05/06/2020 | by Sarah Borchersen-Keto

While the coronavirus crisis could cause some short-term disruption to the life science real estate sector, analysts say the COVID-19 pandemic will only fuel future demand for life science research and development—and the space that houses it.

Late last month during a first quarter earnings call, Joel Marcus, executive chairman and founder of Alexandria Real Estate Equities, Inc. (NYSE: ARE), described the life science industry as being “at the forefront of this multifaceted fight against COVID-19,” while still working daily to create novel technologies and new products to treat cancer, cardiovascular, metabolic, neurological, and other serious diseases.

Marcus pointed out that the first quarter of 2020 set an all-time record quarterly high for the amount invested in venture-backed life science companies, while medical research philanthropy also reached an all-time high.


The life science real estate sector entered 2020 on a high note, buoyed by a continued ramp-up in medical research funding that had produced multiple years of accelerated growth.

Tom Catherwood, BTIG managing director and REITs analyst, points to 2013 as the start of an “incredible amount” of capital formation in the life science industry from venture capital sources, the National Institutes of Health (NIH), pharma companies, and philanthropic organizations.

In turn, life science real estate has seen high single digit rent growth for the past three years and demand has continued to outpace supply, Catherwood notes.

Audrey Symes, director, research advisory at JLL, points out that labs are just beginning to reap the benefits of more than $200 billion in research and development spending over the past 10 years. “The promise of new therapeutics as well as breakthroughs in scientific discoveries and upcoming patent expirations have really stimulated new activity in the industry,” she says.

Underscoring this is the fact that the Food and Drug Administration (FDA) approved a record 59 new drugs in 2018. That level dipped somewhat in 2019 but it is still above the 10-year average of 33 approvals per year. Meanwhile, FDA fast tracking of COVID-19 therapies should be a major tailwind for the life science sector going forward, she adds.

Catherwood points out that while much of the life science funding has shifted to COVID-19 vaccines and testing, a lot of that research has been taken on by the very companies that were already in growth mode, “so we haven’t seen any disruption in demand.”

CBRE Director of Research and Analysis Ian Richardson notes that while there has been some disruption for life science real estate, such as the ability for certain transactions to proceed amid the current upheaval, demand for space “is still strongly there.”

Symes notes that the average life science real estate vacancy rate in 2019 was 9%, or roughly half that of traditional office. In the tightest markets, the rate fell to under 2%, she says. While construction is starting to come back, a lot of projects have been postponed. “This will definitely keep fundamentals tight going forward as the supply lags a little bit,” she adds.

One result of this, according to Symes, is that small and mid-tier life science companies could be in the market for Good Manufacturing Practice (GMP)-designated space that could easily be brought online—instead of sourcing or building their own space—saving both time and capital.

Beyond just the need for lab space is an increasing demand for bio-manufacturing facilities, Richardson points out. Accelerating that trend is increased onshoring, as pharmaceutical and biotech companies seek to bring back production into the United States to ease supply chain disruption. “That’s going to be a further tailwind going forward,” Richardson says.


Meanwhile, Catherwood sees more capital coming into the life science real estate sector both on the public and private side. “There continues to be a broader push into the space because everyone sees the trends—growing demand, undersupply, growing rents,” he says.

“Other than new investors coming in and compressing yields and driving valuations higher, there’s not a lot that I see on the horizon that would be a big negative disruptor for the sector. The continuing growth in capital formation and in the development of novel therapeutics has a long runway ahead of it,” Catherwood notes.

According to Richardson, near-term turbulence in the markets should favor REITs with larger, stronger balance sheets and lower leverage entering this crisis, versus the great financial crisis. “In some cases, it will enable REITs to position themselves better for the resilient growth we’re seeing in the life sciences sector,” he says.

Meanwhile, analysts expect the leading geographic life science markets such as Boston and San Francisco to remain at the forefront going forward. “Over the next three to five years the strong will continue to get stronger,” Catherwood says. He adds that it will be more likely to see growth occurring in satellite markets closer to existing hubs rather than to see new clusters emerge in the near term. Richardson agrees, noting that in Boston and San Francisco, space needs are continuing to venture further out into suburban locations or relatively unconventional areas in those metropolitan areas.