Investors maintain healthy appetite for life sciences

Institutional investment in life sciences real estate is set to grow in both the US and UK markets, says James Jacobs, head of real estate for Lazard’s private capital advisory group.

James Jacobs

Investors, in particular in the US, are increasingly seeking to access life sciences investment opportunities as part of their alternatives allocation. They are attracted by growth in tenant demand, favorable long-term demographic trends and the sector’s resilience.

Demand drivers for life sciences real estate can be attributed to three key factors. First, significant funding for biotech from various sources, such as venture capital, large pharmaceutical companies and the National Institutes of Health in the US, has increased tenant demand for laboratory space.

Secondly, long-term demographic trends play a crucial role in driving demand: aging populations are dependent on new drugs and large cohorts of the global population are entering a period of significantly higher healthcare spending. Therefore, the tenant demand for, and performance of, life science real estate is less correlated to GDP than other real estate sectors.

Lastly, advancements in artificial intelligence and machine learning, combined with an unprecedented pace of innovation and discovery, have accelerated the growth of the life sciences industry. Consequently, the demand for specialized real estate has surged.

In the US market, increasing tenant demand and the strength of the sector, coupled with supply constraints, have 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 scientific and human resources. For example, Boston has evolved as an epicenter for 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 overrides the cost of the real estate. 

The UK’s life sciences market is more nascent, but it is rapidly evolving. The UK government has identified the sector as one of the pillars of its industrial strategy post-Brexit. Initiatives include the creation of the Department of Science, Innovation & Technology aimed at developing the UK’s scientific, research and technological outputs. Like the US, key clusters have formed around access to talent and proximity to leading educational institutions.

Life sciences real estate offers investors an opportunity to capitalize on growing tenant demand, favorable long-term demographic trends, and the structural growth of the life sciences industry. It is likely that investor appetite for this specialized asset class will continue to grow in the coming years.