T$70B poured into life sciences companies last year. But capital — and real estate investment — will likely remain in key hubs.
One of the obvious bright spots for some commercial real estate markets through the Covid-19 pandemic has been accelerated growth of life sciences.
About $70 billion of public and private capital — a record — went into the life sciences industry last year, according to Cushman & Wakefield research. Another $90 billion could be raised this year.
Real estate investors — especially ones sidelined from traditional asset classes, such as office, that have struggled during the pandemic — are taking notice.
Still, an overwhelming amount of capital and, subsequently, real estate demand is concentrated in just a few key markets.
In fact, 74% of the $98 billion raised by life sciences companies in five consecutive quarters, ending in Q1 2021, were from ventures based in Boston, the San Francisco Bay Area, San Diego, New York and New Jersey, Cushman found. Boston alone accounted for 27% of all North American investment in the space during the same time period.
“I think the established (markets) are so pronounced, and the space is so sticky and dependent on having an ecosystem, that it’s hard to create something out of nothing,” said Greg Bisconti, executive managing director and national leader of the life sciences advisory group at Cushman & Wakefield.
CBRE’s midyear life sciences report identified similar “premier” markets as well as “primary” and “emerging” markets, based on venture capital spend.
Ian Anderson, senior director of research at CBRE, said in an email there are a few markets in different stages of creating a substantive amount of leasable, multi-tenant wet lab space.
“Some are still getting started, but they do have many of the right ingredients for success and are demonstrating momentum in those ingredients,” Anderson said. Those ingredients can include National Institutes of Health and venture capital funding as well as presence of major health care institutions, life-sciences industry and talent pool.
Anderson said some standout emerging markets are Pittsburgh, Houston, Atlanta, Dallas, Salt Lake City and Portland, Oregon.
Bisconti said Seattle’s life sciences market appeared to be losing momentum to tech a few years ago but it has since restarted the conveyor belt. There are about 150 life sciences companies and 13,000 employees in the industry in that metro area.
Austin, Texas, and Houston are also on the rise, Bisconti said. Austin, with more than 240 life sciences companies and 15,000 people in the sector, also has a new innovation district expected to be an epicenter for research and development.
The Raleigh-Durham metro area in North Carolina is one of the most affordable life sciences markets today, Bisconti said. It’s home to 600-plus companies and more than 38,000 workers in the sector.
“It’s probably going to become very expensive there in the next couple of years, which might counter some of that growth, but I do think (Research Triangle Park) is going to be a very hot growth area,” he continued.
But it can take decades for a new city to emerge as a life sciences hub, since the factors needed for it to ascend to that level — such as an established biotech ecosystem — take a long time to develop, Bisconti said.
And, unlike big tech companies like Amazon or Apple, which are opening satellite offices across the country to hire thousands of workers, biotech companies tend to stay clustered in the same markets, Bisconti said. Growth at those companies also tends to be much more measured.
Real estate groups and funds hoping to enter the space have to be mindful of how different and nuanced the asset class is compared to, say, office space, Bisconti said. Life sciences real estate projects tend to be more capital-intensive, and many tenants don’t have credit and aren’t profitable for a long time. The risk profile is higher.
While many new real estate players have entered the sector, especially since the pandemic, Anderson said he thinks anyone who has considered entering the space would have done so by now, as the field has become fairly crowded.
At the end of 2020, the average vacancy rate for 14 life sciences markets examined by Cushman was 8.7%, compared to the national office vacancy rate of 14.1%. Rental rates averaged $43.80 per square foot in those markets, compared to $34.45 per square foot for office space nationally, Cushman found.
And even though more groups are adding life sciences space, whether new construction or conversions, supply can’t keep up with demand.
CBRE found 29% of all lab supply in five markets — Boston-Cambridge, San Francisco Bay Area, San Diego, Raleigh-Durham and New Jersey — was preleased in Q1 2021, up from 22% in Q2 2020. There was a 37% increase in demand for lab space between that same time period.