While looking for ways to combat the COVID-19 pandemic, life sciences has been experiencing a boom in real estate demand, according to a new report from CBRE.
CBRE’s Leading Life Sciences Clusters report showed that total commercial lab space increased by 12 percent in 2020 to 95 million square feet. On top of another 11 million square feet that’s currently under construction, there’s a notable increase of conversions of other property types into lab space. In spite of all the additional lab space created and in the pipeline, rents are still rising due to a strong tenant demand. The report also noted that nearly all of the leading life sciences markets like Boston, San Francisco and San Diego, are seeing rising rents and low vacancy that’s expected to continue next year.
“COVID-19 has created some potential new sources of demand,” Ian Anderson, CBRE Americas’ head of office research told Commercial Property Executive. “One of these is that it has accelerated a shift from companies to on-shore some of their life sciences operations, be it R&D, manufacturing, or distribution, so they are not left vulnerable to foreign sources or supply chain disruptions, like they were in 2020.”
Anderson also told CPE that the life sciences industry may be benefiting from a shift in how the public perceives it from “Big Pharma” and “price gouging” to “the savior of today’s pandemic.” He added that this shift in public opinion could also result in more funding from governments and more interest from private investors.
CBRE’s report also showed that total capital venture funding for the life sciences industry for the year ending in the second quarter of 2020 hit $17.8 billion. The record amount of funding came mostly from Boston and San Francisco and showed that the life sciences sector was outperforming the other sectors, which have seen declining investments since the third quarter of 2019.
The boom in funding is also likely due to the industry’s resiliency in the face of COVID-19. Employment in the life sciences sector declined 1.3 percent in July from its peak in March, but was still 1 percent higher than a year ago. The biotech research and distribution sector of life sciences experienced a particularly high employment growth, increasing 4.9 percent compared to a year ago.
The testing, medical and diagnostic lab employment portion of the life sciences market, however, was less resilient, seeing a 5.5 percent decrease since February. Despite the slight decline from March to July, the life sciences sector was still performing better than the 7.6 percent decline of total nonfarm employment.
Top U.S. life sciences clusters
Boston-Cambridge, the San Francisco Bay Area and San Diego retained their positions as the top three life science clusters in the U.S. Both Boston and San Francisco’s markets offer wide talent bases and a lot of lab space and research universities with funding, while San Diego is home to many of the country’s top health-care institutions and the fastest-growing rents for lab space, which saw an 18.4 percent increase since early 2019 to $55.59. Besides the established top markets, emerging markets like Pittsburgh and Austin are growing in popularity due to their focus on the R&D side of life sciences.
For the year ending in the second quarter of 2020, property sales for lab/R&D space declined 18 percent from the same period a year ago to $9.6 billion. The dip followed the overall pullback in the commercial real estate sector, but pricing was still competitive for life science spaces. Property sales in life sciences are continuing to flow, as earlier this month, Ventas Inc. acquired a 796,572-square-foot life sciences campus for $1 billion.
According to CBRE’s report, the life sciences sector will continue to experience a positive outlook due to a combination of factors. On top of the boost in demand caused by the COVID-19 pandemic, Anderson told CPE that the industry will see growth due to the nation’s growing and aging population, the new discoveries and rapid advances in technology, and governments and insurance companies pushing for more solutions.
“The flood of money and government support from COVID-19 this year may have accelerated the pace of innovation and discoveries that was already occurring in labs prior to the crisis,” Anderson told CPE.
Read the full report by CBRE.