Investment in life science assets is slowing

Investment in life sciences, one of the hottest commercial real estate sectors during the pandemic, has slowed significantly in recent months. But analysts say the slowdown is temporary and the asset class still has a bright future.

Real estate data firm MSCI Real Assets reported that sales of life science/R&D asset investments totaled $7.7 billion in the first half of 2022, down 34% from a year earlier. on the other from the record first half of 2021, when trading volume was bolstered by portfolio sales.

During the COVID-19 pandemic, momentum had been strong for the life sciences sector, as investment capital migrated from office properties to building types with more certain prospects, including life sciences. life.

There’s been “a lot of euphoria around this sector and still a lot of interest, but maybe some of that bloom has come out of the rose,” says Josh King, vice president of the financial markets of the real estate services company Cushman & Wakefield. Over the past three to four months, commercial real estate as a whole has faced significant headwinds, he notes.

” This does not mean [the sector is] dead. We were going about 120 miles per hour, and now we’re going to slow down to 50 to 60 mph,” says Frank Petz, managing director of investment sales at real estate services firm Colliers. “I can tell you that there are fewer products on the market because sellers don’t want to sell at low prices knowing that they are going to be reduced. And there aren’t enough buyers to go into the market because everyone is selective and cautious. These words, selective and cautious, burn my eardrums these days. The bidding pool has shrunk considerably.

Rising interest rates have become an added cost for investors who rely on leverage to fund their acquisitions, and as yields rise, so do return expectations, Petz notes. The slowing economy has also reduced tenant demand for space as companies are more selective about growth and making more real estate commitments.

According to King, the investment sales figures for the first half of the year may not be fully representative of the current market situation, as transactions have a life cycle of three to six months. Any deal made in the first half of 2022 likely started in the second half of last year, he notes. Today, customers are encouraged to add at least 30 more days to close a deal and spend more time in the marketing stage with thinner bidding pools.

Between geopolitical instability resulting from the war in Ukraine, an energy crisis that increases the possibility of a recession, and the stock market crash, the trickle-down effect is beginning to impact both tenant and tenant demand. investors, according to King. According to him, the true measure of investor sentiment will only become clear in the second half of the year, and particularly during the fourth quarter of 2022 and the first quarter of 2024. For now, “I think it will be more of the same – restless and investors are waiting to see what happens with inflation and the Fed.

At the height of the COVID-19 pandemic, the life sciences sector was hiring at a rapid pace and taking up a lot of space, which sparked new interest from investors, notes Austin Barrett, executive vice president and Head of Life Sciences at T3 Advisors, a Savills company. There was even a doubling to create new lab space for companies, he says.

But in the past three months, the world has changed again, says Barrett. “The public market is down and a lot of these growth-stage biotech companies don’t have a way out. If you don’t have an exit, you have a lot of tired investors. People are slowing down fundraising, and that’s going to slow down hiring.

look on the bright side

Not all market statistics are negative. Sales of individual life science assets — the market bedrock of investment sales — were up 11% year-over-year in the first half of 2022, MSCI reports.

According to Steve Golubchik, Executive Vice President and President of Western Region Capital Markets, many headlines are saying there is a massive pullback in investment and this needs to be put in the proper framework. “If you look at venture capital funding for 2021, it’s actually quite healthy in 2022. The difference is that there was so much capital raised in 2021, which was so abnormally high, that it feels like that there is a substantial drop. It was more of an anomaly.

Like Petz, Golubchik makes the analogy that “life sciences used to go 200 mph, and now it’s going 80.” Given the level of investment in some of the other asset classes, he still sees it as a very healthy place.

Buyers also continue to pay high prices for Class A and Class B life sciences products in major markets, Barrett notes. There is still a lot of pent-up demand and early-stage discoveries in Boston, San Diego, San Francisco, Raleigh, North Carolina and wherever there is a strong research sector and a shortage of space available in science. life. As a result, markets that serve as epicenters of U.S. life sciences activity, including San Francisco, San Diego, and Cambridge, Mass., are far less likely to see a price discount than markets life sciences schools across the country, says Petz.

Today, there are nearly 21 million square feet of new life science projects under construction in the United States, more than double the pre-pandemic area, according to Cushman & Wakefield. Additional projects of 32 million square feet have been proposed in Boston and the Bay Area alone. At the same time, life science companies are beginning to scale their expansion plans, Golubchik says. “A company that plans to explore 150,000 to 200,000 square feet can now look at 75,000 or 80,000 square feet. The amount of expansion may have contracted slightly, but the amount of demand is still very healthy in the market.

Previously, “we were sitting on rent growth numbers ranging from 10% to 30% per year depending on where you were,” says Petz. “Those are crazy numbers – 120mph numbers – and now we are flat. You can’t put that in your subscription, and it impacts the value.

Until the past 60-90 days, life science asset valuations were strong, but they are now down 5-25%, depending on location, product quality and risk associated with buying ownership, notes Petz.

Stabilized assets that are fully occupied and generating cash flow can see their valuations drop 10-15%, King said. More opportunistic assets, involving new developments or conversions, are off by a higher percentage due to the higher cost of debt, he says.

According to Craig Leibowitz, executive director, Innovation and Insight Advisory, of real estate services firm Avision Young, there are early indications that life science property valuations have moderated from 2021 levels, after five years. average annualized price growth of 19%. Between 2020 and 2021, the sector’s capitalization rates decreased by 5.1%. Now, higher benchmark interest rates are likely to stabilize or increase returns on near-term life sciences assets, Leibowitz notes.

Who buys?

The life sciences industry has become institutionalized in recent years as it has grown in popularity. Since 2020, private capital has accounted for 53% of real estate purchases in the sector, REITs 36% and foreign investors 6.3%, according to Leibowitz. Between 2015 and 2019, foreign investors accounted for just 0.4% of life sciences investment sales.

This year, groups such as CBRE Investment Management and GI Partners have been among the top institutional buyers of life sciences assets, says Lauro Ferroni, head of U.S. capital markets research at the real estate services company JLL. Blackstone (through its BioMed Realty REIT) remains one of the most prolific private equity investors in life sciences assets. Several other private equity firms have also increased their allocations to life sciences over the past 12 months, Ferroni said.

Meanwhile, as the availability and price of debt have increased this year, it’s becoming increasingly difficult for leveraged buyers to compete for assets, King says.

“Institutional advisors to pension funds and core funds tend to get by with low leverage,” he notes. “The higher the leverage, the higher the yield guys are closed end funds or offshore capital [with] ties to high net worth capital.

Golubchik says he’s seen a lot of sovereign wealth funds and state pensions that are active in life sciences after learning about the sector that was previously considered “alternative.” Life sciences remain attractive to commercial real estate investors “due to long-term industry demand,” adds Ferroni. Venture capital investment in pharma and biotech startups in 2022 to date remains high, already exceeding 2019 levels and on track to beat 2020 levels (2021 was a record year). This seed capital pipeline should continue to drive new business creation and demand for lab space, Ferroni said.

Although a potential recession would have some impact on the life sciences sector in the short term, investors should view these properties as an investment over a five to 10-year period, according to King.

“Long term, there are still huge tailwinds that will benefit this sector – demographic changes in the country and aging populations and more money flowing into the sector over time.” Right now, we are experiencing a hiccup after what has been an absolutely meteoric rise in capital flows into biotechnology and health care over the past few years. There has been double-digit growth in the capital invested in this business, which has translated into a strong demand for new spaces and the construction of new spaces. These will slow down and catch up [their] breath, but in the long term, the trends are positive.