Investment Perspectives

The Case for Life Sciences

December 13, 2023 10 Minute Read Time

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The Future of Medical Office

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Paper 1 of this Future of Office Series suggested that widespread working from home is leading to a significant rise in the number of people who no longer spend most of their work week in the office. This in turn is bringing about a permanent structural change in office usage and, consequently, office portfolio strategies. Paper 2 demonstrated that the medical office subsector is an exception. Now, Paper 3 of the series focuses on life science real estate.

Life science real estate serves a very specific tenant base and purpose. The life science subsector benefits from strong structural drivers: it is heavily funded by the federal government as well as large corporations, which in turn brings stability to the sector. Furthermore, as buildings tend to be located in clusters close to elite universities to tap into expert talent pools, there is often limited supply, resulting in long leases, high asking rents, and high rent growth.

Long-term demand dynamics also support the sector: an aging population that is creating greater demand for medical services and treatments; record federal funding for vaccine development and preparation for the next pandemic; and innovations around the human genome and AI. All are supportive of long-term demand for life sciences space.
The key drivers for life sciences that we will discuss in more detail in this paper include: Immunity from the work from home factor, strong fundamentals and long-term structural drivers.

Life sciences: an exception

As highlighted in Part 1 of the series, the U.S. office sector is having to work through structural change arising from widespread work from home. With the proportion of traditional office-using employees working from home as high as 32%, occupiers are looking to reduce and/or reconfigure office portfolios, putting pressure on the wider office sector. The life sciences and medical office subsectors are shielded from the worst effects of the work from home factor—life sciences workers require laboratory space to carry out research.The American Community Survey shows that health life science workers, like their medical office counterparts, are less likely to work primarily from home.

Percent working primarily from home, 2021 v 2019

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Source: American Community Survey from U.S. Census Bureau, downloaded via IPUMS, January 30, 2023. See Appendix I for list of occupations in each category. For illustrative purposes only. Current market conditions differ from prior market conditions; including during prior periods of stress and dislocation.  There can be no assurance any prior trends will continue. Based on CBRE Investment Management's subjective assessment and subject to change.

Life sciences: Location, Location, Location

Over the years, life sciences real estate in the U.S. has clustered around a handful of irreplaceable and unique locations. Most notably, the “Big Three”: East Cambridge (and greater Boston at large); Torrey Pines (and San Diego’s North County at large); South San Francisco (and the San Francisco Peninsula). All are centered around world-class research institutions and elite universities that provide the specialized talent required by life science occupiers. Because of this, developers have been confident that there will be demand for their highly specialized and expensive projects.

Land in these Big Three locations is finite. Supply is becoming increasingly constrained, leading developers and tenants to expand into adjacent areas or into emerging life science markets like  Raleigh-Durham’s Research Triangle Park; Seattle’s East Lake corridor; the I-270 Corridor in Maryland; University City in Philadelphia; Fulton Market in Chicago; and nascently, Midtown Atlanta.

As with the “Big Three,” these secondary clusters are based around high-level educational/research establishments—Maryland’s Route 270 Corridor features access to the National Institutes of Health in Bethesda and the Johns Hopkins campuses in Baltimore and Rockville. Furthermore, these locations all share a rich heritage of being at the cutting-edge of innovation having attracted some of the most innovative firms in the world. Big Tech and life sciences companies often work side by side in life sciences space. Meta, for example, occupies the top floor of a life sciences building, 100 Binney Street in Cambridge. These emerging markets represent opportunities to acquire or develop next generation life science office assets.

Supply, demand and vacancy for life science office properties, U.S. market overall

Vacancy rates are on a long-term downward trend as shown in the chart below.

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Source: Costar, April 2022. For illustrative purposes only. Current market conditions differ from prior market conditions; including during prior periods of stress and dislocation. There can be no assurance any prior trends will continue. Based on CBRE Investment Management's subjective assessment and subject to change.

Rent and rent growth in life science properties

Gross asking rents for life science space are on a long-term upward trend.

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Source: Costar, April 2022. For illustrative purposes only. Current market conditions differ from prior market conditions; including during prior periods of stress and dislocation. There can be no assurance any prior trends will continue. Based on CBRE Investment Management's subjective assessment and subject to change.

Life Sciences: Long-term structural drivers

A population that is aging, innovations around the human genome and AI, as well as increased investment and funding are acting as structural drivers for life sciences:

Aging population: the over 65 population in the U.S. has grown on average 3% per annum over the past decade. That translates into an increase of nearly 15 million people. As people live longer,  the incidence of age-related illnesses increases too. Higher numbers of people with illnesses leads to higher levels of funding for research into new treatments. Research into new treatments fuels increased demand for life sciences space.

The human genome and AI: according to the 2019 KPMG Report Driving value from genomics in Life Sciences, “This is a very exciting time for R&D in Life Sciences. Genomic data can take the sector into an era of highly personalized medicine, where patients get treatment tailored to their genetic make-up, with a greater chance of success, delivering value to the healthcare system.” Making sense of all that data is key and where AI is being used. As the KPMG Report points out: “…deep learning algorithms have already demonstrated revolutionary achievements in the field of AI (e.g. image recognition, object detection, audio recognition and natural language processing). The intersection of deep learning and genomic research offers huge promise in understanding human disease, particularly with the introduction of high-throughput sequencing.”

KPMG believes this is “…a very exciting time for R&D in Life Sciences,” because of a higher chance of success, lower costs and greater value for healthcare systems.

Increased investment and funding: the race to develop vaccines to tackle the pandemic brought to light the importance of the life sciences industry. It also led to a major uptick in funding from the the federal government, venture capital firms and NGOs for research into vaccines and treatments for fatal diseases such as cancer. According to CBRE, “NIH funding is budgeted at more than US$60 billion in 2023, a 32% increase over 2022. Private sector investment exceeded NIH funding in 2021, with venture capital firms dedicating $47 billion, a 30% increase over 2020 and double pre-Covid levels…The largest source of life science research funding by far, however, are life science firms themselves. Per S&P Capital IQ, R&D spending by public life science firms totaled $154 billion in 2021, up from $136 billion in 2019.”

National Institutes of Health program funding

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Source: Congressional Research Center report R43341 (May 2022). Values are for fiscal years, which end September 30. Value for 2023 is provisional and based on President's Budget. For illustrative purposes only. Current market conditions differ from prior market conditions; including during prior periods of stress and dislocation. There can be no assurance any prior trends will continue. Based on CBRE Investment Management's subjective assessment and subject to change.

The Case for Life Science Office Investment

The investment case for life sciences is three-pronged:

  • An exception to the work from home factor that is impacting the wider office sector and leading tenants to consider downsizing.
  • Strong fundamentals not just in the established Big Three locations where low vacancies and rising rents are being driven by unique assets in irreplaceable locations serving the most innovative firms in the world, but also in secondary locations, which offer the opportunity to capitalize on the growth and ascendance of emerging life science clusters.
  • Long-term structural drivers such as increased funding and technological advancements together with strong fundamentals lead to long-term leases to creditworthy occupiers.

The life sciences office subsector benefits from a combination of positive short- and long-term fundamentals and drivers and why life sciences is a preferred office subsector strategy.