Real Estate
Three Trends Supporting Life Sciences REITs
Article
Sep 20, 2021
The COVID-19 pandemic has fueled increasing demand for the niche life sciences property sector. Armed with record levels of venture capital funding, tenants have been seeking laboratory and office spaces—so-called life sciences properties—in which to develop and produce everything from vaccines targeting emerging variants to cures for cancer.
Life sciences tenants range from pharmaceutical and biotech companies to medical research and medical device firms. Demand for life sciences spaces across U.S. markets has grown by 34% since mid-2020, as the essential nature of this research and development cannot be replicated remotely.1
This strong demand has benefited real estate investment trusts (REITs) with exposure to the sector, and we believe three trends will add further support from here.
Resilient occupancy rates and rents over the near term. Both occupancy rates and rents have risen amid strong demand for life sciences spaces and limited supply, with rents recently hitting record highs in major markets (or “life science clusters”). In the largest U.S. life science clusters (Boston/Cambridge, the San Diego area and the San Francisco Bay area), laboratory/research & development rents increased about 10% from mid-2020 through the first part of 2021.2
We see this trend persisting, even as new supply hits the market. Private capital and REITs are responding to recent demand and rent growth with new life sciences developments, as well as conversions of existing office space. While supply is growing in key life science clusters, pre-leasing figures suggest that new space is being absorbed at a reasonable rate. We think these trends will be supportive for higher occupancy and rent growth.
Strong demand drivers for life sciences over the medium to long term. The search for a COVID-19 cure isn’t the only factor driving demand for the sector. Other factors supporting demand for life sciences spaces over the medium to long term include an aging population, a more supportive regulatory environment (e.g. faster drug approvals by the U.S. Food and Drug Administration) and increasing funding from both venture capital firms and the federal government. For instance, the National Institutes of Health’s most recent budget proposal (which is allocated toward medical research for the American public), totaled $51 billion for fiscal year 2022. That figure was up 20% from the prior year. A meaningful portion of the increase is for the newly-proposed Advanced Research Projects Agency for Health, which is seeking $6.5 billion to “build platforms and capabilities to deliver cures for cancer, Alzheimer’s disease, diabetes, and other diseases.”3
Emerging focus areas for the life sciences industry. The life sciences industry isn’t just focused on developing new treatments and vaccines. It’s generally focused on improving life, so its work also includes development, research and production in a host of other areas, including agricultural technology (or “Agtech”) and environmental sciences.
In particular, we see growing demand for Agtech to address global hunger as an additional catalyst for life science property types. According to current estimates, 690 million people (about 9% of the world’s population) suffer from hunger. To alleviate global hunger, the UN states that “increasing agricultural productivity and sustainable food production are crucial.”4
The Agtech industry received $26 billion in venture funding in 2020, more than double the amount invested in 2017.5 And select landlords focused on the life sciences sector have set up investment vehicles to fund companies focused on Agtech and environmental sciences. Increased investment efforts in these areas could drive demand for lab space. Additionally, these assets may benefit from increased sentiment from sustainability-focused investors.
The investing implications
Given these three trends, we believe there is significant value to be found in the niche life sciences property sector over the long term, even after the sector’s strong recent performance. However, in our view, an active approach is key to capturing this value. We favor diversified and high-quality health care REITs with exposure to life sciences portfolios, as well as pure-play office landlords focused on the space.
Endnotes
1 Source: CBRE, United States, Life Sciences, Biotech Revolution Accelerates Demand for Lab Space, Mid-year 2021.
2 Source: CBRE, United States, Life Sciences, Biotech Revolution Accelerates Demand for Lab Space, Mid-year 2021.
3 Source: National Institutes of Health, Office of Budget, https://officeofbudget.od.nih.gov/pdfs/FY22/br/2022%20CJ%20Overview%20Volume%20May%2028.pdf
4 Source: The United Nations Web site. https://www.un.org/sustainabledevelopment/hunger/
5 Source: Alexandria Agtech/Climate Innovation Acquisition Corp. form S-1, as filed with the Securities and Exchange Commission on March 10, 2021.
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