Location Is Key For Life Sciences Investors – For Now

For investors looking to break into the booming life sciences asset class, location is king – at least for now. 

“Investors are focusing on specific markets,” writes Real Capital Analytics’ Jim Costello in a new post  – but he notes that while “location may matter for life sciences assets for now, [it’s] not forever.”

The top life sciences firms are clustering in markets with major research institutions, with Boston, San Jose, San Francisco, the East Bay region, and Seattle rounding out the top five for the four quarters ending in Q3 2021. San Diego, Philadelphia, Manhattan, Los Angeles, and Orange County follow behind to round out the top 10 US R&D markets.

Boston earned top marks thanks to a combination of significant portfolio activity and its proximity to some of the world’s best universities. But, Costello notes that the San Francisco Bay Area beats out Boston when combining the markets of San Jose, San Francisco proper, and the East Bay: “There too, great universities like UC Berkeley and Stanford create the labor force that life sciences firms need to thrive,” he says.

Supply in the asset class has struggled to keep pace with demand, as companies in the sector sought nearly 24 million square feet of new real estate in the third quarter alone. That figure exceeds the amount of lab space under spec construction by nearly 2.8 million sq. ft., according to CBRE. The US vacancy rate for lab and research & development space is at 4.9% nationally, with Boston-Cambridge and New York City each at a record low of 1.1%, per CBRE data. Average asking rents also ticked up 7.5% in the top 12 markets CBRE tracks from March to September of this year.

But while the sector appears heavily anchored to major research institutions for now, RCA’s Costello predicts that too will change.

“It is not as if the life sciences firms are immune from market forces and competition. In the pursuit of efficiency and cost competitiveness, like other firms they will look to outsource non-essential work,” Costello says. “Do I need a group of PhDs to run simple lab tests in Boston?”

He notes that there are currently firms offering outsourced services around lab work “much like there are third-party logistics firms helping firms offload non-core activities tied to the distribution of consumer goods.” The question, he says, is whether those third-party services firms operate in smaller markets and outsource basic pieces of the life sciences puzzle to alternative locations. And if that happens, the calculus around how investors underwrite the role of locations in life sciences assets clustered around major US universities will likely change.

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