Bio-Tech 2020s: Economic and Demographic Challenges

Just today I walked past a big whole in the ground with a crane standing in the middle. I asked a passerby, ‘Do you know what’s going in there?’ “Labs”, they answered.

When I think of biotech and pharma I think of the yearly 100,000+ overdose deaths in the United States. Or the unrelenting TV commercials that promise to treat ailments with side effects that always include a bit of suicide and death. Then there’s Covid-19. What did biotech really accomplish?

My simple definition of a vaccine is a drug that prevents me from getting ‘X’. What did Moderna or Pfizer do but create a shot that would just make me less sick? And is society coming out of the pandemic because of the vaccine or from weakened strains of the virus?

I’d also like to know, is long-term Covid a joke? Where is the great biotech solution for that?

Sorry to be rude, but why is the Boston area betting-the-farm on an industry that mostly kills hundreds of thousands with opioids, through overdose or side effects and, not to put too find a point on it — has not cured cancer or much of anything else?

In the nine years we’ve lived in Cambridge, I have watched the lower middle-class population shrink, to the point that it not longer exists in Cambridge and within a few years will no longer exist in Somerville either.

Let me be clear. I am not against these biotech developments. I am not an advocate of affordable housing. Nonetheless, there are economic, social and demographic issues that few are addressing.

I’ll start with my personal experience.

When we moved in Cambridge in 2013, I looked for a place to continue my robotics hobby. I discovered Artisans Asylum in Somerville. It was a huge warehouse, 40,000 square feet, housing small maker cubicles and tool shops, from CNC machines to electronics. The 100-foot square spaces were around $400 a month, which was reasonable, but they didn’t have any available.

I soon found the Cambridge Hackspace, which occupies 2,000 square feet. For $75 a month I received a crate to put my parts in, access to CNC machines, a laser cutter and a 3D printer. I later joined the board, as Treasurer.

Someone at these small startups would join the Hackspace, print out some parts, and then leave. None, to my knowledge, went on to rent space nearby.

Our lease and utilities ran about $2,500 a month. We are non-profit; no one is paid. We couldn’t survive if they were (keep that in mind).

I noticed that the large Artisans Asylum couldn’t raise fees on their current members either. And they couldn’t afford quality staff to support larger community outreach.

Always under financial pressure, Artisans Asylum recently moved out of their Somerville space and into new subsidized space, in Allston, provided by Harvard University. To my knowledge, no maker space in New England has survived as a commercial enterprise.

If there was a significant small-startup population wouldn’t maker spaces thrive?

Let’s move up to small companies with over 5 people.

Here’s a new biotech lab building in Boynton Yards, 101 South Street, Somerville, MA. The 280,000 square foot building is assessed at $144 million, or $515 a square foot. My guess is that it cost around $1,000 a foot to build.

Lease terms aren’t public between it and its first tenant, Flagship Pioneering, a VC holding company. The building isn’t fully leased yet.

The photo above was taken from the building below, from the left side.

561 Windsor, was recently bought with a plot of undeveloped land for $60 million. Somerville assessed this building’s value at $15 million, or roughly $175 per square foot.

They’re asking around $20/foot in lease costs. If the new building across the street is worth three times that amount we can assume Flagship Pioneering would pay in the vicinity of $60/foot at 101 South Street.

If there are companies that can afford $60/foot across the street, wouldn’t there be smaller companies taking the lower rents across the street? Yet the building remains 30% to 50% empty.

In a healthy economy, all space is filled by whatever each business that can afford.

One can argue that as the crown jewels are put into place, these secondary spaces will get filled up. Or maybe it just doesn’t matter what happens to them. Suffice it to say, middle-class businesses in Cambridge and Somerville have been driven out.

Except for desirable locations like Harvard Square or Kendall, I see no demand for small and mid-sized office space. In my experience, that has been true for years and it is only getting worse.

Not only do I believe $20/foot is too much, these existing commercial buildings could give the space away at cost and still end up empty! For every $2,000 in rent they must service $600 a month in taxes. As I mentioned, the Cambridge Hackspace, at even 33% below market rates, is only viable if everyone works as a volunteer.

If there is $60 million to pay for a half-empty building and plot of scrap-land why isn’t there a few million to invest in small and medium sized business development? Shouldn’t they significantly subsidize small startups, maker and art spaces, and the low-cost housing needed to house those working in that micro-economy — now!?

Of course, they say they will — in the future. I’ve been hearing it for years.

These economic-class wealth pockets aren’t unique to Boston. Similar states of economic fragility can be seen in every large city.

I’m of two minds. It will all work out! Everything is brand-new, the lab spaces, the condos/apt, parks, restaurants, cafes, and new train stops. Why wouldn’t young technologists want to work there, developing new treatments?

But then I look at the business desertification of the surrounding areas. Empty storefronts. Office buildings, half empty. Homes and rentals unaffordable to most young people. Help wanted signs in the windows of every food-services business.

I remember my youth, in the 1970s, all the urban blight. Where did it come from? Lately I wonder if it came from the same circumstances as today.

In short, all the labs going up are funded through Wall Street speculation and remain entirely disconnected from economic reality. If the funding dries up why wouldn’t the labs disintegrate from lack of real (cash) income.

Now let’s look at the demographic headwinds.

Workforce

The blue line is college graduates between 2002 and 2020. The developers (boomers) have lived through an incredible growth in talent, from around 3 million graduates to 5 million.

But we’re sitting on the above curve in 2022. The number of graduates has slowed down since 2019 and is now declining.

The orange line is the demographic cohort of those between the ages of 25 and 29. A key group that drives tech growth. As expected, the trend matches those of college graduates. If that correlation has been true for the past 20 years, then shouldn’t we also expect that in the next 20 years there will be a decline or flatlining of available techies?

The following massive apartment building is supposed to house 1,000 well-paid biotech workers in Somerville, MA. Where will they come from? Sorry for the Dr. Obvious, but it takes 25 years to create a 25-year-old biotech scientist! Every city is the Western world is building with the same expectation that the past grown in young people has continued — it hasn’t.

Salaries

A high paid biotech researcher can certainly afford Boston. What about the administrators, lab assistants and cafeteria workers?

I’m not making a moral judgement here. I’m simply pointing out that in the days that textile mills needed river access, they didn’t build them right next to NYC! Yes, the Boston area educates some of the best tech talent in the world. That doesn’t mean labs can succeed in densely populated areas where there isn’t easy access to service-economy labor.

Consider, for a 2-bedroom in the area, a family needs at least $1 million to buy. To rent, $4,000 a month. Not married yet? These new buildings start at around $3,000 for a 1-bedroom. Call it $40,000 a year, after utilities.

One out of three people (30%) don’t even gross $40k a year in Massachusetts!

Thermo Fisher Scientific, one of the larger medical tech companies in Boston, has a workforce of 40,000 globally. Its revenues per employee are near $500,000. Look at that building above. It expects to become occupied by 1,000 tech workers who would bring in half a billion dollars of extra revenue to the local economy — and that’s only one of many such buildings!

I’m not arguing that they won’t. I’m just pointing out that implication of future increases in revenues — if you extrapolate from all the new construction — is staggering.

Biotech real estate developers don’t seem to be investing based on real growth (see debt to revenue below). Instead, they believe in a substitute, growth from concentration. There are many ways of seeing this in various dataset. I’ll use my favorite, unemployment insurance claims, which represents all salaried workers.

The population of the U.S. grew from 249 million in 1990 to 331 million in 2020, an increase of 33%. Over long periods of time, unemployment insurance (UI) represents the turnover of employees with salaried positions. Every year, about 10% of all salaried employees lose their job and collect benefits.

In the chart above, we can see spikes of claims during the 1991, 2001 and 2008 recessions.

Even as the population expanded, unemployment claims during each recession declined and, even more telling, the ratio of people with UI has decreased in the past 30 years. In other words, every year, more and more people work without unemployment insurance; which means they’re net-net poorer than those who have it.

Put another way, the number of jobs with good benefits has remained the same while the growing population ends up employed without benefits. Of course, well see this, but it bears repeating because again, will new biotech development pull from the general population or will it only create more concentration of wealth in the benefit class?

Above, we see that the number of jobs available has grown, as expected, with the population, which highlights the shrinkage of high paid workers relative to everyone else.

I’m not trying to get in the weeds on this, only point out that biotech is not pulling from an expanding population of salaried workers. That doesn’t mean the biotech developments can’t succeed, drawing from this ever shrinking population, only that it must be able to function without support from a low-income, non-salaried workforce.

From a recent Wall Street Journal story:

Mr. Goodhart argued that … pensioners consume more than they produce, especially with healthcare. The dwindling pool of savings, combined with increased corporate spending to secure supply chains and make up for a lack of workers, will push up interest rates, he predicted. He said the Black Death, a 14th century pandemic, triggered a quarter-century of soaring wages and rampant inflation.

Consider the chart below. It says that when Biotech complexes were drawn-up, restaurants would have about 4 servers (under the age of 50) for every party of 5. Soon it will only be 3 servers. I already notice the shortage. Do you? Ordering form your iPhone isn’t a gimmick; it’s a necessity.

If it weren’t for Chinese students it’s likely we’d have a recession in higher education. International students ,already enrolled, will finish their education in Boston. Once they graduate we’re looking at a 45% decline in new international enrollment. Need I mention they pay full-freight?

Biotech Money Supply

Public health related corporations in Massachusetts recently took in ~$90 billion in sales. But they also service $132 billion in total debt. The trend of debt to sales raises questions. Sales have increased by 79% over the past 7 years. Debt by 129%!

Debt is increasing, not income.

The debt issue is even worse if we look at all public companies in Massachusetts.

One should bear in mind that biotech property developers are separate from the biotech industry. Some of the buildings are being financed from retired military. USAA is one such investor. Do these veterans understand that Sanofi, for example, doesn’t have to pay rent (their retirement income) in the Cambridge Crossing’s new lab buildings? In short, all the lab space is built on spec.

Massachusetts corporations (mostly tech) are highly leveraged. An increase in borrowing rates and lower revenues would not lead to anything good.

I’ll conclude. Demographics are no longer providing growth. Large corporations have NOT been able to increase revenues faster than debt. The problems of climate change dwarf personal health issues (market for biotech). Interest rates are going up. Boston is no longer a diverse economy. The Labs won’t have easy access to low-cost support labor. And finally, it only takes one lab accident to change Boston forever.

Maybe it will all work out. We won’t know for a few years.

All I can do, like everyone else, is watch all the buildings go up, wait and see.

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Max Rottersman

Max Rottersman

I try to write stories that go where the general media doesn’t.