More investors are betting on life sciences real estate amid unrelenting outbreaks of Covid-19 infections worldwide.
The Coronavirus pandemic has accelerated a property segment that has always been very niche and receives very little attention – research laboratories and corporate offices for the life sciences industry. Life sciences is the umbrella term to cover all health-related sectors like pharmaceutical, biotechnology, medical equipment, food science and healthcare, and includes research and development into new vaccines for Covid-19.
Not only are specialised labs needed, the real estate demand for this segment includes logistics facilities (including cold storage) and manufacturing facilities.
Though not new, such a specialised property class has attracted a lot of investor interest since the Coronavirus pandemic started in late 2019. Among the reasons is its notably low vacancy rate which any landlord would be pleased.
It’s also a very stable income earner as the tenant would not be moving out anytime soon once settled in. This is because of the vast initial outlay, the expensive and sophisticated equipment onsite and most of all, the researchers must be physically present in the lab ensuring no work-from-home (WFH) disruption – this is one job that can’t be performed from home!
The market has been growing rapidly in North America and Europe (UK) even before the pandemic but since 2020, it has experienced exponential growth due to the race to get the Covid-19 vaccine out. Also, more companies are looking to take advantage of expiring pharmaceutical patents, according to CBRE. Additionally, there’s more demand for high-specification logistics facilities, including cold storage, partly due to specialised storage requirements for mRNA COVID-19 vaccines.
Unsurprisingly, the sector is expected to see strong growth in the next five years, according to Cushman & Wakefield’s “Life Sciences 2020: The Future is Here” report. The market for the global prescription drug market alone is expected to surpass US$1 trillion by 2022.
The pandemic has caused the property market in most countries to slowdown and stagnate especially the office and retail market due to widespread lockdowns and work-from-home directives across the globe. With increasing vacancies in these two sectors, it’s the perfect time now to think about repurposing or converting them into spaces that are in demand now. Labs and warehousing are two areas that have caught the attention of governments and private sector developers.
For example, in Montreal which has the highest concentration of biotech research facilities in Canada, property developers are busy buying empty buildings built in the 1980s and 1990s, as well as industrial warehouses to convert into lab space. The demand is unrelenting as more new entrants
get into contract research and contract manufacturing, hence requiring more such custom-built labs and manufacturing spaces.
Deloitte Life Sciences reports that Novartis, Pfizer, and Fujifilm have increased investments in gene therapy manufacturing while contract manufacturers such as Catalent and Thermo Fisher Scientific are also ramping up operations to support gene therapy R&D.
“In the current market, contract manufacturing agreements are growing for next-generation therapies because a lot of pharma companies prefer to use contract manufacturers instead of manufacturing the products themselves. The rapid ability of contract manufacturers to scale is set to continue,” the report concludes.
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According to a top Canadian commercial developer, it takes only 6-8 months to complete a customised lab or manufacturing facility despite some very specialised requirements such as different equipment and power requirements. That also means a more expensive price tag. On average, they are three times more expensive to build than office or residential space. In Vancouver, the cost of construction for new lab spaces is estimated to average between C$600 and C$800 per sq ft which is much more expensive than even Class A office space.
Says a research analyst, “I’ve never seen more urgent interest from developers and users for sophisticated research and development labs even though lab operations require considerable upfront costs to build or retrofit spaces. But a cooling of the office and residential markets is shifting attention to investment in life sciences facilities.”
“Conditions are ideal for maximum profitability arising from innovative new pharmaceuticals and medical devices,” says Audrey Symes, U.S. Healthcare and Life Sciences research director at JLL.
“The production of vital medicines, as well as increased testing and therapies to combat COVID-19, are boosting occupancy levels. Ongoing demand from critical cancer, gene therapy, and immunology research, as well as pioneering advancements in biology, have fuelled demand for labs and their offices, and continue to provide sustained demand,” adds Symes.
Global real estate investment plunged by almost half in 3Q 2020 compared to 3Q 2019, according to JLL data. But sectors that have proven critical throughout the crisis – such as logistics, data centres and multifamily – have fared better than others.
Life Sciences Hubs
The clustering of life sciences firms and researchers is common. Cities with top industry and academic talents, existing substantial hubs of research facilities and sophisticated infrastructure, continue to be a top draw for investment.
In the US, the life sciences hubs are clustered in Boston, San Francisco and San Diego, while in the UK, they are in the famed Oxford-Cambridge-London triangle. These hubs capture 70% of venture capital in 2019, according to JLL 2020 US Life Sciences Outlook.
In Asia, the areas around Japan’s University of Tokyo and Sun Yat-sen University in Guangzhou are among the top draws. In late 2020, China announced three new Free Trade Zones which include the 10 sq km Zhongguancun Life Science Park.
Shanghai and Beijing traditionally stand out for their advanced manufacturing and R&D capabilities catering primarily to a large
domestic market. Top-ranked Tokyo and Singapore are noted for their sophisticated infrastructure, talent pool and protection of intellectual property. At No: 5 spot is Melbourne which is known for its advanced manufacturing of pharmaceutical and medical technology products, university-backed research capabilities and strong logistics networks.
In Asia Pacific, demand for specialized R&D facilities is being supported by preferential policies, including incentives to support new R&D set-ups in key industrial parks.
CBRE in its latest report lists four factors that will drive expansion in the Asia Pacific life sciences sector – growing health expenditure, an ageing population, government support and a rise in pharmaceutical R&D. So far, the strong demand has translated into a 17.4% y-o-y growth in the volume of life sciences office leasing in Asia Pacific in 2020.
CBRE expects more public-private sector partnerships to drive development opportunities amid a surge of enquiries on opportunities in the Asia Pacific region. Government support for homegrown companies and the ownership of core technologies are also helping the region catch up with the US and Europe in terms of R&D capabilities. Examples are China, Malaysia and Thailand which are actively undertaking R&D into Covid-19 vaccines based on mRNA technology.
However, CBRE notes that direct investment in Asia Pacific life sciences assets remains limited, with only a handful of transactions completed in Australia, Japan and China over the past 24 months. Chief among the reasons cited is that these assets have not been made available for sale because these facilities are purpose-built and self-owned. The pool of investors comes mainly from Europe, North America and Asia.
This has not deterred investors who are hoping that some assets previously developed under public-private-partnerships will be made available for sale, and that more will be built or converted from old buildings amid a fresh wave of coronavirus infections due to new variants.
Dr Henry Chin, Global Head of Investor Thought Leadership and Head of Research, APAC, for CBRE, says, “While life sciences real estate is at a nascent stage of development as an investible asset class, there is significant potential – particularly in the Asia Pacific region, where life sciences transactions account for less than 1% of annual investment activity, compared with circa 4% of deal activity globally.”
“The obvious entry route is via sale and leasebacks as multinational pharmaceutical companies recycle capital for R&D activities or offload non-essential assets following mergers and acquisitions. However, we expect other opportunities will include converting older industrial properties into labs or cold storage facilities as well as the construction of modern life science facilities under public-private partnership frameworks across the region,” he adds.
Megalabs are starting to be built in several locations across the world while conversions from existing buildings are more appropriate for markets with a limited supply of land such as Hong Kong and Japan.
Currently, pharmaceutical manufacturing facilities in Asia Pacific are mainly sited in India, China, Japan, Thailand and Malaysia.
However, in the case of Covid-19, global manufacturing capabilities are far below what’s needed—only about a dozen countries have the capacity to produce COVID-19 vaccines, according to the Council on Foreign Relations. It notes that individual governments are investing billions of dollars to expand production plants to manufacture Covid-19.
As of June 2021, about 180 potential Covid-19 vaccines are in preclinical development by pharmaceutical companies, academic institutions, and government agencies worldwide, according to WHO.
What this means is that there is still a lot of room for development and production of new and improved vaccines, thus requiring more labs and manufacturing facilities. Moreover, as long as the Covid-19 disease can’t be totally eradicated, as many believe, this would translate into continuing strong demand for life sciences real estate amid more capital inflows into this sector.
Because the success of the life sciences sector largely depends on talent, the workspace becomes a central strategy to attract and retain knowledge workers. Thoughtfully designed buildings can create the kind of environment that can spur innovation by allowing the staff to interact creatively with their surrounding and connecting meaningfully with their colleagues.
Breakthroughs — whether tests, treatments or vaccines — happen because of the talent and collaboration of scientists and experts. Hence, the environments in which they work, from wet labs to dry labs, from social spaces to R&R, play a critical role in encouraging their best output.
Hence, life sciences buildings should be designed to foster community and communication with other likeminded companies and include amenities such as coworking spaces, restaurants, retail, parks, convention centres and public event plazas.
Furthermore, as research progresses, it would require reconfiguring spaces, hence, space flexibility should be the prime consideration in the design. This means using materials that can easily be moved around such as prefab and modular systems, and movable partitions that allow areas to be quickly and easily converted for different uses.
It also involves the use of easily reconfigured lab equipment, mobile conference rooms, flexible floor plans and reconfigurable workstations.
In addition, research buildings are highly energy intensive. Thus, developers should integrate renewable sources of energy such as solar, geothermal, biomass, etc, that can reduce energy costs. – Compiled from various sources.
8 Top building requirements
Floor space large and solid enough to support heavy equipment
Ample power for various equipment
High-efficiency ventilation system
Higher ceiling to cater to ventilation and air conditioning systems
Storage facilities to include refrigeration
Near research hospitals & universities, health services
To integrate renewable sources of energy as it’s energy-intensive
Flexible space layout due to evolving research needs