Covid drives historic demand for life sciences real estate and these REITs, report says

All the fundamentals are aligning for the life sciences industry, as Covid-19 accelerates already growing demand for real estate in the sector.

Rents are rising for lab space, vacancies are plunging and research and development, and employment and new development are expanding further, thanks to strong venture capital investment. 

In the top life sciences markets there’s currently about 13.9 million square feet of space under construction, but active tenant demand is outpacing that, running at about 14.7 million square feet, according to a new report from CBRE. Lab-space vacancy is historically low at less than 8% percent in most top life sciences markets, pushing rents higher.

“The biotech sector may be the single most attractive subsector within commercial real estate today,” said Spencer Levy, chairman of Americas research and senior economic advisor for CBRE. “Not only because of the pandemic, which accelerated many trends, but because of these mega trends which existed prior to it, including an aging demographic, the importance of personalized medicine, and the importance of venture capital in this sector which is only increasing.”

Venture-capital investment in the sector grew to a rolling annual total of $17.8 billion in the second quarter. That is the largest amount on record, according to a survey by PwC/CB Insights MoneyTree. Employment in U.S. biotechnology research and development professions is also growing at a fast clip and exceeded 220,000 in July.

Large institutional investors that had been in the four major asset classes — apartment, retail, office and industrial — are now looking for alternatives like biotech, data centers, student and senior housing, even though those have gotten beaten up.

Biotech is a bright spot because of the pandemic, but it also has a promising future because of all the venture capital in the space, as well as funding from the National Institutes of Health. There does not appear to be much downside risk to the sector, unless construction were to really overheat and outpace demand.

Major REITs in this space include Alexandria Real Estate Equities, Healthpeak Properties, and Ventas.

“Stocks that are in this sector are doing very well. And why is that? Because of the demand for biotech,” said Levy. “I would make the similar argument about data centers. I would make the same argument about industrial overall, but these subsectors where there’s massive demand and durability through phenomena like work-from-home, gives them a bright present and a long-term future.”

Largest U.S. life sciences real estate markets

1.)    Boston-Cambridge

2.)    San Francisco Bay Area

3.)    San Diego

4.)    Washington-Baltimore

5.)    Raleigh-Durham, N.C.

6.)    New Jersey

7.)    Philadelphia

8.)    New York City

Important to watch are some of the biggest emerging markets in the sector, which include Pittsburgh, Houston, Austin, Detroit, Phoenix, Dallas-Fort Worth, St. Louis, Atlanta, Minneapolis and Portland, Oregon.