Post-Pandemic, U.S. Life Science Office is Here to Stay

03/28/2024

Autor

Scott J. Soucy

Scott J. Soucy

Senior Managing Director

Deutsche Finance America

Blogbeitrag

Post-Pandemic, U.S. Life Science Office is Here to Stay

Of the 10,000 diseases currently affecting humans, only 5 % have known cures. As the biotech, medical, and research communities grapple with how to tackle the remaining 95 % of diseases, the U.S. real estate industry is working to address the acute need for space by developing purpose-built lab office and life science research facilities to meet these needs.

Scientists and researchers generally believe that access to the best technical equipment, and the space to use that equipment effectively, will improve the odds of discovering the next breakthrough cure. Access to safe chemical storage, room for specialized equipment requiring high power levels and ventilation, and a flexible layout that can be adapted to the latest frontiers of science are of paramount importance. The quality of the space available has a direct impact on the quality of experiments that can be performed. Specifically, purpose-built life science office buildings offer mechanical redundancy, air circulation more than twice as powerful as a traditional office building, higher floor-to-floor heights with ceiling-mounted utilities running to lab desks, larger floor loading capacities to handle specialized equipment, and larger open floor plates to improve collaboration. Redundant equipment contained in the large mechanical penthouses (a visual giveaway on top of buildings that it is a purpose-built lab) is required to ensure that a power outage does not damage or destroy a multi-million-dollar experiment.

From the perspective of the venture capital investor, life science companies represent an investment decoupled from the ups and downs of the broader market environment. The need to pursue treatments for the thousands of diseases with no known cure is limitless and won’t slow down when the broader economy weakens. Our rapidly aging society and the sheer number of diseases with which humans continue to grabble will not ebb, regardless of macro-economic factors. The intellectual property protections afforded in the United States, along with a robust healthcare infrastructure, incentivizes continued investment in this space. In general, the first company to discover a drug earns a “winner-take-all” investment return and the need to improve the likelihood of the best scientific outcome is therefore paramount for life science venture capital investors.

From the perspective of the real estate investor, future development and investment is driven by the guiding principle that science works best when the brightest minds are located near each other and require state-of-the-art space. It is no coincidence that the strongest clusters of life science investment are located near top universities with leading research institutes. Markets such as Boston, San Francisco, and San Diego lead the way in talent, funding, and development and make up over 60 % of total lab space (and transaction volume) in the U.S. as a result. Unlike many other professions, working from home is not possible for researchers and scientists that handle hazardous chemicals and rely on delicate specialized equipment. As core office continues to struggle following the COVID-19 pandemic, our collective experience during that period highlighted the importance to society of advancements in life science and the physical space requirements needed for scientists to operate most effectively.

Since 2017, given the specialized needs of lab office tenants relative to the broader office market, deals have transacted at higher valuations and lower cap rates than traditional office. These specialized assets cannot be replicated easily, and therefore command a premium over traditional office. It is critical for life science companies to attract and retain the best talent. Offering top scientists and researchers a well-equipped workplace with opportunities to collaborate with other professionals in a nearby urban setting is an invaluable tool when seeking to retain talent in a highly competitive environment. The investment outlook for purpose-built life science real estate in the top urban clusters therefore continues to be very strong as the world looks toward preventing the next pandemic and advancing human health.

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