The life sciences sector is in high demand among tenants and investors

Last week, global real estate investor and manager Hines announced it would put more emphasis on life science / biolab properties through acquisitions and new developments. “The life sciences industry is experiencing an era of unprecedented growth, driven by increased public and public funding combined with a sense of post-pandemic urgency and market opportunities,” said David Steinback, director of Hines Global investments, in a press release. Although Hines already has a few biolab projects in its portfolio, including the Levit Green development near Texas Medical Center in Houston, the company made the decision to ramp up its efforts in the space after reviewing data collected for a recent white paper. Hines researchers predict that 20 selected U.S. subways alone could see demand for Class A life science properties increase by 33 to 50 percent, accounting for up to 65 million square feet of space.

Meanwhile, architecture, design and planning firm SGA, which specializes in life science projects, revealed it had had a record-breaking year in 2021, with 11 million square feet of construction projects. active in the sector. To meet growing demand, the firm had to double the staffing of its Boston and New York offices.

Related: More and more office buildings are becoming laboratories in major life science cities

In fact, the life sciences industry in the United States has seen a record level of venture capital funding in recent months, reaching over $ 30 billion in the first three quarters of this year and nearly matching the total for 2020, according to a recent report by commercial real estate services company CBRE. Biotechnology research and development jobs in the United States are growing at their fastest rate on record, the report notes, to 3.0% in 2021, compared to an annualized rate of 1.3% between 2016 and today.

“Occupancy has never been higher in most cases across the country,” says Ian Anderson, Philadelphia-based, senior director of research and analysis at CBRE. Anderson adds that submarkets that show historically low vacancy rates of at least 1.0% for the life sciences space include Cambridge, Massachusetts, the northern peninsula of San Mateo County outside. from San Francisco and Torrey Pines to San Diego. This is happening despite the fact that in the Boston / Cambridge market, for example, the amount of new biolab space has nearly doubled over the past three years with the addition of 20 million square feet.

Related: Where are the new investment opportunities in biolab assets?

“Life science labs have quickly become a type of property in high demand with tenants and investors,” says Anderson. “This intense demand for laboratory space is the natural result of a global push for new drugs leading to strong funding and recruitment in the life sciences industry.”

In the third quarter, the demand for life sciences space in the United States, totaling nearly 23.8 million square feet, exceeded new supply by 2.8 million square feet, despite the surge in continued power of new construction, found CBRE. The country’s three major life science centers, including Boston / Cambridge, the San Francisco Bay Area and San Diego, are seeing average asking rents soar from over $ 70 per square foot at Torrey Pines to well over $ 100 per square foot. in Cambridge.

Rents for life science space increased 22% year-on-year in the third quarter in Boston, 19% year-on-year in the Bay Area, and 28 percent in San Diego, notes Amber Schiada, senior director of research at JLL.

Nationally, the vacancy rate in life science properties in the third quarter averaged 4.9%, according to CBRE, with demand increasing in six months totaling 19.7% and 513 tenants in the market looking for space. Average asking rents ranged from $ 29.11 per square foot in the Raleigh / Durham, NC area to $ 94.62 per square foot in Boston / Cambridge.

“Rents are also hitting record highs in almost every market,” adds Anderson. “The event is the natural result of increasing demand exceeding supply, causing a rush of capital into the market in search of life science properties, which contributes to higher prices. “

Real estate investors are excited about what’s going on in the life sciences industry and want to “catch the wave,” according to Schiada. She says high barriers to entry, squeezing rate caps and competitive bidding have not deterred investor interest. “Investors are betting on locations, buying Class A office buildings and waiting for tenants to leave to convert them into lab space,” she notes.

For example, earlier this year, private equity giant KKR agreed to pay $ 1.08 billion or $ 1,440 per square foot for The Exchange, a 750,000 square foot space. building at 1800 Owens St. in the heart of the San Francisco Life Science Center. According to Anderson, the LEED-certified property will offer a combination of Class A office and biolab space.

From January to November 2021, the sales volume of investments in the life sciences / research and development sector reached $ 19.1 billion, compared to $ 10.0 billion during the same period in 2020 and more than double the average investment volume observed before the pandemic, according to real estate. data company Real Capital Analytics. Over $ 8 billion in sales volume so far this year has been attributed to life sciences trades / research and development properties in Boston, followed by San Jose, with over $ 4.5 billion in transactions. Nationwide cap rates in June averaged around 6.1%, a record high and down 250 basis points from a decade ago.

Schiada notes that nearly 25 million square feet of converted and converted lab space is under construction in all of the major U.S. life science markets, but about three-quarters of that space is already pre-let. And that demand is only expected to continue growing over the next 12 months, supported by job growth in life sciences and venture capital funding, according to her and Anderson.