A new tech frontier, a new category for real estate investors
- December 1, 2020: Vol. 7, Number 11

A new tech frontier, a new category for real estate investors

by Loretta Coldfelter

The drive to research and eliminate COVID-19 has accelerated pre-existing trends in the life sciences sector, which in recent years has been buoyed by scientific advancements and technological innovation.

The pandemic provides a stark illustration of the importance of the life sciences industry to the economy as a whole, according to Tim Wright, senior managing director in the capital markets group at JLL, and Greg LaBine, managing director in the capital markets group at JLL.

In November, several pharmaceutical groups announced credible progress on developing a vaccine for COVID-19. Pfizer and BioNTech have developed a vaccine candidate that was reportedly 90 percent successful in Phase 3 trials, while Moderna announced a vaccine candidate that was reportedly 95 percent successful in Phase 3 trials.

“The first interim analysis of our global Phase 3 study provides evidence that a vaccine may effectively prevent COVID-19. This is a victory for innovation, science and a global collaborative effort,” said Ugur Sahin, BioNTech co-founder and CEO, in a statement. “When we embarked on this journey 10 months ago, this is what we aspired to achieve.”

The speed with which vaccines for the novel coronavirus are being developed demonstrates the astonishing leaps being made in the fields of medicine and biotechnology.

“The idea that we have a pandemic and could get to a vaccine in 12 months is incredible,” says Jon Gelb, managing director and portfolio manager at Clarion Partners, which owns more than $2 billion of life sciences real estate across the United States.

We are witnessing a technological revolution in biotech and pharmaceutical R&D — genomics/DNA sequencing, advances in medicine and devices. And changing demographics, i.e., an aging population, support the thesis for investment in the space.

“The same way we saw the potential and first inkling of the venture capital community potentially coming back to the technology community and pivoting out of traditional office investment into tech office investing 15 years ago was the same way we felt about life science five or six years ago,” says Joseph Sitt, chairman of Thor Equities Group. “Our belief was that what the technology industry was in the world for the 20 years or 30 years prior is what life sciences would become to the world over the next 20 or 30 years to come. And we went as pioneers a little bit ahead of it.” Sitt says Thor Equities’ R&D property investment goes beyond biotech to robotics and other science uses.

“Biotech has become the next frontier of technology,” agrees Alex Snyder, assistant portfolio manager, real estate securities, at CenterSquare Investment Management.

“That intersection of technology and medicine is creating rapid expansion in biotech,” says Gelb, which is a great backdrop for real estate.

“The life science industry has experienced unprecedented innovations and scientific breakthroughs in recent years as biology and technology continue to converge,” says Dan Belldegrun, co-founder and CEO of Breakthrough Properties, a venture sponsored by Tishman Speyer and Bellco Capital. “With new tools such as cell and gene therapies, as well as the emergence of AI and machine learning to support basic research, innovators in life sciences today are producing cures for some of the world’s most challenging disease.”

“In most markets, demand for [life sciences] space is outpacing supply,” says Wright. “Demand is generated by several segments including drug treatments, drug delivery, medical devices and agricultural biotechnology.”

“Even for conditions that are treatable today, new techniques are being developed all the time that improve efficacy or reduce side effects relative to existing treatments,” adds LaBine. “New technology such as CRISPR, whose developers just won the Nobel, is also revolutionizing treatment and curative capacity for gene therapy and life sciences in general.”


“Biotechnology, starting just recently, has stepped up to become something that is top of mind for the investment community,” explains Sitt. And that means the sector is positioned to deliver a material return on investment.

Venture funding of the biotech sector has tripled during the past decade, from annual total fundraising of around $5 billion from 2006 to 2012, to a high-water mark of $19.0 billion in 2018 and another $17.2 billion in 2019, according to BioPharma Dive, based on data from PitchBook. That surge in venture capital funding — reflecting 941 deals in 2019 alone — has created strong demand for life sciences real estate in recent years.

Additional funding sources, such as the National Institutes of Health, have also been increasing — NIH funding rose from $37.0 billion in 2013 to $53.4 billion in 2017, for example.

“These incredible innovations in science are being met with a record-breaking capital environment, which has only been further accelerated in the wake of the COVID-19 pandemic,” says Belldegrun. “By nearly every metric — venture capital investment, IPO volume, venture mega-rounds — 2020 set new all-time highs through the first three quarters of the year.”

“The existing life science ecosystems that have been most successful have the right combination of investment capital, through NIH grants and venture capital, human capital, driven by major universities and research institutes, and clinical facilities,” says Wright.

“Also, the investment capital is critical because it pays the rent for life sciences tenants, most of whom are pre-revenue,” adds LaBine.

In a sign of the attractiveness of life sciences investment, Blackstone has agreed to sell BioMed Realty Trust — with an 11.3 million-square-foot portfolio, it is the largest private owner of life sciences real estate in the United States — to a group led by existing BioMed investors for $14.6 billion. Blackstone Real Estate Partners VIII, an opportunistic real estate investment fund, and co-investors acquired BioMed Realty Trust in January 2016 for approximately $8 billion.

“Many of our investors are eager to maintain or increase their exposure to life science office, and this recapitalization enables them to do that,” noted Kathleen McCarthy, global co-head of Blackstone Real Estate, in a statement.

“The demand for life sciences real estate is a little bit unique,” explains Tim Wang, managing director and the head of the investment research group at Clarion Partners. “It’s not tied with cyclical economic growth.” He says the sector provides both stability and diversification for real estate investors.

“Life science screens very well on supply/demand fundamentals by sector and by market, although the supply pipeline bears watching,” says Gelb. It’s a chance for good rent growth over time, he notes.

Life sciences real estate “exhibits a lot of desirable core traits,” adds Wang. Clarion Partners estimates the market is a $100 billion investment universe. Alexandria Real Estate Equities has $20 billion, Blackstone (through its investment in BioMed Realty) has $10 billion, and the rest is fragmented. “But it is a growing segment,” says Wang.

“The big picture is if you look at life science within the REIT sector, the growth has been phenomenal,” says Scott Crowe, chief investment strategist at CenterSquare Investment Management. With investments in the space by office REITs, healthcare REITs and one pure-play life sciences REIT — Alexandria — there is at least as much exposure to life sciences property as there is office property in the REIT space.

For many property sectors, public market values have been lower than private market values, but the life sciences sector has been the opposite — life sciences REIT property values have traded at a premium to private-sector values. And regarding the BioMed recapitalization, Crowe notes, “that transaction has proven out that private market values are chasing public market values.”

As far as investing in life sciences real estate, “the best time to start moving was yesterday,” says Crowe. He acknowledges, though, “getting access through the REIT market is not a bad way to start.”

Sitt says investing in biotech/life sciences property is a way for investors to satisfy an office allocation with a better solution. It is “the next iteration, a better iteration of technical workspace.”

One thing that sets the life sciences sector apart from the office sector is that it is less vulnerable to a work-from-home trend. “You can’t really run these experiments from your house,” says Crowe.

“You can’t cure cancer from home,” agrees Snyder. He adds, “Life science has really stood out as something — pardon the pun — immune to the pandemic.”

In addition, traditional office has long faced structural headwinds of increasing density, while life sciences space does not have the same trends, given the need for more space for equipment.

“This idea of core real estate is obsolete because it’s just a reflection of what used to be important,” says Crowe.


Life sciences properties are distinct from office and industrial properties because they have specific requirements in their build-out.

“There are physical configurations in life sciences that mean you can’t do it in any office building,” says Gelb. These include things such as ceiling heights and ventilation. “You need higher floor-to-floor space in laboratories to accommodate air-handling systems,” he explains.

“Given the large upfront capital expense required to build high-quality lab facilities, it’s critical to design the infrastructure correctly the first time around and future-proof the asset for the rapidly evolving life science landscape,” says Belldegrun. “If you do not effectively design flexible facilities, you can run into major economic challenges with an asset over the long term.”

The attractiveness of life sciences property is based in its potential for NOI growth. Wang points out “capex for traditional office is higher than life science.” While the initial build-out can be more costly, capex is lower over time because these properties have much higher tenant retention than traditional office, says Wang.

“With respect to the physical property, the initial investment is high relative to other product types, so it is essential to build the infrastructure in such a way that it is reusable to a broad range of possible tenant candidates,” says LaBine.

JLL’s Wright and LaBine point to the increasing need for production facilities with “good manufacturing practice” — known as GMP — in which pharmaceutical companies and other biotech firms can manufacture their approved products. And given the supply disruptions caused by COVID-19, onshore manufacturing is more desirable now.


Investing in life sciences real estate means focusing on a few key markets with the necessary agglomeration of research institutions, venture funding and talent. The top markets on the West Coast are San Francisco and San Diego. And on the East Coast, the top markets are Boston/Cambridge, Mass.; Raleigh-Durham, N.C.; and Washington, D.C./Maryland. Wright and LaBine add emerging markets include New York City, Chicago, Houston, Seattle and Philadelphia.

Gelb says top research universities are part of the picture for attractive markets: Boston has the Massachusetts Institute of Technology and Harvard University; San Francisco has Stanford University, University of California (UC) San Francisco and UC Berkeley; and San Diego has UC San Diego.

“You can’t just do life sciences everywhere,” says Gelb. He says companies have to be in these specific cluster markets because that is where the resources are.

“It is a cluster effect — cutting-edge science; access to talent, universities, researchers drive innovation,” says Wang.

“While the primary markets continue to rapidly expand, there is fantastic science happening all over the world,” says Belldegrun. “But creating a life science ecosystem takes much more than fantastic science — it requires symbiotic interactions between industry and academia, committed capital partners, and access to senior leadership who know how to bring products from bench to bedside.”

The need of companies within the pharmaceutical, biotech and other life sciences segments to be located within these critical markets means high demand for laboratory and R&D space. And occupiers’ rental costs, relative to their overall business, are low.

“Demand for this space has legs for a very long time,” says Snyder.

“We would say life science has been one of the top performers in this pandemic environment,” says Gelb. He notes that leasing remains active, rents have been steady or even rising, and there have been a few trades.

“There is nowhere near enough life science space,” says Sitt.

On the leasing side, Breakthrough Properties, a venture sponsored by Tishman Speyer and Bellco Capital, signed a lease in July with CRISPR Therapeutics to fill The 105 in Boston. The 263,500-square-foot lease was signed only four months after groundbreaking and about 18 months before the project will actually be completed.

A spokesman for Breakthrough Properties said, “The deal is indicative of the strong current demand for buildings with modern laboratory space for medical research.”

One of the largest life sciences transactions this year was the $1.02 billion acquisition of Genesis South San Francisco, a class A, three-property portfolio in South San Francisco, by Ventas, on behalf of the Ventas Life Science and Healthcare Real Estate Fund.

“Strong and growing capital flows into the life science sector are accelerating innovation and discovery,” said Debra Cafaro, chairman and CEO of Ventas, in a statement on the transaction.

The nearly 800,000-square-foot portfolio, anchored by a 21-story, multitenant life sciences building, was sold by Bain Capital Real Estate and Phase 3 Real Estate Partners in a deal announced in October. The portfolio is 96 percent leased, and tenants include a mix of established and growing biotech companies, such as Fluidigm Corp., Sana Biotechnology, Pionyr Immunotherapeutics, Corbion, Arsenal Biosciences, Amunix Pharmaceuticals and Tizona Therapeutics.


The question Sitt thinks real estate investors need to be asking is: “Am I investing in the past or investing in the future?” Biotechnology is positioned to be the innovation engine of the future.

“The thesis for laboratory office was good before the pandemic, and it’s only gotten stronger now,” says Gelb. He says the COVID-19 pandemic has demonstrated the value proposition of life sciences real estate, as it’s a real-world example of the medical discovery process.

“Ultimately, the life science industry will create the solution to the COVID-19 pandemic, as well as many more of the world’s most challenging diseases,” says Belldegrun. “And there has never been a more important time to invest in biomedical innovations and the supportive infrastructure.”

“One of the risks is regulation,” cautions Wang. He notes if pharma regulations become stringent, that could be a risk. A cap on drug prices, for example, could have a negative impact.

“Many biotech firms have shifted some of their resources to fighting COVID, increasing their need for high-quality real estate,” says Wright.

“While there is a measurable uptick in research activity, most growth is independent of COVID research/investment,” adds LaBine.

Gelb says there are many “exciting breakthroughs because of new technology” and that will continue to create demand for life sciences real estate. “The medical challenges are endless,” he adds.


Loretta Clodfelter is senior editor of Institutional Real Estate Americas.



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