During an otherwise dreary year for office investors, research spaces catering to the life sciences industry were a shining bright spot. But newcomers rushing to the space might be biting off more than they can chew.
Jonathan Pearce, executive vice-president of leasing and development for offices and industrial for the Canadian pension investor Ivanhoé Cambridge, likened the sector to the “wild west,” pointing to the barrage of opportunities that have come out of the woodwork from landlords looking to capitalize on rising demand for research and development space.
“Anyone who has a defunct office building is calling up guys like us and saying, ‘Life sciences conversion, anyone interested?’” Pearce said during a panel on the US office market for PERE’s Global Summit 2021.
Life sciences deals made up a record 16.4 percent of the overall office and flex transactions in the US, according to a January report from the New York-based advisory firm Newmark. At $10 billion, total investment in the space was down 22 percent year-on-year, far less than the overall market decline of 50 percent. And, by the end of 2020, such assets were trading hands at $627 per square foot, triple the price paid in May.
This surge in pricing has attracted many would-be developers, Pearce said, some of whom are less qualified than others. “What worries me is not that the demand isn’t there, because right now, the music could stop and everyone would still have a chair,” he said. “But fast forward that two or three years, and who knows? There are a lot of people on the sponsorship side who really have no track record of execution and they’re wading into very complex, very technologically advanced buildings that are different from office; they’re more akin to a hospital.”
Fellow panelist Ariel Bentata agreed that a “frenzy” had set in on the life sciences sector. The founder and managing partner of the Florida-based manager Accesso Partners, said his firm has a small exposure to life sciences tenants, and while he sees a long runway for growth in key markets like Boston, San Diego and Raleigh, North Carolina, he cautioned against rushing into the property type before weighing all the risks.
“It’s a big investment per square foot and if you don’t have the right configuration, the right systems, then your basis is completely out of whack and the conversion back to office is very difficult,” Bentata said. “People just have to be very thoughtful about where to do it, when to do it and what kind of risk they’re willing to undertake before having a tenant in hand.”
Ryan Simonetti, chief executive and co-founder of the flexible space provider Convene, said the structural shift in how R&D is conducted in the biotech sector will support demand for lab space for the foreseeable future. But the panelist, whose firm has been brought into to provide hospitality and amenity services for some of these properties, said the market could soon be flooded.
“The one thing that sector has to be concerned about is oversupply and operators who maybe aren’t as experienced in the vertical getting way out over their ski tips,” Simonetti said.