‘Billions And Billions Of Dollars’ Of Unlocked Potential: Life Sciences CRE Is Just Beginning

In the midst of widespread commercial real estate turmoil, the life sciences market emerged as a bright light, as investors and operators flocked to the asset class — many for the very first time — to address the booming lab demand needed to combat the pandemic. Some would say this was a validation of the “niche” market; a select few would say it has always stood on its own. Lightstone Life Sciences Executive Managing Director Bill Hunter is in the latter category. 

The office market took a major hit during the pandemic that continues to this day. D.C. posted a 20.4% office vacancy rate in Q2 2023, while San Francisco’s office sublease market has surged 140% since 2020. While the industrial market appeared to be cooling and retail sliding downhill, life sciences appeared to be the safe harbor.

In recent months, however, there has been speculation that life sciences assets may suffer a similar fate to the office market because they are underutilized, overvalued and at risk of experiencing similar woes to the office market. 

Hunter strongly disagrees with this assessment. According to him, life sciences vacancy rates are being misreported, and have historically been highly inaccurate, and it boils down to a profound lack of understanding within CRE of exactly how complex the nuances of the vertical can be. 

“Comparing life sciences to office or retail is comparing apples to oranges,” Hunter said. “With other asset classes, you have 50 to 100 years of historical data and markets to compare against, but with life sciences that is not the case because we are only in the second inning of the game.” 

Hunter, a 20-year veteran of the sector, said what many people don’t understand is that the phrase “life sciences industry” does not adequately define the breadth and depth of the specialized vertical. Life sciences is actually a series of industries including pharmaceuticals, biotech, medical device, contract development and management organizations and much more. All are unique, but have their own related space needs, including regulated laboratories and Good Manufacturing Practices, or GMP, manufacturing space. It is a much larger market than most CRE investors and stakeholders realize, Hunter said. 

“It's such an underserved market because it's not just bricks, sticks and spreadsheets, and you have to really understand the entirety of each industry in order to deliver the right space for your clients,” he said. “Very few of us have that depth, breadth and track record.” 

Hunter pointed out that unlike with other asset classes, second-generation life sciences spaces do not become Class-B properties, but actually appreciate in value because there is so little appropriate move-in-ready space available for all these different sectors of the industry. 

“Second-, third- and even fourth-generation lab space actually appreciates in value with almost no additional investment from the landlord, because the initial investments landlords and tenants make are maintained meticulously by tenants and have decades of useful life,” he said. “The tenants keep up their space at their own cost, and treat their research environments truly as mission critical 24/7/365.” 

He added that the success of life sciences companies and their real estate are directly linked and intertwined, and even when these companies fail, they almost never go insolvent, because another company will purchase them for their intellectual property and human capital. 

The problem, he said, is that CRE professionals generally do not understand the logistical specifications of the space and how the real estate impacts the science and vice versa.

He said that as a result, major brokerage firms are coming out with reports showing inaccurate life sciences vacancy rates, because they are basing it on properties that are considered “lab-ready” or “speculative lab suites” that have very different definitions and connotations to the end user. Hunter said that just because a 210K SF retail space has closed and is now being considered for GMP, that does not make it GMP-ready, but too many owners, operators, investors and brokers don’t understand the distinction between a big-box space and one that is ready to serve the life sciences market. 

“It is not really lab-ready or GMP-ready if you don't have enough power or gas, you don't have the floor rigidity or deck-to-deck height, you don't have the critical right process and personnel flows, etc.," Hunter said. "So the numbers that come out in the big broker reports are often misleading and vastly overstating vacancy rates because they often are listing properties that aren't suitable for lab conversion.” 

Hunter said this is why — despite the number of companies announcing their intention to convert spaces into labs — the true availability of actual move-in-ready lab space across the country is incredibly low. It comes down to an insufficient number of developers and landlords who truly understand the industry on the granular level required to serve it properly. It’s not just about keeping the lights on and measuring foot traffic, he said, and life sciences tenants can quickly tell the difference between landlords who understand their needs and those who don’t. 

In the end, Hunter said he believes that despite what reports may say, there is a huge trove of owner-occupied life sciences real estate still waiting to be unlocked. It’s just about finding the right developers and landlords who can unlock balance sheet liquidity by convincing life sciences companies that their landlords truly understand their business from pre-clinical through commercialization and can grasp the complex regulatory environment in which these companies operate.

“There are billions and billions of dollars locked up on balance sheets within life sciences companies because they just don't feel that landlords understand their business,” he said. “My life’s mission is to get the industry to a point where these companies can unlock the liquidity of the physical assets on their balance sheet and apply that toward advancing the science to find more cures for the ailments that plague our world.” 

This article was produced in collaboration between Lightstone Group and Studio B. Bisnow news staff was not involved in the production of this content.

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