CHICAGO – Innovative sectors such as cell and gene therapies, artificial intelligence and ancestry and genetic testing are all forecast to grow by as much as 37 percent annually in the next five years and drive a wave of demand for lab space, diagnostic centers and healthcare facilities, according to Cushman & Wakefield’s Life Sciences 2020: The Future is Here report.
All of this research and growth require capital, not to mention talent. Together, National Institutes of Health (NIH), venture capital and corporate R&D invested an estimated $125 billion in the pharmaceuticals and life sciences sectors in 2018. In the current decade, growth in life science-related employment has been more than three times stronger than total U.S. employment. As capital has flowed into life sciences, employment has increased leading to greater demand for lab and office space and a 12-million-square-foot pipeline under development.
“With a growing and aging global population, the life sciences sector is seeing more capital investment and scientific advancement than any time in history,” said Greg Bisconti, Cushman & Wakefield Executive Director and Leader of the firm’s Life Sciences Advisory Group. “We expect this decade to be transformative on many levels, but primarily genomics and specialized and personalized medicine. We may experience an economic correction, but the inherent need and advances should continue to drive the national and global demand for laboratory and related office and manufacturing needs. Historically, the life sciences industry weathers the inevitable ups and downs better than other sectors. On that note, the ups are likely to be stronger and the downs less severe than we have seen in the past,” Bisconti concluded.
With rising capital expenditure and employment driving growth, the life sciences sector is a small but rapidly growing commercial real estate product type. In the 14 major U.S. life science markets covered in the report, there is a total of 146 million square feet (msf) of lab space, with another 12 msf expected to be delivered in the next two years. Currently, vacancy is lower and rents generally are higher for lab space than for office space in these 14 markets, with vacancy at 7.1 percent compared to overall office vacancy or 12.4 percent in the same dozen markets.
The largest markets are Boston/Cambridge, where lab-space vacancy is near 0 percent, and the San Francisco Peninsula – both have 20+ msf of space. San Diego and New Jersey follow, both approaching 20 msf of lab space each. As of the third quarter of 2019, average asking rent for lab space in the 12 markets evaluated is $43.10 per square foot (psf), ranging from a low of $22.85 psf in New Jersey to as high as $130 psf in Boston.
There are five markets in the U.S. in which the total lab space accounts for 10% or more of the total office inventory: San Francisco Peninsula, San Diego, Suburban Maryland, Boston and Seattle/Puget Sound. Any developments in life sciences will have an important impact on these markets. Because life sciences development in the San Francisco Peninsula accounts for one-third of the total inventory, what happens in the life science industry is the critical driver there. On the other hand, in New York City, lab space accounts for less than 0.5 percent of the total office inventory. Nevertheless, approximately 1.7 msf of lab space is expected to be completed in 2021 in New York City, making it the third largest pipeline in the nation, only behind San Francisco Peninsula (+3.9 msf) and Boston/Cambridge (+2.3 msf).
“Real estate investors have become increasingly focused on alternative asset classes and appetite across the U.S. for life sciences assets or buildings that can be converted to lab use is extremely strong,” said Joshua King, Cushman & Wakefield Executive Managing Director, Capital Markets. “There is a significant amount of capital chasing a finite number of opportunities in the sector. The relatively strong pipeline we are seeing in New York and across the country demonstrates that investors and developers are eager to build more product in order to capture the underlying demand.”
That development pipeline and other drivers also point to a promising outlook for life sciences and healthcare properties investment and capital markets.
“Employment growth and resilience suggest that powerful drivers such as an aging population, rising investment in research and rapidly evolving technology are likely to support and enhance values of life sciences properties,” Bisconti said. “This generally involves a long-term strategy and sophisticated investor due to both the return characteristics of the asset class – outperforming over the course of full cycles – and also because the asset are operationally complex, increasingly specialized, heavily regulated and dependent on sustained relationships with health systems, end users at various stages of growth; and organizations such as the NIH and venture capitalists.”
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 51,000 employees in 400 offices and 70 countries. In 2018, the firm had revenue of $8.2 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.