While the outlook for Twin Cities offices is undoubtedly bleak in the era of hybrid work, there is at least one bright spot in the commercial real estate world: life sciences.
This vast sector includes a wide range of companies, including medical technology companies and device manufacturers such as Medtronic, and is part of Minnesota's booming economy, with the Twin Cities one of the top areas for medical technology jobs in the country and set to receive millions of dollars in federal support.
New data bears that out, with average vacancy rates for life sciences buildings dropping to just 3.3% in the metropolitan area at the end of the first quarter, according to commercial real estate brokerage Colliers. At the same time, office vacancy rates remained stable overall but near record highs at 13.8%, while industrial real estate vacancy rates increased slightly.
While office buildings from suburban to downtown Minneapolis are selling well below their original value as mortgage and property tax payments fall behind or they are in negotiation to be converted to residential use, construction of life science buildings is on the rise, with several life science projects currently underway or in the works that will add hundreds of thousands of square feet of laboratory, production space and research facilities to an area particularly known for medical device manufacturing.
Experts say the Twin Cities has all the necessary ingredients to be a life sciences hub, including top research universities, major medical centers like the Mayo Clinic and a recently announced $5 billion expansion. From 2018 to 2022, the Twin Cities ranked second in the nation for number of medical technology jobs and third for total venture capital funding into medical devices and supplies, according to a national analysis by JLL.
“We're the original device market,” said Jessica Mogilka, executive vice president at JLL. “We're the grandfather of all devices. [Medtronic founder] Earl Bakken builds a pacemaker in his garage in northeast Minneapolis in the 1950s.
Giant Footprints
In many ways, the surge in life sciences development occurring in the Twin Cities is long overdue.
Michael Anderstrom, vice president and senior advisor for Colliers' life sciences team, said there's a lack of life sciences development in the Twin Cities compared to other commercial real estate markets: Despite its prevalence as a major industry in the region, it only accounts for about 2% to 3% of the metro area's total commercial market.
This is probably because, given the specialization of these businesses, projects are difficult and very expensive to build, and difficult to reuse if needed.
But development is still underway. Minneapolis-based builder Ryan Koss has carved out a niche in the life sciences market, recently breaking ground on a $145 million custom-home project in Maple Grove. The project will include a 400,000-square-foot office and research and development facility for Boston Scientific, the anchor tenant of the 100-acre Minnesota Science and Technology Center. That will add to Boston Scientific's current Minnesota locations, another 79-acre campus in Maple Grove and a 92-acre campus in Arden Hills.
“There are a lot of reasons why Minneapolis is a good place for Fortune 500 companies, but it's also a good place for medical technology users,” said Dan Mueller, Ryan's senior vice president of real estate development.
Ryan also recently completed construction of a 42-acre Innovation Center campus for Medtronic in Colorado, which includes a nearly 500,000-square-foot facility with 60,000 square feet of lab/R&D space, and in 2020 developed a 132,000-square-foot headquarters building for Calder Products, a manufacturer of quick-connect couplers for medical technology and pharmaceutical companies.
Muller said the focus on medtech projects is especially important now because, unlike typical commercial projects, much of the industry's work cannot be done just anywhere.
“These facilities require people. You can't do it at home or in a coffee shop,” he said. “You can't create cutting edge technology at home.”
Flexible Space
One thing that makes the Twin Cities medtech environment unique, Mogilka said, is the millions of square feet of “flex space” — mostly single-story buildings with office and warehouse capacity that device manufacturers can use for a variety of purposes.
Mogilka sits on the board of directors for University Enterprise Laboratories (UEL), a 150,000-square-foot lab space near the University of Minnesota campus. Anderstrom said UEL is one of three purpose-built lab spaces that serve as incubators for companies ready to take the next step, including 4Front Campus in Oakdale and Mortenson's Discovery Square One and Two in Rochester. All of these give these startups access to critical infrastructure and equipment that could one day grow into the next Medtronic or Boston Scientific, both in terms of name recognition and real estate.
But before these startups reach the point of building 100 acres, they may enter the flex space market.
IMRIS, which makes magnetic resonance imaging systems that move on rails attached to the ceiling in hospitals and clinics, once operated out of a repurposed five-story building in Minnetonka built in the 1970s, but the building was too big for the company's research and high-tech manufacturing needs, and the company ended up evolving in ways that the space couldn't accommodate.
“We realized that the space we were in wasn't optimized for how we do business,” says Alan Weinberg, vice president of marketing and product management at IMRIS. “The space we're in now is optimized for interaction.”
IMRIS moved last fall into a newly constructed facility in Chaska that includes offices and production areas.
This week, North Dakota-based life sciences company Aldevron asked the state for millions of dollars in aid to fund a 2022 expansion of a warehouse building the company purchased in Eden Prairie.
“There's a tipping point when you compare new building to an existing building,” Mueller says. “At some point it becomes more cost-effective to work from the inside out and design the building for its intended use.”
Future Possibilities
It's not just the private sector that's driving the life sciences sector: With the support of industry, economic alliance organization Greater MSP is leading the effort to expand the region's importance as a medical technology hub through an initiative called MedTech 3.0.
The effort will foster collaboration with hospitals, research institutes, medical device manufacturers, etc. The group recently applied for $60 million in federal funding, but plans to move forward with its plan with or without funding.
“We have a lot of expertise and the whole supply chain and ecosystem,” Mogilka said.
But Brent Webb, Mortenson's development director, said such funding is essential to spur research and development, which is vital to being able to attract and retain top talent.
“All of these things are connected in some way,” he said.
In late March, the University of Minnesota Foundation selected Mortenson as its development partner for the first phase of a 12-acre “innovation and economic development hub” called the Minnesota Innovation Exchange (MIX).
Webb said the foundation has yet to identify anchor tenants for the first phase of the project — adjacent to the university's Biomedical Discovery District and a future clinical campus expansion near Huntington Bank Stadium — but that medical technology users will likely be a component of it.
“MIX itself is creating a framework to support researchers and their ideas, but it's also creating connections with the private sector,” Webb said.
Webb said that while the life sciences sector has been a bright spot in the Twin Cities' commercial real estate landscape, it hasn't been immune to the financing crunch that has plagued other parts of the industry. Venture capital funding has become harder to come by, and many companies are focusing on investing in operations rather than expansion, he said.
“Growth has slowed a bit,” he said. “It's not back to where it was three years ago.”