Renting Space in Vacated Research Facilities Offers Cost Savings as Well as Less Obvious Advantages

The high costs of building a laboratory present a major financial challenge for small companies and start-ups. At the same time, mergers and acquisitions, primarily in the pharmaceutical industry, are resulting in the closure of very large modern laboratories employing 1,000 or more people. This is not a new trend. Such closures have occurred periodically when waves of mergers and acquisitions swept various industries or when poor economic conditions forced the closure of large laboratories. Results of earlier mega-lab closures discussed below indicate how recently shuttered labs could evolve.

Instead of spending scarce capital to purchase or build a laboratory, firms can rent facilities in one of the large laboratories closed as a result of corporate mergers and acquisitions and reopened, usually under new ownership, as rental facilities. These facilities can enable small and midsized companies to rent first-class laboratory space at relatively modest cost. Many of these mega-laboratories also include offices, small production plants and warehouse space.

Renting laboratory space in a large, formerly closed laboratory offers other advantages as well. Government emissions permits are required for laboratories. Obtaining these permits often requires many hours to complete the necessary paperwork, followed by months of waiting time for the permit requests to be processed. The time and expense of obtaining these permits usually can be eliminated when leasing space because the permits already exist for large, multiuser laboratories. Another advantage: janitorial and other services can be shared by the tenants, reducing the cost to each tenant.

University of Pittsburgh Applied Research Center

In 1985 Chevron acquired Gulf Oil and consolidated R&D operations in California. It closed Gulf ’s corporate research center near Pittsburgh and donated it to the University of Pittsburgh in 1986. This is a very large facility: 53 buildings having a total of 1 million square feet of laboratory, office, manufacturing and warehouse space on 85 acres of land, 12 miles from the University of Pittsburgh. The university renamed the lab the University of Pittsburgh Applied Research Center, U-PARC, and began seeking tenants. In three years employment at U-PARC increased from 250 to more than 1,000 as companies moved into the site.

Tenants have many amenities. The buildings are connected by underground pedestrian tunnels that tenants can use during inclement weather. Tenant employees have access to an on-site cafeteria, catering service, meeting/ conference space, post office, credit union, picnic areas, locker rooms and shower facilities. Besides laboratory, office and storage space, there are 32 small-scale manufacturing plants that include petroleum, petrochemical and chemical-based technologies. Advanced manufacturing and testing capabilities include environmental, synthetic fuels, biotechnology and other emerging technologies.

Jeff Latcheran, of real estate management firm Oxford Development Company, facility manager for the U-PARC site, noted that companies have leased about two-thirds of the leasable space while the University of Pittsburgh and its affiliated Manufacturing Assistance Center occupy the remainder. Intertek PARC Technical Services, a subsidiary of Intertek Group Plc, is the largest corporate tenant, occupying 11 percent of the leasable space including oil refinery pilot plants and automotive testing service facilities.

While several Fortune 500 firms rent space, most of the approximately 120 U-PARC tenants are small and midsized firms. Plextronics, with 58 employees, is one example. The firm develops and manufactures conductive polymers used in solar cells and other advanced electronics devices. The firm rents more than 20,000 square feet of space for laboratory, manufacturing and headquarters facilities.

Shell’s former California lab

More than a decade before U-PARC was established, another major oil company, Shell, closed its big research lab in Emeryville, a suburb of San Francisco. This was part of a process in which Shell centralized its research and headquarters operations in Houston. Despite its closure, the lab was to have an exciting future. This was the period that saw the birth of the biotechnology industry, and the San Francisco area was one of the hotbeds of the nascent technology. Initially left empty, the lab was occupied by one of the pioneering biotechnology firms, Cetus Corporation, established in 1971.

Only a small start-up company when it moved into the Emeryville laboratory, Cetus grew rapidly as it developed biotechnology manufacturing procedures that have become the foundation of the biotechnology industry. Cetus also developed several new drugs. The company went public in 1981. It continued to spend heavily on research but encountered financial difficulties in 1990 when the U.S. Food and Drug Administration delayed approval of its new drug for treating renal cancer, called IL-2.

Biotechnology firm Chiron Corporation acquired Cetus in 1991 and continued research using the Emeryville laboratory. Chiron gradually grew, eventually employing about 2,300 employees. It was acquired by Novartis, a major pharmaceutical firm, in 2006. Novartis established a new division, Novartis Vaccines and Diagnostics, which currently occupies the laboratory.

Renting space

Other companies with declining laboratory needs never closed their labs but did rent parts of them to other firms. One example is Eastman Kodak. The Eastman Business Park (EBP) is the former Kodak Park, a 1,200-acre site containing 3 million square feet of building space in Rochester, New York. In addition to laboratories, manufacturing facilities and offices, the site also has a 2,000-seat auditorium, cafeteria, fitness center and gymnasium. Emergency medical services are available on-site, as are a credit union and shops where one can purchase lab safety glasses and safety shoes.

EBP currently hosts around 20 external businesses in addition to Kodak’s remaining research efforts. Besides large firms employing hundreds, such as International Paper Company and divisions of such Fortune 500 companies as Johnson & Johnson (the Ortho-Clinical Diagnostics, Inc., division), midsized firms such as Arnprior Rapid Manufacturing Solutions and small start-up firms such as 2008 startup Transparent Materials LLC with five employees also occupy laboratories at EBP. (According to founder Joseph Bringley, Transparent Materials is using nanotechnology to develop medical implants that better integrate into the human body and speed the healing process.)

Transparent Materials employees include former and retired Kodak scientists. In leasing labs at EBP, Transparent Material scientists have access to Kodak’s analytical equipment so they can pay for advanced testing as needed without having to purchase the expensive laboratory equipment.

Besides Kodak’s analytical capabilities, EBP tenants also have access to various Kodak services including project and construction management services and energy management consultation. For instance, rather than build its own production plant, start-up firm Novomer, with 23 employees, will use an idle one at Eastman Business Park to produce sustainable materials using waste carbon dioxide—a greenhouse gas— as a primary raw material. The materials can be used as computer casings and other products. Mike Slowik, Novomer’s manager of strategic planning and analysis, says that by using Kodak’s manufacturing services his firm will get substantial quantities of test materials into the hands of prospective customers much faster.

David Stokla, while director of EBP, noted that EBP’s mission is “to sell properties that are no longer needed by Kodak.” This means selling as well as renting EBP buildings. For example, in late 2009, LiDestri Foods, Inc. purchased a 625,000-square-foot building at EBP to expand its manufacturing operations and serve as a new product development center.

Another example is Shell Oil’s Westhollow Technology Center in Houston. During the years 1990–2002, Shell sold a number of its chemical businesses. Most of the buyers rented space these businesses had used in the technology center. Tenants included large firms such as Dow Chemical, midsized firms such as Resolution Performance Polymers (now part of Hexion Chemicals) and Kraton Polymers, and a small firm, Tomah Products. Since 2008 these tenants have moved out to their own facilities as their leases expired. Shell is building two new buildings on the Westhollow site and will be moving employees from other research locations into the expanded facility.

Rebirth of closed pharmaceutical labs

The 2003 closure of Pharmacia’s Kalamazoo, Michigan, laboratory when Pfizer acquired Pharmacia provides another interesting example. The lab has reopened as a multiuser facility called the Western Michigan University Business Technology Research Park. Local financial backing, abundant local scientific talent, affordable housing and local universities are aiding Kalamazoo’s effort to become a Midwest biotechnology hotspot. Life sciences service companies, drug companies and medical device firms are locating to the area, with some renting space in the once-closed laboratory.

One such company is contract research firm MPI Research. In 2008 Pfizer sold two of its empty downtown Kalamazoo laboratory buildings to MPI Research. The privately held Midwestern company provides research services to biotech, pharmaceutical, medical device, animal health and agrichemical companies. The two buildings contain 510,000 square feet of space and will house customized, state-of-the-art laboratories.

In 2008 Pfizer announced the closing of its Ann Arbor, Michigan, laboratory employing more than 2,700 people. This is the lab where the blockbuster heart medication Lipitor was invented and much of the development work was done. The University of Michigan (UM) moved quickly and purchased the laboratory for the bargain price of $108 million.

Renamed the North Campus Research Campus (NCRC), the facility’s 30 buildings sit on a 174-acre site that contains more than 2 million square feet of space consisting of 33 percent laboratories and 17 percent laboratory support space for machine and electrical shops and other laboratory support facilities. About 14 percent of the floor space is manufacturing facilities, primarily a plant to produce quantities of new drugs for clinical trials.

UM researchers will use part of the facility and 300 of them are moving in as of early 2010.

Mary Masson of the university’s service group for the site explains, “Our initial effort is to develop a critical mass of researchers at NCRC that will serve as the linchpin for an increased level of public and private partnerships and also rent some of the space to outside companies.” For those companies that do locate at NCRC, Masson says, “We do expect there will be shared services such as IT, conference space, access to scientific cores, parking facilities and more.” (Scientific cores provide shared services such as DNA sequencing for scientists.)

“We are not aggressively marketing NCRC to companies interested in becoming tenants,” notes Masson. “Our primary goal is to provide space for innovative University of Michigan-led research projects and to attract private-sector entities that want to interact with our researchers. We have no interest in simply becoming a landlord for the sake of securing a rent check.”

Is there a large laboratory in your area that might close? Or is there one that has closed and reopened and is renting laboratory space? If so, this might represent a valuable opportunity for your firm.