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Life Sciences More Than Doubles Sector Investment After Pandemic Upheaval

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After more than a year of grappling with a historic global pandemic, and the ensuing upheaval that impacted every established economy and industry across the world, one sector of commercial real estate has prospered so effectively that venture capital funding more than doubled from first-quarter 2020 to the same period in 2021.

According to a new report by CBRE, “U.S. Life Sciences: The Biotech Revolution Emerges Even Stronger Post-Covid-19,” this is exactly the state of the life science sector today, and it may be the salve that helps heal an industry in the wake of an unprecedented public health and economic crisis.

“While there’s so much upheaval in commercial real estate — whether it’s offices, retail, hotel, what have you — life sciences, laboratory R&D space, and manufacturing have only strengthened,” said Ian Anderson, senior director of research for CBRE, who authored the report. “I don’t think there’s one element in the data where we haven’t reached a new record as we speak, and it just continues to get stronger.”

In addition to the massive increase in venture capital funding, CBRE reports that the demand for life sciences space across all major markets has grown by 34 percent since mid-2020. And, while more than 15.6 million square feet of speculative space is currently under construction, it is exceeded by tenant requirements being driven, in part, by massive increases in the sector’s employment.

“U.S. life sciences employment reached a record high in March 2021, driven by the revolution in biotechnologies and other industry advancements,” read the report. “Industry job growth has jumped nearly 15% since March 2017, surpassing growth in the technology sector.”

As venture capital, employment and general demand grow, so have rents throughout major life sciences markets. The report’s findings include a close to 50 percent increase in lab and research and development rents in the Boston-Cambridge cluster, and almost 40 percent for the same sector in San Diego since the end of 2017. Life sciences rents in Philadelphia, meanwhile, have increased by 35 percent since the middle of last year.

All of these drivers have combined to position life sciences as a dominant sector in commercial real estate in 2021 and beyond, as investors clamor for involvement and seek investments that provide stability in the midst of widespread market volatility.

“The COVID-19 pandemic fueled some of the alternative sectors, so health care, data centers, and life science centers were some of the beneficiaries of investors moving away from more traditional product types and into more purpose-built facilities,” said Chris Bodnar, vice chairman and co-head of Healthcare & Life Sciences Capital Markets at CBRE. “The investor pool is looking for that stickiness of the tenant going forward, especially in light of what’s happened in the office sector and concerns about how work-from-home will impact renewal probabilities.”

The evidence is especially strong in New York City, where “ … lab leasing activity has already reached a record high for a single year, at 257,000 square feet through May 2021,” according to CBRE’s findings. As contributors to the increase in activity, CBRE highlighted the Icahn School of Medicine at Mount Sinai’s recent lease of 165,000 square feet of research-focused space at 787 Eleventh Avenue, and also noted C16 Biosciences’ 19,000-square-foot lease at the Hudson Research Center, where the Bill Gates-backed startup will relocate from its incubator space at BioLabs New York.

According to Anderson, the explosion in demand for life sciences investments over the past five to six years marks the coalescence of numerous trends, including the fading effects of the 2008 recession leading to greater economic optimism, more accessible capital, insurance companies pressuring corporations to find more cost-effective solutions, rapid advancements in technology, the pandemic-driven decline of other sectors, and the extraordinary investment in the search for solutions to the COVID-19 pandemic.

“In many cases, the fact that so many other industries were in distress caused investors to look for brighter opportunities,” said Anderson. “Real estate developers and venture capitalists all of a sudden saw a new industry in the spotlight.”

Bodnar also sees three other reasons investors are going all-in on life sciences.

“One is, you can’t do research from home. Putting lab space in your home is not a viable option,” Bodnar said. “No. 2, we don’t anticipate [National Institutes of Health] funding for this sector slowing down anytime soon —we only see it accelerating. And No. 3 is that venture capital funding is accelerating. Capital flowing into this sector from private equity and venture capital is growing exponentially, and this doesn’t go unnoticed by real estate investors, some of whom are even making investments as venture capital partners with biopharma companies.”

Given all of these market forces, it’s unsurprising to see owners converting real estate initially dedicated to other sectors into life sciences facilities.

“You’ve got a lot of commercial real estate holders — could be owners of suburban office buildings or even downtown office buildings — looking for some type of silver lining; some type of better exit for themselves. So, they’re looking at converting to labs,” said Anderson. “Office owners have been through such a troubled time over the past year, and some of them have been carrying buildings in distress for many years. So, they see a potential opportunity to make a quick and easy out, and convert their office building to laboratory.”

“We’ve even had some groups talk to us about converting medical into life sciences,” said Bodnar.

And, while life sciences is now pulling from other sectors, it’s also spreading into geographical areas beyond traditional clusters like Boston-Cambridge, the San Francisco Bay Area and San Diego.

“Raleigh — one of the hotter markets — is more traditional, but that market is just so impressive,” said Anderson. “Not only have we seen huge demand for laboratory R&D space, but also for biomanufacturing and high tech. So that market continues to impress. Pittsburgh has also been impressive. And a few that are emerging that we haven’t talked about in the past as much are Portland, Salt Lake City and Dallas. They’re probably in the beginning stages, but we’ve seen a lot of venture capital go into those markets.”

Taken all together, the report’s findings indicate that while life sciences has been the notable winner in commercial real estate throughout the pandemic, it’s possible we still haven’t scratched the surface of how strong the life sciences sector will become.

“I’ve been tracking this space for years now, and it just continues to get stronger and more intense each year,” said Anderson. “The demand for laboratory R&D space by the life sciences industry is stronger than ever.”

 

Source: Commercial Observer

Medical Office Property Remains An Investor Darling, Post COVID-19

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Once again medical office assets have proven their resilience against recessions.

According to a new CBRE report on medical office trends, investment sales of medical office properties experienced a moderate drop compared to most major property types last year as the pandemic gripped the United States. What’s more, investor appetite for medical office product appears to be growing in spite of a dip in healthcare employment in 2020. With a 50 percent drop in patient visits to medical office clinics in 2020, healthcare employment declined by 6.4 percent, according to Oxford Economics data. That was still significantly below an 11.2 percent decline in employment for the broader economy.

“Demand for medical office space for clinical healthcare services experienced a brief decline in 2020, particularly in the early months of the pandemic, when non-emergent outpatient services were suspended,” says Lorie Damon, managing director, healthcare advisory practice at real estate services firm Cushman & Wakefield. “Nevertheless, occupancy remained strong. Since then, healthcare providers that had planned to add new sites, relocate existing sites or acquire additional entities, have continued to do so.”

In fact, demand for space has accelerated as vaccinations were rolled out and new growth opportunities in the medical office sector have emerged as patients who deferred care last year returned, Damon notes.

“Medical office has been the ‘steady Eddie’ through two recessions,” emphasizes Chris Bodnar, vice chairman and co-head of healthcare & life sciences capital markets at CBRE.

In CBRE’s 2021 survey of healthcare real estate’s most influential REITs, institutional investors, private capital investors and developers, 80 percent of respondents said the sector is recession-proof. Property fundamentals data supports this view. Last year, medical office landlords collected more than 95 percent of rent due, according to data firm Revista LLC.

Bodnar says that medical office isn’t prone to huge rent peaks or valleys and last year’s rents were mostly flat. But about half of CBRE’s survey respondents are expecting a 2 to 3 percent increase in rent growth this year. The expectation for rent growth is based on pent-up demand for new space by medical providers that had put expansion plans on hold during the pandemic. A bump in rents for new product is also anticipated—partially due to an increase in construction costs that will be passed through to tenants.

Healthy Outlook

With medical office occupancy remaining stable throughout the pandemic, Damon notes that rents are already rising in some markets that have limited supply and steady demand for quality space. According to Bodnar, with little new product developed in 2020, there is now a dire shortage of new medical office space, which should push up rents.

“Oversupply in this sector was rare even pre-COVID-19,” Bodnar says. “As medical office developers are very disciplined—they don’t build on spec. Rather, they like to create an ecosystem of healthcare tenants that work together—or compliment each other—and then build around that nucleus. With the trend toward consumer-directed healthcare growing, particularly among millennials, providers are seeking space in locations convenient to the populations they serve.”

He notes physician groups and other providers are using GIS (Geographic Information Systems) modeling to look at demographics, population and insurance coverage to help determine where they should expand and how many physicians should be located in a new market. For example, with many young families with small children migrating to the suburbs, pediatricians may find this an optimal location to grow market share.

“Retail centers are on the list of potential sites, as existing space offers greater speed to market than new development,” Bodnar says. “Retail centers also typically offer attractive rental rates.”

Physicians and other healthcare providers prefer open-air centers, as they provide good visibility and can place signage directly above the space so patients can easily find them, according to Bodnar. Other advantages include nearby amenities, convenient access and abundant parking.

Damon notes, however, that medical office tenants’ criteria for space vary depending on the type of practice, patient population served and strategic goals. So, while retail and mixed-use centers are preferred by some types of physicians, they are not suitable for every type of healthcare service.

Growing Demand

Last year, investment sales of medical office properties fell by 12.7 percent, according to CBRE—far below the more than 40 percent drop in volume for traditional office buildings.

According to Cushman & Wakefield’s healthcare capital markets team, which is led by Gino Lollio and Travis Ives, investors have a very positive view of medical office, and many investors new to the sector are aggressively seeking acquisitions. But overall, acquisition activity has been somewhat constrained, largely due to supply constraints rather than a lack of investor appetite.

New investment funds pursuing medical office acquisitions are generally seeking core or core plus assets, with strong tenant bases and significant weighted average lease terms remaining, according the Cushman & Wakefield’s markets experts. These funds are mostly geography-agnostic, though some prefer the Sunbelt states.

Most investors in medical office real estate prefer buildings of 25,000 sq. ft or larger, located on or in close proximity to a hospital campus and anchored by a health system or a leading physician practice, according to Cushman & Wakefield’s team. Buildings within 250 feet of a hospital tend to provide the greatest rent premiums, as reimbursement by the Centers for Medicare & Medicaid Services (CMS) is 40 percent greater than for those facilities vs. off-campus healthcare practices.

The Cushman & Wakefield’s team notes that with strong competition for available assets, cap rates have compressed over the last year as investor demand increased. Yields have compressed as well, though compared to other commercial asset types, medical office yields remain attractive to investors.

According to CBRE data, the average cap rate on sales of medical office assets compressed by about 20 basis points year-over-year in 2020, with the average cap for portfolio sales declining by 100 basis points to about 5.52 percent. The average cap for individual sales dropped to 6.61 percent. Over the same period, the average price per sq. ft. for medical office buildings increased by 5.5 percent.

According to Bodnar, because of strong property fundamentals and a positive outlook, an increasing number of investors are switching their real estate allocations from traditional office buildings to medical office. Those new to the sector are often partnering with experienced medical office developers and operators.

Among CBRE’s 64 survey respondents who answered the question, a total of $10.9 billion in equity has been allocated to healthcare real estate investment and development activity in 2021. That’s approximately 11 percent below the results of the 2020 survey, but 6 percent above the survey administered in 2019. And of the 64 firms respondents to this specific question, only 13 are a healthcare REIT or an institutional healthcare investor.

For example, in January, MedCraft Investment Partners announced it was launching a $500 million joint venture for medical office acquisitions, and, according to The Wall Street Journal, Kayne Anderson Real Estate is getting ready to close a $2.5 billion fund and expects to allocate about half of it to medical offices.

Among the biggest private equity players, Blackstone and KKR have already made significant investments in life sciences real estate and are now seeking additional allocations in the medical office sector. In addition, Nuveen Real Estate, a global real estate investment management firm, has partnered with Healthcare Realty Trust, a REIT focused on managing, acquiring and developing outpatient medical facilities, to enter the medical office sector.

However, Cushman & Wakefield’s team notes that many of the large institutional funds now entering the medical office space are looking for immediate scale, preferably via large portfolio transactions or platform acquisitions.

 

Source: Wealth Management

Dallas-Fort Worth Named The No. 2 Investment Market Nationwide

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Commercial real estate investors rank Dallas-Fort Worth as the No. 2 investment market in the U.S., with the Texas metro maintaining its reputation for solid economic fundamentals in the job and population growth categories, CBRE said in its 2021 Americas Investor Intentions Survey.

Popular investment targets include life sciences labs, medical offices, single-family rentals, data centers and cold-storage facilities.

Austin is the only market to outrank DFW in the study, which was completed by surveying 150 U.S.-based real estate investors from Dec. 9 through Feb. 2.

Secondary markets like Dallas and cities across the Sun Belt scored high among CRE investors in the latest survey because of investors’ potential to obtain more equity and income growth in these low-cost, rapidly expanding areas, CBRE said.

Tech-driven markets also scored high among the CRE investor class, with the Top 10 choices for investment outlays including big-time tech players like Austin, Denver, San Francisco and Seattle.

Investors with more assets under their control also showed a greater interest in taking risks in 2021. For the first time since the survey began seven years ago, a larger pool of  investors with assets of more than $50B under their control showed a stronger appetite for opportunities in secondary markets like Dallas over primary, first-tier cities.

Investors looking for high returns also exhibited a greater risk tolerance heading into 2021, with 30% of respondents, up from 16% last year, saying they’re ready to target distressed assets or opportunistic plays in 2021. As they expand their reach, investors expect aggressive pricing in the logistics and multifamily spaces and discounts in most other asset types, according to CBRE.

CRE investors in 2021 also want more diversity when it comes to asset types.  Seventy-two percent of those surveyed said they are looking to invest in one or more alternative asset types this year, up from 54% in 2020.

 

Source: Bisnow