Micro Trends: A Conversation with JLL on Growth in Life Sciences Real Estate Niche

Interest in life sciences real estate has jumped during the current public health crisis. MBA NewsLink interviewed JLL Executive Director of U.S. Life Sciences Markets Travis McCready, Managing Director Zach Bowyer and Senior Vice President Erik Hill about the sector.

JLL recently released a new Life Sciences Emerging Markets Index report, available here.

MBA NEWSLINK: Interest in the Life Sciences real estate category jumped significantly during the current public health crisis alongside investment in the associated industries. What factors play into this trend? 

TRAVIS McCREADY: With traditional asset classes like office and hospitality significantly wounded worldwide by the pandemic, institutional investors sought haven in alternative asset classes. Life sciences, cold storage, data centers and other niche areas not only remained stable but indeed continued grow at a strong rate as a result of the activity generated by the pandemic. Through this discovery process, investors have been exposed to the unique, powerful and accelerating demand drivers of the life sciences industry, and they have come to understand that there simply is not enough lab space available in today’s market. The amount of lab square footage in the US is only about 1 percent of the overall industrial square footage. Scarcity, high trading value and accelerating demand is a tempting combination for any institutional investor.

NEWSLINK: Is the increased investor demand and interest in this area projected to moderate, wane or continue to grow over the next 12 to 36 months? 

McCREADY: It is impossible to say. Without doubt, some investors will reallocate interest back to the traditional asset classes once the economic behavior starts to re-approximate pre-pandemic activity.  Investing in life sciences real estate requires specialized knowledge and partnerships and presents a completely different risk profile that other asset classes. 

That said, we expect interest to remain strong. Underlying scientific demand drivers are strong as is the pipeline of early stage and scaling biotech companies. Life sciences venture capital remains at an all-time high and federal sources of R&D capital remain strong. Moreover, the pandemic has awakened the general public to the power of the life sciences, not just for rare diseases but towards global public health. 

We already see new institutional investors making long-term commitments to the sector and this will fuel discoveries and cures for years to come. 

NEWSLINK: Is the basic impact of this sector’s growth being felt mainly in medical office properties or are there other asset types impacted?

ZACH BOWYER: The life sciences sector is in a class of its own. While the demand for space offered in life sciences buildings is dramatically accelerating, so is the demand in the medical office space. Medical office and life sciences are experiencing unprecedented growth and are not really considered competitors to each other, due to the differences in tenant type and interior build-out of each.

If anything, these assets classes are now starting to draw investors away from more traditional sectors, such as office and retail. As for office, we are starting to see adaptive reuse from office to life sciences. Not only is this trend feeding the demand for life sciences space, but also helping support a teetering office market.

NEWSLINK: Whenever there’s a new hot trend that captivates investors, the contrarian in me wonders about values and returns being bid down. What trends are you seeing in the transaction markets, whether for investment sales or financing?

ERIK HILL: This is definitely occurring in the life science sector, due to the scarcity of lab space across the country. Properties that are located in life science growth markets (San Francisco, Boston, LA/Orange County, & the North Carolina Research Triangle) are receiving multiple offers, often at above asking price. Cap rates in these areas are continuing to compress, with many sales now solidly in the 4 percent cap range and some sales closing with sub-4 percent rates.

It’s also important to recognize that this “trend” is largely driven by recent advancements in gene therapies, intelligent drug development, telemedicine, etc. These scientific and technological advancements are the core drivers behind demand for this sector. With global pharma sales alone totaling $1.03 trillion in 2019 and expected to have topped $1.07 trillion in 2020, investment in this space will continue.