British Retirement Fund Giant L&G To Accelerate Investments In U.S. CRE

Legal & General, a London-based insurance and asset management firm, is betting big on life sciences to kick-start its push into the U.S. commercial real estate market.

The company is one of the UK’s biggest CRE investors. Now, two years after first expanding into the U.S., L&G is wagering that it can deploy the same strategies that grew the company over the last decade in the UK — even as it relies on asset classes that are currently struggling stateside.

“We're not seeking to deploy capital in a blind way,” L&G Asset Management Managing Director for Urban Regeneration Wes Erlam told Bisnow in an interview. “We're not going out and saying, ‘Let's acquire as many lab buildings as we can in primary locations in Boston and San Diego and San Francisco.’ That's not the strategy.” 

L&G, which is made up of five businesses including insurance and pension annuities and has more than $45B of commercial real estate assets under management, has grown astronomically in the UK in recent years.

In 2013, the firm’s newly formed division focused on direct investment into assets, Legal & General Capital, bought half a share of housebuilder Cala. A decade later, L&G Capital was the second largest division at the company, controlling £3.7B of the firm’s assets and generating more than £450M in profits in 2022.

Now, L&G is hoping that its asset management division can grow based on demand for life sciences assets in the U.S. But the asset manager’s investment comes at a moment when life sciences investments have gone belly-up for some developers and investors.

Venture capital backing has dwindled for nascent life sciences companies over the past two years, while property deliveries are bringing some markets to saturation point.

A historic glut of life sciences space has led to leasing woes for a billion-dollar project in San Diego and a downgrade for the development’s lenders. Even in Boston, the nation’s No. 1 life sciences hotspot, vacancy in lab buildings has shot up from 3% in 2022 to more than 20% at the end of the second quarter.

Despite the market signals, L&G doesn’t think it mistimed its move because of the types of assets it is pursuing.

L&G’s strategy is partnership-based and intended to endure through multiple economic cycles, Erlam said. The asset manager’s first move on this side of the pond took place in 2022 when it joined forces with developer Ancora to acquire $4B of life sciences real estate over five years.

“We've got significant investments that rest across the UK in offices that have been backed by long duration leases by the local government,” Erlam said. “In the U.S., we would see that initially being replicated in the same way.”

Its first project came less than six months later when the joint venture paid $85M for 387 Technology Circle NW in Atlanta, a fully leased, 128K SF life sciences and lab property close to Georgia Tech and the city’s Science Square district.

“From an investment perspective, we thought that was a good opportunity to get into an ultimately strong emerging market where Georgia Tech and others have strong plans for expansion,” Erlam said.

The L&G-Ancora joint venture also won a bidding process with the Rhode Island Department of Health to build an 80K SF lab that already had a letter of intent from Brown University. That project will be partially occupied by the Centers for Disease Control, with the rest occupied by private tenants, Erlam said.

“The partnership we created, the Ancora-L&G business, is actually focused on anchor institutions rather than life science pure play,” Erlam said. “It will manage life science and development assets, but it's not the case that it's reliant on that market in isolation. It's much more around partnering with the right types of anchor institutions.”

Life sciences real estate is just the first stage of L&G’s expansion plan. From there, it is most likely to target industrial due to its resilience, Erlam said, despite a slowdown in leasing and falling rents. The asset manager is also looking at residential and data centers as future investments despite warnings that developers will get burned in the industry’s land rush.

“If we look at the MSCI data and Green Street forecasts, it's clear that industrial logistics and residential are two sectors that have been more resilient, and that there is an expectation that they will continue to perform well,” Erlam said.

Industrial properties are down 16% from their most recent peak value, according to Green Street's latest price index. Overall prices are up 3% so far in 2024, according to Green Street, led by resilience in industrial and residential. Apartment properties are still down 20% from their most recent peak, while offices are off 37%.

The continued weakness of office real estate means L&G will stay away from purchasing those assets in its initial U.S. foray — but Erlam didn't close the door on playing in that space eventually.

“Offices are not a core target for us right now, as they're not for many different investors, because we think there are better returns and lower risks elsewhere in the sectors,” Erlam said. “But we do believe that there are instances where there will be opportunities where you can secure outsized returns by securing the right assets — and that may extend, in due course, to offices as well.”