The covid-19 pandemic brought renewed attention to the importance of public health. The need for more funding in biomedical sciences has since become firmly entrenched as a mega-trend likely to be sustained by long-term investment appetite. Within this, we are seeing more pharmaceutical companies crossing over into ‘tech start-up’ territory by choosing to set up shop in urban locations – or ‘innovation clusters’ – instead of out-of-town sites.

“Life sciences firms tend to locate in regions where other similar companies are already established or large research facilities can be found,” explains Francesca Boucard, head of real estate research and strategy at Swiss Life Asset Managers. “Proximity to universities also ensures that qualified scientists and technicians can be recruited. Investors are looking for cities that tick all these boxes.”

While regional science hubs once attracted the majority of life sciences real estate investment, biotechnology and pharmaceutical companies are increasingly realizing that the downsides of urban locations, which include limited space and higher costs, are generally outweighed by their unique benefits, namely proximity to start-ups, peers and academic expertise.

Across the globe, cities are competing to attract science talent, influencing the direction of real estate capital. Several urban locations have emerged as front-runners in the race for investment, including Tier 1 conurbations like London, Boston and Tokyo, as well as smaller rivals. With global investment in life sciences real estate reaching $21.4 billion in 2021 according to CBRE research, up 62 percent on 2020, cities will be keen to compete for a slice of this pie.

Shifting demand

Examples of this urban focus can be found the world over. According to Savills Science Cities index, which ranks the most successful locations to establish and grow life sciences businesses, the US claims seven of the top 10 cities. Shanghai’s sixth-place ranking in the index is telling, however, with other urban areas in Asia-Pacific expected to join the city soon as the life sciences sector receives further investment to tackle the region’s aging population.

“The life sciences sector has a strong outlook due to various structural demand drivers,” says Megan Walters, global head of research at Allianz Real Estate. “These include an aging global population, Asia-Pacific healthcare spending catching up with Western economies, and higher productivity versus other sectors of the economy supporting private funding.”

Despite US dominance, there are key factors driving capital further eastward. Home to 43 of the world’s top 100 life sciences universities, Europe has an enviable talent pool. In
Asia-Pacific, with the number of biotech patents granted in China alone having now surpassed both the US and Europe, the corporate ambition is a clear draw. And in both regions, the agglomeration benefits of city center locations represent prime areas for life sciences firms to tap into both the talent and infrastructure they require to transform ideas into impact.

Competing for investment

Of course, different investor types have different priorities. This means out-of-town science parks and micro-ecosystems will continue to attract investment. In the UK, for example, the Innovation Corridor may be bookended by two city powerhouses of scientific research in London and Cambridge, but it is also punctuated with more remote clusters. Proposals to invest more than £100 million ($106 million; €108 million) to create a 90-acre (‘Twenty Five 25’) science park in Broxbourne, Hertfordshire, suggest that regional out-of-town locations will continue to make their own case for life sciences real estate investment. Even so, this particular example targets a site just off the M25 motorway and only a 30-minute drive from London.

“The crossover between tech and life sciences skills is another attraction of many city locations”

Megan Walters
Allianz Real Estate

“Some investors will only look at premier hubs like Oxford, Cambridge or London; or ones in continental Europe, such as Amsterdam and Leiden in the Netherlands, Paris in France, or Munich, Heidelberg and Berlin in Germany,” explains Alexander Nuyken, professional services firm JLL’s EMEA head of life sciences markets.

“More important than the name of the location are its features. These can include proximity to universities to access innovation and talent or big pharma to acquire tenants with long-term commitments (or customers for those tenants). A good early-stage funding environment and the specifications of the premises are also key.”

Many businesses in the life sciences space have realized that working closely with academics and start-ups boosts productivity and fosters innovation. There is an opportunity to share resources, as well as ideas. This extends into other industries and knowledge areas beyond life sciences, too.

“The crossover between tech and life sciences skills is another attraction of many city locations,” Walters notes. “Technology-focused cities have become prominent life sciences locations due to the digitalization of healthcare research and the adoption of artificial intelligence and robotics.”

Space at a premium

Before real estate investors start committing funds to city center science developments, a key consideration is the differences in costs that life sciences firms will have to pay for the privilege of an urban location. Rents can vary markedly, with newer, purpose-built cities often proving more affordable. This is certainly the case in Pangyo, South Korea, where rates are some 60 percent lower than in the popular Gangnam district of Seoul, according to a report by the Urban Land Institute. This affordability has seen pharmaceutical companies like Huons Global flourish.

Life sciences companies will also have to decide whether to prioritize office or lab space and in what quantities. While lab space rental can be as much as 50 percent higher than prime office rates in cities like Boston, it is more than 60 percent cheaper in Shanghai, according to Savills research. The amenities on offer in these locations also need to be factored in by potential tenants and investors.

“There is a shift in focus towards second-tier locations given land and space is both limited and at premium costs at prime locations,” Nuyken admits. “Second-tier locations can provide investors with more attractive yields.”

While scarcity of space and high demand for talent give investors plenty to think about, some core principles will remain pertinent. Long-term sustainability, asset quality and flexibility of use remain most important when choosing which urban markets to support. It will be necessary to take a scientific approach to evaluating risk and return.

Strength in the numbers

Declining venture capital funding is not a harbinger of falling demand.

Life sciences businesses have attracted significant venture capital funding since the pandemic, but there are signs this is tailing off in 2022. A report by Newmark records a 18.5 percent year-on-year decline in H1 in venture funding for life sciences companies in the US.

Life sciences real estate investment in the country may have dropped off in tandem, but overall volumes are still high at $7.7 billion for H1, just at a slower pace than outlier 2021. Asset pricing also keeps climbing, hitting a new record of $564 per square foot in the first half of the year. In the US and beyond, robust demand from both tenants and investors is likely to ensure the outlook remains bright for life sciences real estate.