A greater proportion of real estate investors have expressed a desire to commit capital in September than in any other month since March 2020. Among the asset classes of interest, notably, their attention is turning to the life sciences sector. They appear to be attracted by a growth in tenant demand, favorable long-term demographic trends and the resilience of the sector during the covid-19 pandemic.
Significant funding for biotech from venture capital, large pharmaceutical companies and the National Institutes of Health has increased tenant demand for laboratory office space. The life sciences sector also benefits from long-term demographic trends: aging populations are dependent on new drugs and large cohorts of the global population appear to be entering a period of significantly higher healthcare spending. As a result, the tenant demand for, and performance of, life science real estate is less correlated to GDP than other real estate sectors.
While certain sectors have experienced significant declines during the covid-19 pandemic, life sciences firms have remained resilient. Indeed, the focus on scientific progress has intensified during the pandemic. The industry is considered essential, and consequently, employment has remained robust over the last eight months. It is also a sector which has seen relatively little workforce disruption. Unlike many business roles, the majority of laboratory office tasks cannot be conducted from home.
Increasing tenant demand and the strength of the sector, coupled with supply constraints, has put upward pressure on rents. There is a preference for laboratory offices to be located within the vicinity of established life sciences clusters with access to established scientific and human resources. For example, Boston has evolved as an epicenter of life sciences due to its concentration of academic, research and medical institutions and the significant public and private capital investment they attract. Rents constitute a relatively small proportion of the cost base in the sector. For tenants, the proximity to sources of funding and talent often override the cost of real estate.
Investing in life sciences real estate is a specialist area. There are significant differences between laboratory and traditional offices due to the highly specialized needs of life sciences tenants. Investors need to align themselves with managers with specific expertise in the field, in particular, when it comes to construction. Covid-19 is undoubtedly playing a part in current demand, but we believe investor appetite for life sciences assets is likely to remain strong long after the pandemic.