Real estate investment in life sciences, a bright spot in the office market, is slowing from its record pace

After a record year of investment in 2021, the pace of life sciences real estate acquisitions and capital markets activity slowed in the first half of 2022, according to a new study.

Less venture capital and a mixed outlook led to lower trading and fundraising, brokerage Newmark found. The results follow trends observed by industry executives and CoStar analysts.

The change matters because growth in life sciences has been one of the few bright spots in the U.S. office market, which has been hampered by a shift toward flexible work arrangements during the pandemic. Now, however, according to new data, the flow of funds that boosted medical and biotech startups and supported real estate investment is weakening.

Real estate investment in the life sciences fell nearly 34% to $7.7 billion from January to June compared to the first half of last year, according to data from Newmark. Reflecting lower investment in life sciences, venture capital funding in the sector fell 18.5% year-over-year to $20.8 billion in the first half of 2022.

The pace of fundraising activities for the life sciences has also slowed. More than $3 billion in fund targets were announced in the first half of this year, but that figure was down from $7.1 billion in the first half of last year, according to Newmark.

“It looks like investing may just be normalizing after a record-breaking 2021,” said Elizabeth Ptacek, senior director of market analysis for CoStar Group, in reaction to Newmark’s report. “I think the industry will continue to attract investment capital and assets will continue to trade, but it doesn’t surprise me that the pace of activity is slowing, especially considering the volatility in the financial markets and rising cost of debt.

Despite reduced investment activity, prices for life sciences and research and development properties remain at an all-time high, hitting $564 per square foot in the first half of the year, pointing to some investor demand, according to Newmark.

“Although the bidding pools have thinned compared to 2021, investors are still attracted to laboratory assets, in part due to the imbalance between supply and demand that still exists on the largest cluster markets,” Newmark said.

Newmark said the life sciences sector remains well positioned for future growth, as the occupancy and expansion risks that affect tenant demand for conventional office space do not appear to exist for laboratory space.

Several cities with a particularly large presence in technology, biotechnology and healthcare, such as Austin, Texas; San Diego, California; and Tampa, Florida – have seen above-average rent increases and a faster recovery in office employment than the national average since the fourth quarter of 2019, according to CoStar Advisory Services.

On average, since 2019, areas with the highest concentrations of office space used by technology, biotech and healthcare companies offer more favorable vacancy rates and high net absorption, or more tenants moving in than tenants. move, according to the CoStar analysis.

“However, the sector is not completely immune to the negative impacts affecting virtually all asset classes in the first half of the year,” Newmark’s report said. some retrading activity.

The concept of “re-trade” in commercial real estate refers to the practice of a buyer renegotiating for a lower purchase price after initially agreeing to a higher price.

“The deceleration in venture capital funding will have an uneven impact on tenant demand and will affect start-ups that are unable to raise sufficient funds in later venture capital rounds,” Newmark said. “The pullback will also impact less well-capitalized companies and recently opened biotech companies that may reduce future leasing activity.”

Besides Newmark, other real estate brokers said the life sciences sector may not be able to sustain the pace of 2021 in the near term.

Greg Bisconti, who has spent the past 28 years at Cushman & Wakefield, joined rival JLL in April to lead a San Diego-based life sciences tenant advocacy group. He sees the slowdown as natural after such strong growth.

“I think what we saw in 2021 and 2022 was the end of an anomaly in the life sciences market fueled by record funding, record investment, record IPO activity and growth. without hindrance from the sector,” he said. said CoStar News in an interview. “I think this will be a much-needed setback or recovery from unsustainable growth.”

In July, Los Angeles-based Kilroy Realty, a major West Coast office owner, said it was suspend the development of two projects as leasing weakens. On hold, a creative office development of approximately 125,000 square feet at 1633 26th street. in Santa Monica and an approximately 180,000 square foot life sciences and office campus called Santa Fe Summit in San Diego.

The top buyers of life science properties in 2022 have been a mix of existing large landlords, such as Alexandria Real Estate Equities, but also emerging players such as the Canadian Retirement System, the Municipal Employees Retirement System of Ontario and institutional groups such as CBRE Investment Management.

Alexandria made about $3.6 billion in acquisitions this year, according to CoStar data, the same pace as last year. Alexandria also reported solid rental in the second quarter despite an otherwise volatile economy.

The Pasadena, Calif.-based company, which oversees a nationwide portfolio of biotech properties of more than 41 million square feet, said second-quarter revenue was up more than 26% year over year. previous year, supported by rising rents.

Ontario’s pension system announced last week that it earned a 6% return on investment for the year ending June. Among the highlights of the year, the pension fund cited its investment activity in life sciences.

The Retirement System announced a strategic partnership for the Navy Yard in Philadelphia which over time will own and develop up to 3 million square feet of life science properties, as well as acquiring a portfolio of 13 life science buildings in San Diego. Since the end of June, it has completed the conversion of the Boren Labs office building to an all-life science facility in downtown Seattle.

This year’s fundraiser included a $2 billion commitment of Taconic Investment Partners to expand its life sciences business outside of New York.

Jose C. Birney