, a 520,000-square-foot building home to several biotechnology companies (such as Rib-X Pharmaceuticals, AlexiPharma, Molecular Staging and a number of Yale University laboratories) leasing has been a tough sell.
In late November, Achillion Pharmaceuticals added 12,500 square feet, bringing the company's total lab and office space to 27,000 square feet. Sopherion Therapeutics, a biotech company that recently received $26 million in Series A financing, took 25,000 square feet. Paula's Deli also recently moved into 2,500 feet of restaurant/deli space on the first floor. Other potential deals with other biotech companies, totaling some 70,000 square feet, are in the works but some two to three months away from being closed, says Tim Fegan, senior vice president at commercial Realtor CB Richard Ellis.
While interest remains strong in 300 George, Fegan says, many of the start-up companies he's seeing have been aversely affected by the retreat of venture capital.
"It's proven to be a major obstacle. Many of the start-ups we're dealing with are troubled by raising funding in this environment," Fegan adds. "VCs don't want to deal with smaller, unproven companies. Instead they are focusing on larger deals in the $30 million to $50 million range."
Elsewhere in the region, the city of Waterbury is finally reaping rewards from its economic development efforts aimed at high tech companies.
In 1998 the Brass City established Connecticut's first "Information Technology Zone (ITZ)," a 42-block area in the Central Business District earmarked for information technology companies. The area, encircled by three rings of fiber-optic cable that provide high-speed Internet access, was designed to attract high-tech companies such as software developers, back-office operations and Web site developers to the city center.
With more than 700,000 square feet of space available at an average cost of $11 per square foot (comparable space in New Haven is about $13), the ITZ has one of the lowest costs for comparable space in New England.
The ITZ offers a hefty package of financial incentives, including tax abatements, grants and low-cost loans. The state committed $2.2 million to install advanced communication infrastructure and offer generous financial incentives for information technology companies locating in the zone.
The ITZ is administered by Naugatuck Valley Development Corp. on behalf of the city of Waterbury and funded by the state's Department of Economic & Community Development (DECD).
To date 13 new IT companies have relocated to downtown Waterbury as a result of the ITZ program offerings. Says Tom Hill III, of Waterbury-based Drubner Industrials: "Regardless of our city's financial difficulties, creation of the ITZ has been instrumental in getting tech-related businesses to move into Waterbury. We recently completed a $1 million sale of a 15,000-square-foot corporate/tech center to Innovative Information Solutions, formerly of Woodbury.
The CEO, Evans Walters, was attracted to Waterbury because of the central location and the value in downtown compared to other tech spots," Hill says. "But inventory is incredibly low."
Over time, Hill and others are hopeful that some measure of equilibrium will be achieved between those who are developing a selling technology-specific real-estate projects - and those who depend on it to survive and thrive.
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