Behind This Year’s Drop in Life Science Investment Activity

Life science investment activity decelerated by 33.6% in the first half of 2022 compared to a year ago and fundraising increased during that time, although at a slower pace, according to a report this week by Newmark.

“Despite a slowdown in investment activity, pricing for life science and R&D assets remains at a record high, hitting $564 per square foot in 1H22,” Newmark said in the report.

“Although bidding pools have thinned compared with 2021, investors are still attracted to laboratory assets, in part due to the supply-demand imbalance that still exists in the largest cluster markets.”

Welcome to Low Vacancy, Rising Rates

Reports on the ground can back that up. 

For instance, David Vincent, investment specialist, Cadre, tells GlobeSt.com that demand for life science space remains especially high, as investors clamor for the opportunity to buy into a property sector exhibiting low vacancy rates and rising lease rates. 

“We are especially interested in the need for office conversions to spaces suitable for the scientific community, as conversions can increase rent potential to benefit both investors and the scientists taking on highly important work,” Vincent said. “There are a number of examples of this trend in action, including our recent sale of a Washington, D.C. based asset named Key West Crossings. Due to the height of demand, Cadre sold ahead of underwriting and achieved 40%+ net IRR, as we announced in July.”

Katie Bernhisel, director, life science advisory services at Raise Commercial Real Estate, tells GlobeSt.com that capital-efficient companies remain appealing to investors. “The science doesn’t slow down because the economy does. 

“Companies that were planning to go out for their Series A are not changing those plans. They’re not shelved, just adjusted to do more with less funding. Their focus is on milestones and speed to market. With capital, the R&D timeline is accelerated. Despite more tepid funding activity, the growth in the life science sector is trending further upward. 

“This steady increase positively impacts real estate, which is a significant line item on balance sheets. In underdeveloped submarkets, such as LA, there is a rare opportunity for the Life Science community to influence how developers accommodate their nuanced needs.”

Raising Capital Affected by Rising Interest Rates

Mark Goodman, the principal of Mark Goodman & Associates, tells GlobeSt.com that investment in life sciences has been off the charts since the onset of the pandemic, and that’s not a sustainable level of growth for any industry, “so it’s inevitable that we would see it eventually begin to taper off.

“Additionally, the rise in interest rates has also made it harder for firms to find capital from traditional banking sources, as well as VC firms.”

“That being said, investments in life sciences are still above pre-pandemic levels and expected to remain strong. Recent announcements, such as the news of Chicago-based ARCH VC raising $2.9 billion to fund early-stage biotech firms, prove the industry still has room to grow.”

Available Debt Financing Slowing

Kevin S. Kinigstein, Partner, Cox, Castle & Nicholson, tells GlobeSt.com that he believes the life science investment market will remain relatively strong, particularly in comparison to other real estate asset classes. 

“There continues to be more available equity than life science projects to invest in, and despite macro-economic concerns, there also continues to be an influx of money from sources that are not traditionally life science investors,” Kinigstein said.

“However, with available debt financing slowing down dramatically, investment activity is slowing down relative to 2021 and will likely remain only as active as the debt markets allow.”

Luminous: Slowing Demand in California

Bob Dougherty, Chief Investment Officer of Luminous Capital Management, tells GlobeSt.com that he has witnessed a slowdown in leasing demand and investment appetite in California biotech markets during the past two months.

“Of course, this coincided with the arrival of summer which often brings lighter activity. However, recent economic news doesn’t seem as dour as it was in July, so we are hopeful that improved investor confidence will translate to a more robust market after Labor Day, particularly given the six to eight weeks we’ll have had to adjust to interest rate hikes that were already anticipated. 

“We don’t foresee a return to the white-hot climate of 2020-2021 in the Fall but venture capital and NIH funding levels are projected to end the year well above 2018-2019 levels, and those were pretty strong years in life sciences real estate.

An 11-Year Lease in California

Bucking that trend, Harbor Associates announced the signing of A2 Biotherapeutics to an 11-year lease for the 75,994-square-foot property in Agoura Hills, Calif., that will serve as A2 Bio’s new global headquarters.

The lengthy lease is an example of the demand for space by life science and bio-tech firms across the US, Harbor said.

According to CBRE, at the end of 2021, office-to-lab conversions in the 12 largest U.S. life sciences markets, which includes Los Angeles, amounted to 9.9 million square feet, up 49% from the beginning of the year.

Life Sciences Sector Drives Boston

Doug Ressler, Yardi Matrix, tells GlobeSt.com that despite the headwinds faced by the office sector and gateway markets, Boston’s new-supply pipeline remains robust. 

The largest projects under construction in Boston are towers that broke ground before COVID-19 upended the office industry, such as the 1.4 million square-foot mixed-use Winthrop Center or the 1 million-square-foot redevelopment of One Post Office Square. 

“Since the pandemic began, new supply in Boston has been driven by the life sciences sector,” Ressler said. “More than 40% of all office square feet under construction there are in buildings designated as life science space, and among projects that have broken ground since the start of 2021, that share jumps to 55%.”