Chapter 2
Investment Performance
U.S. Life Sciences Real Estate Investment Trends
5 Minute Read
Looking for a PDF of this content?
Investors are seeking yield in alternative investments such as life sciences, which has provided superior risk-adjusted returns.
Key Takeaways
- Over the past five to 10 years, investor preferences have significantly shifted toward alternative real estate sectors for higher-yield, value-add and opportunistic assets. This is primarily due to cap rate compression (prior to the recent interest rate spike and consequent weakening of investment activity) or structural demand shifts across major property types. Life sciences assets’ strong fundamentals and top risk-adjusted returns have made them one of the most popular alternatives over the past decade.
- Although life sciences and other alternative assets have performed well over the medium- and long-term, recent capital markets disruptions have led to higher cap rates and lower values. However, this dip is expected to be temporary.
- This year, investors’ interest in life sciences real estate continues to grow, surpassing pre-pandemic levels. A significantly larger portion of life sciences investors, particularly institutional and private investors, plan to be net buyers this year. Significant capital has been raised for life sciences real estate but not yet deployed, indicating a large and ready reserve of investment funds.
Institutional investors are increasingly focusing on alternative real estate sectors such as life sciences.
Life sciences is the largest alternative segment in institutional investor real estate portfolios, representing more than 36% of alternative asset value.
In recent years, investors have increasingly focused on alternative real estate sectors, driven by the pursuit of higher yields, and structural shifts in the economy and property markets. The pandemic, technological innovation and the lackluster performance of key sectors such as traditional office real estate accelerated many of these shifts.
The portion of the NCREIF Property Index-Plus (NPI-Plus) composed of alternative commercial real estate assets grew to over 6% of market value in Q4 2023, a considerable increase from less than 1% in Q4 2015. By Q4 2023, institutional portfolios held approximately $56.8 billion in alternative sector assets. This trend continued in 2022 and 2023, despite rising financing costs and market liquidity concerns.
Figure 8: Share of Institutional Holdings in Alternative Sectors
Source: NCREIF, CBRE Strategic Investment Consulting, March 2024.
Figure 9: Breakdown of Alternative Sector Institutional
Source: NCREIF, CBRE Strategic Investment Consulting, March 2024.
Methodology Note: NCREIF provides the most detailed and robust data on U.S. investment returns and institutional holdings, but the data primarily represents institutional real estate investors, which may not fully capture the performance of smaller or non-institutional real estate investments. Investment universe only covers physical assets and does not include alternatives like debt/mortgages.
Life sciences properties have yielded superior returns compared to other asset types.
They have also had less volatility than other high-performing assets such as industrials.
Data from NCREIF reveals life sciences assets have earned higher total returns than most property types across various time periods, especially against offices (Figure 10). Over the past decade, the life sciences sector’s average annual return was 12.2%, outpacing the NPI-Plus overall average, which includes alternatives. The industrial sector was the only one it did not outperform.
Life sciences properties have performed exceptionally on a risk-adjusted basis over the last decade, even compared to the industrial sector (Figure 11). This performance was driven by both steady net operating income (NOI) growth and cap rate compression “Risk” is measured here as the standard deviation of quarterly returns.
Figure 10: NCREIF NPI-Plus Total Returns by Sector, Q4 2023
Figure 11: NCREIF NPI-Plus Total Returns and Standard
Methodology Note: NCREIF provides the most detailed and robust data on U.S. investment returns and institutional holdings, but the data primarily represents institutional real estate investors, which may not fully capture the performance of smaller or non-institutional real estate investments. Investment universe only covers physical assets and does not include alternatives like debt/mortgages.
Strong rent growth has driven consistent cash flow returns and NOI growth for investors in the sector.
Capital markets conditions in 2023 hampered value appreciation, resulting in negative total returns. However, income returns improved.
Over the past five quarters, capital values for almost all sectors declined to reflect higher financing costs and cap rates, leading to negative total returns. Life sciences assets’ value declines and negative returns in 2023 were less severe than the NPI-Plus average, and about half that of the office sector (Figure 10).
Nonetheless, the life sciences sector maintains strong underlying fundamentals. Its average annual rent growth has far exceeded 10% for four consecutive years, outperforming most U.S. asset types. In contrast, the average office rent growth rate has not exceeded 2% since 2019. This largely explains the life sciences real estate sector’s sustained positive cash flow returns, even in 2023 when property values began declining. It also clarifies the recent cap rate decompression, driven more by falling values than underlying cash flow and fundamentals.
Figure 12: Life Sciences Average Annual Returns by Component and Rent Growth Comparison
Source: NCREIF, CBRE Econometric Advisors, CBRE Research, CBRE Strategic Investment Consulting, 2024.
Methodology Note: NCREIF provides the most detailed and robust data on U.S. investment returns and institutional holdings, but the data primarily represents institutional real estate investors, which may not fully capture the performance of smaller or non-institutional real estate investments. Investment universe only covers physical assets and does not include alternatives like debt/mortgages.
Life sciences real estate remains a major focus for alternatives investors.
Investors are optimistic about life sciences investment activity rebounding in 2024.
According to CBRE’s 2024 U.S. Investor Intentions Survey, 60% of investors plan to focus on alternative asset sectors in 2024, doubling from 30% in 2019. Additionally, 35% of investors in alternatives sectors are targeting life sciences or healthcare facilities for their 2024 allocations, up from 25% in 2019. While the 2019 survey did not distinguish between life sciences and healthcare, the 2024 survey reveals that 29% of alternative investors are targeting life sciences. This survey also revealed that investors are generally most interested in opportunistic, value-add and core-plus prospects, as opposed to distressed, debt and core prospects. This aligns well with the life sciences sector, which is largely made up of core-plus assets, development opportunities and value-add repositioning.
More than 40% of life sciences-focused investors are real estate funds. Since 2018, these funds have raised nearly $12 billion, excluding diversified real estate funds that may invest in this area too. Much of this capital likely remains undeployed because it was mostly raised in 2021 and 2022, with few acquisitions in 2023.
Respondents to CBRE’s 2024 U.S. Healthcare & Life Sciences Investor & Developer Survey demonstrated a much higher likelihood of being net buyers in 2024. Additionally, only a third of respondents anticipated decreased overall sales activity in 2024, compared with about half in last year’s survey.
Figure 13: Share of Investors Pursuing Each Alternative Sector (Among Those Pursuing At Least One Alternative)
Source: CBRE Investor Intentions Survey Results, 2024 and 2019.
Figure 14: Life Sciences Investor Intentions for 2024 Activity
Source: CBRE Healthcare and Life Sciences Capital Markets, Investor & Developer Survey Results, 2024.
Related Services
- Property Type
Life Sciences
We provide the life sciences industry solutions that maximize facility and investment performance across labs, manufacturing space and critical enviro...
Related Insights
-
Explore rankings, data and insights for R&D, manufacturing and medtech talent across the top 100 U.S. life sciences markets.
-
Revolutionary advancements by the U.S. life sciences industry could increase in 2024 despite macroeconomic uncertainty.
-
