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Navigating the Tension Between Medicine, Real Estate And the People Who Pay For It All

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In what has been a transformative year for healthcare, more than 250 national leaders in the sector just came together in person at the GlobeSt. Healthcare Real Estate conference in Scottsdale, AZ.

And while many of the sessions drilled down into the opportunities to be had in this asset class, at least one discussed the tensions that can exist between the practice of medicine and the realities of paying for it.

According to Angie Weber, a first VP at CBRE, healthcare has two speeds… Slow and slowest. “Covid added a new one…slowest. You have the physicians who want what they want and you have the finance folks where a plan needs to be in place before anything gets done. Who will come out on top depends on the system and the state.”

Jon Boyajian, a principal at Echo Real Estate Capital, says there is also an arm wrestle in the hospital between the operations group and the finance group. “Their capital and expansion plans really got turned on its head during Covid,” he said. “The finance folks want to move all the family practice and provider groups into buildings they already own, and the operations people are saying, ‘no wait, those buildings are well located and are great amenities etc….why would you move these practices.’”

As for what the future holds for these spaces, Weber said that she believes the systems will start to utilize their space within the four walls of their hospital differently than they have been.

“What Covid showed is that they cannot afford to not do surgeries because of other patients being too ill, said Weber. “I think we will start to see that over the next five to 10 years, they will take things out of the mother ship and put it nearby. You will see different utilization for space within the walls of the hospital because they don’t have a choice. They do have to make money and oftentimes, elective surgeries is how they do that. The behavioral health side is also going to be more of a trend in a big way for sure.”

Switching gears, when discussing flexibility of healthcare space, Boyajian said that every doctor his company has spoken with would prefer larger exam rooms for people to spread out. They also said they would want larger or multiple break rooms for provider and staff and admins to spread out.

“The footprint will increase in the future because they want and need to spread out,” said Boyajian.

Weber added: “You have two things right now…you have the physicians and the ones who own them.  There has been a real tug over the last years over what physicians want and the reality. I think Covid will increase the size of a lot of space, but I also think it will be a reevaluation of how they do things. All of these changes and even putting as many flags in as many places as possible takes resources and dollars and it isn’t just systems. There is a lot of VC money that has come into healthcare. They are going big and all over whether it is 3,000 square feet of space or 15,000 square feet of space and they are planting flags in spots like fertility groups, oncology groups and more. On the systems side, some have more financial wherewithal than others.”

Boyajian added that private equity companies don’t just make an investment and sit on it.

“They make an investment and want to see growth, said Boyajian. “The good part about it is private equity groups when they can partner with nimble development groups, they can roll out more quickly and then the landscape and network is there.”

 

Source: GlobeSt.

How Venture Capital Funding Could Give Office A Much-Needed Boost: Healthcare/Life Science Sectors Gained 20% Of Global VC Investment

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Hiring data across hundreds of firms that received venture capital-backed funding may provide a clue into how those cash infusions will impact CRE, according to a new report from Newmark.

The 500 US firms Newmark analyzed and cross-referenced against LinkedIn data raised a total of $44.9 billion and posted 22,582 job openings since April 2021, translating to about 3.4 million square feet of CRE demand. That’s about 7,500 square feet of demand for every $100 million raised, if you assume 150 square feet per worker. If you assume 200 square feet per worker, that equates to 10,000 square feet of demand per $100 million raised. But Newmark analysts say these numbers are likely “considerably lower than the reality.”

Here’s why: according to LinkedIn, about 85% of jobs are filled by networking, and not every company uses the platform to find candidates. And what’s more, the survey occurred in early July, meaning some of the companies funded since April have already filled open jobs.

“Total employment growth from the sample set is likely anywhere from 30.0% to 50.0% higher than what the job postings data suggests,” the report notes. “This means that even using a ratio of 10,000 square feet of demand for every $100 million raised is likely far below the reality, possibly by half. Anecdotal evidence shows the ratio is likely something closer to 25,000 square feet of demand for every $100 million raised, but a number that is easily and logically defensible is a minimum of 15,000 square feet per $100 million raised.”

So far this year, $315.3 billion in new VC money was raised globally, with $166.4 billion raised in Q2. Prior to the pandemic, annual VC investment had averaged around $164.1 billion annually. The B2C and healthcare/life science sectors have gained the most market share and account for about 20% of global VC investment each.

The US is the dominant market for new VC investment, according to Newmark, and accounts for more than half of all funds raised, followed by China. Since the first half of the year, VC funding in the US has been focused mainly on artificial intelligence, fintech, TMT, SaaS, and big data.

“Under normal circumstances, these numbers would suggest a commercial real estate boom in the making, at least within markets where there is a heavy tech focus,” the report states. “They still do, though it will be tempered by the pandemic.”

 

Source: GlobeSt.

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