While Life Sciences Leasing Slumps, Evolving Investment Market Gears Up For Turnaround

Structural shifts in who is investing in the life sciences sector — and how much they’re planning to pay — suggest a growing critical mass of backers is preparing to invest after seeing improvement in the larger U.S. financial picture. It offers a sign of confidence in the long-term success of biotech and lab real estate, even as the larger life sciences leasing picture remains challenging.  

Institutional actors and public investors are expanding their investments, and new entrants are increasingly using joint ventures as they get into the sector, according to a new CBRE report covering life sciences investment trends.

Over the last decade, investment by institutional players in the so-called alternative assets sector has grown from 1% to 6%, now totaling $56.8B, with the largest single share of roughly 33% going to life sciences. Investment volume in research and development properties was 68% higher between 2020 and 2023 than it was between 2016 and 2019. Even with venture capital drying up, outside investments have maintained a steady flow. 

“In primary markets, we believe that the life sciences niche is increasingly being viewed as a normalized asset class and, in some states, an important driver of their local and regional economy,” BGO Vice President of Life Science Development Nick Cassaro said in an email. “We expect that there will be steady growth of institutional investors solely focused on life science as a whole and specific segments within this category of real estate investing.”

As supply grows, it creates more entries for new investors right as more money is entering the space, CBRE Research Director Michael Combs said.

“There’s a broader group through this partnership group that wants to gain exposure to this growing alternative sector,” Combs said.

In the last five years, the amount of tradable lab real estate in the U.S. has gone from 180M SF to 230M SF, a 20% increase that, especially in recent months, is playing out during a downswing in demand. It opens up asset acquisition opportunities for outside investors, who have been much more focused on partnering with experienced players to lower risk. Combs said he is hearing a lot about overseas life sciences investors seeking opportunities and partnerships with local market leaders. 

“We are seeing continued investment from institutional investors into the Life Sciences, both domestically and abroad, and more specifically from Europe,” Cassaro said. “Our view is that investors are diversifying their portfolio with targeted investments where tenant growth and growing demand for this niche asset class is demonstrating robust growth.”

The new players are coming from various directions, Unispace Managing Director of Life Sciences Americas Daniel Maldonado said via email: Institutional investors such as pension funds and university endowments; biotechnology and healthcare-focused exchange-traded funds; and overseas investors, including large pharmaceutical companies and venture capital firms from Europe and Asia.

“A more favorable rate and market conditions could potentially ignite a surge in investments in life sciences real estate,” Maldonado wrote. “Earlier this week, Philadelphia Fed President Patrick Harker said that U.S. Federal Reserve would be able to cut its benchmark interest rate once this year. If that happens, it will fuel confidence and increase in capital allocation towards multiple sectors, preferable for innovative companies.”

“The new capital appreciates those who know lab,” said Matt Gardner, CBRE advisory life sciences practice lead. “It’s an alien entity to those who haven’t worked in this space before.”

According to CBRE talent research, the employment rate in life sciences has steadily increased since 2014, only to plateau in the last two years during the current slowdown. But there haven’t been significant layoffs, and life sciences unemployment remains below 2%. Gardner’s take is that the key infrastructure of the industry, the research talent, has never contracted, setting up significant growth in the future. The pent-up capital on the sidelines will quickly be able to be deployed to new startups, science and ideally, lab leases. 

“You might be able to attack South San Francisco and Torrey Pines in ways you couldn’t before,” Gardner said. “This is both a bumpy ride and creates opportunities for investment.”

Many conversion projects stopped during the life sciences downturn over the last few years or became assets larger landlords sold off. But as the market continues to swing back, convertible assets in places like San Diego’s Torrey Pines or Greater Boston's Kendall Square will suddenly become places for this new capital and new investors to look. The broader the investment pool gets, the better the market will be going forward, Combs said. 

“Purpose-built life science buildings in the core markets can be infinitely adaptable within the R&D space, playing out for the long term and making life sciences a highly attractive investment,” Project Management Advisors Vice President Melissa Plaskonos said. “I expect we’ll see a flight to quality in the next few years, with tenants focused on newer, updated buildings and suites, advancing their sophistication and science accordingly.”