Chapter 3
Investment Characteristics
U.S. Life Sciences Real Estate Investment Trends
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Key partnership, location and design considerations can influence the success of life sciences real estate.
Key Takeaways
- Joint ventures and other strategic partnerships enable generalist investors to access opportunities through experienced investors, developers and/or operators, increasing investments while optimizing risk-adjusted returns. New construction, including the conversion of underutilized or obsolete office and flex space, is enabling some institutional players to expand their holdings faster. High barriers to entry, including specialized design, operational knowledge and complex tenant build-outs, pose challenges to interested new investors.
- Innovation ecosystems, anchored by research institutions, large companies, startups and VCs, are most prevalent in Boston-Cambridge, San Francisco and San Diego. Although emerging markets have attracted more experienced life sciences investors and operators, most remain focused on core and secondary markets with a proven innovation ecosystem.
- Environmental, social and governance (ESG) considerations are increasingly influential. Life sciences assets offer sustainable building features and contribute to socially important scientific advancements, appealing to investors’ ESG goals.
Many newer investors are leveraging strategic partnerships to help navigate complexities, minimize risk and maximize returns.
Joint ventures and other strategic partnerships enable capital investors and experienced operators to leverage each other’s unique strengths.
Less experienced institutional investors now more commonly partner with experienced REITs and private operators through joint ventures or limited partnerships. For example, more than a quarter of the capital for lab assets bought in 2022 and 2023 came from strategic partnerships. These collaborations facilitate quicker portfolio scaling for investors and owners, while helping them gain knowledge and limit risk.
Partnership structures and participant roles can vary (Figure 15). The most successful partnerships leverage each party’s expertise, influencing financial commitment, operational arrangement and legal structure. For capital providers, this translates into access to the operator partner’s client relationships, deep market knowledge and overall operational capabilities. Operators, in turn, access significant capital, and in some cases, experience with fundraising and other key financial aspects of investment.
Figure 15: Strategic Partnerships Can Take On Several Types of Arrangements
Complicated requirements and asset management add a barrier-to-entry for many new life sciences investors.
Life sciences facilities are more complex and expensive to build, own and operate than most other asset types (Figure 16).
In addition to forming strategic partnerships with experienced investors, investment managers can outsource operations to reputable project and property management companies, among other solutions. Project management companies can assist with capital improvements and build-outs, while property management companies can help handle daily operations and facilities management. Outsourcing arrangements can assign a full range of services, such as leasing, maintenance and operations, to a single operator, or contract them separately. Some arrangements may involve the investor performing certain services. Building capacity in-house can be time-consuming and expensive, making these partnerships a strategic means of enhancing NOI and returns for investors.
Figure 16: Lab Facilities Require Operators to Handle More Complex Requirements Than the Traditional Office
New construction has been a key path for institutional investors to enter the sector during a period of low inventory.
Limited property stock available for acquisition opportunities for investors, combined with immense demand from occupiers for expansion space, led to more new developments and conversions.
Before the past several years’ construction boom, life sciences tenant demand far exceeded the available space in the market. Existing assets traded at significant premiums so investors capitalized on the major new development opportunity. Construction and renovation volume of lab facilities increased to nearly 40 million sq. ft. by 2022, accounting for more than 20% of the existing inventory.
Institutional investors have increased their involvement, as full owner-developers or through joint ventures and limited partnerships. These investors have mainly focused on development in the core markets, where more than 80% of the square footage of active construction projects were in Q4 2023 (Figure 20).
Development of lab space can be risky, costly and complex, which has historically curtailed development. For new ground-up construction, CBRE estimates that the core and shell costs (before fit-out) for a lab facility are 1.5 to two times the costs of office spaces. Additionally, fitting out a lab shell space typically costs about twice as much as for offices, although particularly complex lab requirements can be much more expensive. A large portion of this cost difference results from the additional mechanical, electrical and plumbing (MEP) equipment life sciences facilities need.
Figure 17: Share of Total New R&D Construction Value by Capital Group Source and Time Period
Source: Real Capital Analytics, CBRE Research, CBRE Strategic Investment Consulting, March 2024.
Figure 18: Total Sq. Ft. of Lab Facility Under Construction by Development Type
Figure 19: Breakdown of Key Lab Facility Fundamentals by U.S. Market
Source: CBRE Research, CBRE Strategic Investment Consulting, Q4 2023.
Figure 20: Institutional Investor-Funded Lab Construction Projects by Market, Q4 2023
Why is so much life sciences capital concentrated in three core markets?
Markets with mature life sciences innovation clusters are well suited for growth, particularly the three largest – Boston-Cambridge, San Francisco and New York.
Figure 21 shows that anchor research institutions are among the key features of a successful life sciences cluster. The top markets for R&D asset investments typically host major universities, hospitals and non-profit research institutions, where significant innovation originates. This innovation fuels startups, attracts government support and draws major life sciences companies to the area. Figure 23 illustrates the evolution of a dense, mature life sciences cluster from an anchor university and non-profit research institutions established in the mid-twentieth century.
Numerous elite life sciences research institutions are in top markets, such as Baltimore with Johns Hopkins and New York with Memorial Sloan-Kettering. Secondary markets with strong anchors can also attract risk-tolerant investors due to their still-emerging real estate sectors. High-quality real estate development, an essential component of the ecosystem, can expand secondary markets through industry growth. Secondary markets may experience even more growth if scale becomes too costly or difficult in the primary markets, which are typically the most expensive and challenging places to develop.
Figure 21: Key Features of Core Life Sciences Market Clusters
Figure 22: Share of NIH-Backed Patents Granted to Top Institutions vs. Share of R&D Sales, by Market
Source: CBRE Research, CBRE Strategic Investment Consulting, March 2024.
Figure 23: San Diego—Example of Life Sciences Clustering Effect
Investors are strongly focused on ESG and life sciences real estate offers unique advantages.
The life sciences sector inherently has sustainable building features, robust corporate governance and societal benefits, making it attractive for ESG-conscious investors (Figure 24).
Life sciences properties are much more likely than other assets to meet the “environmental” component of many investors’ ESG goals or mandates. They can also help fulfill “social” goals, which can be less straightforward in other types of real estate investments. Figure 24 details some of the ways that life sciences real estate contributes to investors’ ESG goals.
Sustainable buildings also trade at a premium. According to MSCI/RCA data, from 2020 to 2023, LEED Certified R&D buildings in the three core U.S. markets sold for approximately double the average price per square foot of non-LEED buildings. Additionally, cap rates for LEED buildings traded at 110 bps lower. In CBRE’s 2022 Strengthening Value Through ESG report, nearly 80% of U.S. life sciences investors stated that a green building certification would impact their decision to acquire an asset, with nearly half indicating they would pay a premium for this asset.
Despite weaker capital markets conditions, investors remain committed to ESG in the near-term. More than 80% of CBRE’s 2024 U.S. Investor Intentions Survey respondents noted that challenging market conditions have not impacted their near-term ESG goals.
Figure 24: ESG Considerations and Benefits for Life Sciences Investors
Figure 25: Have Challenging Investment Market Conditions Changed Your Near-Term Focus on ESG?
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