Canada Sees Opportunities in Thriving Life Sciences Market

Life sciences continues its attractive run as an asset class for commercial real estate investors in the US and now Canada is stepping forward to develop its own opportunities.

Sabrina Solomiany, Senior Managing Director, Head of Medical & Life Sciences, Berkadia, led a discussion with Maureen McCaffrey, PE, LEED, AP, Director MIT Investment Management Company, and Milos Dajic, CFA, Vice President, Investments, Oxford Properties Group, at last week’s CREW Network conference in Atlanta.

“Covid was a wakeup call for Canada, teaching it that it needs to create labs for vaccine development, so it doesn’t have to rely on the US and elsewhere,” Dajic said. The key Canadian target markets are Toronto, Montreal, and Vancouver.

“There’s only about 7 million or 8 million square feet of life sciences real estate right now in Canada,” he said. “We are seeing that if you build it, it won’t be tough to fill it.

“The question becomes, ‘Who has the risk appetite to build it?’ The capital markets are tough right now.”

REITs comprise about 60% of the sector’s US ownership and the remaining is split by universities and government institutes. There are roughly 2,600 life sciences buildings, accounting for about 200 million square feet of space.

Boston (particularly in the Cambridge area), San Diego, and San Francisco dominate US holdings.

McCaffrey said the Cambridge market’s vacancy rate is less than 2%, a few points better than the national average vacancy rate.

Cambridge’s Kendall Square, across from Boston and the Charles River is perhaps the most reputable life sciences market.

“All the human capital is in Cambridge,” McCaffrey said. “Harvard’s faculty teaches and practices in that market. There’s the ‘bump-and-grind’ culture there where you could be walking down the street and passing some of the greatest minds in life sciences.”

The panel pondered converting existing buildings into life sciences assets and viable characteristics. Life science rents are double that of office, however ground-up construction costs are very high, Solomiany said.

“There’s nothing better than purpose-build assets,” McCaffrey said. “If you are looking to convert, consider structural capacity, floor heights (is there 4.5 feet between floors to fit all the wiring that is necessary).

She said the building’s freight capacity to receive the necessary machines and the structure’s ability to handle vibration are also factors.

“You also have to determine if there is opportunity to increase air handling space because these buildings need a great deal of air flow given their labs,” according to McCaffrey.

Dajic said location matters, because “you can’t fix location” and being near universities and hospitals is optimal.

Construction overall is suffering from a labor shortage, especially for the kind of specialized construction skills that life sciences buildings need.

Another challenge the panel pointed out was the mandate to operate these properties with electricity only. The cost to retrofit them is high and the ability for the power grid to support them is questionable.