Pandemic puts premium on life-sciences space, while undercutting hotels, shopping centers and senior housing
Covid-19 is clobbering hotels, shopping centers and senior housing communities. But the pandemic is providing an extra boost to landlords leasing to biotechnology, pharmaceutical and other life-sciences businesses.
Those owners were already doing a lot of business with companies working on health problems like diabetes and cancer. Now, they are seeing strong demand from companies working to find a cure for Covid-19. And while work-from-home policies are crimping demand for office space, life-science lab work can’t be as easily replicated remotely.
“One of the disruptive forces to office space was that we all went home and figured out how to use Zoom,” said Steven Binswanger, a director at real-estate investment banking firm Eastdil Secured. “No one in their house has a lab set up.”
Billions of dollars are flooding into the sector from governments, venture capitalists and other private sources. Alexandria Real Estate Equities Inc., the largest life-sciences real-estate investment trust in the U.S., last week raised $1.1 billion through a new share offering. Shares were priced at a discount of only about 2.6% below the existing share price. Past secondary offerings by Alexandria have offered discounts in the range of 3% to 8%, said Joel Marcus, the company’s founder and executive chairman.
“It was the largest equity offering in the company’s history, the tightest pricing [in the last ten years] and massively oversubscribed,” he said.
Other big real-estate companies with life-sciences businesses are adding more. BioMed Realty, which was taken private by Blackstone Group Inc. in a close to $9 billion deal in 2016, is moving ahead with a development pipeline that will add 2.5 million square feet to its existing portfolio of 11 million square feet in such markets as Boston, San Diego and Seattle.
In April, Toronto-based Brookfield Asset Management closed on its purchase of a 50% stake in Harwell Campus, a 700-acre life-sciences campus near the University of Oxford, for more than £200 million ($251 million). The owners are now looking at a range of expansion possibilities including adding a hospital to the campus to boost its research and development businesses.
Since the pandemic hit, Brookfield has been taking a measured approach on developing other types of commercial property, said Zachary Vaughan, the head of Brookfield’s European real-estate business. “But as it relates to life sciences, we’re going to continue because the demand is there and it’s only going to grow.”
One of the biggest concerns in the industry is the possibility of developers and investors creating too much supply.
“This has been the institutional focus du jour,” said Jason Kaufman, senior vice president at Silverstein Properties Inc., which is planning to expand the life-sciences business it has created in New York to other cities. “Now everyone who operates a loft-style building in New York City thinks they have a life-sciences building.”
Developers warn that there are high costs and hidden complexities of building space for scientific and medical research. Buildings need sophisticated ventilation and gas and water delivery systems.
“If you don’t know what you’re doing, you blow yourself up,” said Mr. Marcus, of Alexandria.
Still, it isn’t hard to see the appeal of life-sciences property especially when comparing its post-Covid-19 performance with other types of commercial real estate. While office leasing markets are moribund in many cities, Alexandria reported that it leased more than one million square feet in the second quarter with an average rental-rate increase of 37%.
While many hotels have yet to reopen and some retail landlords are reporting as many as 50% of their tenants have missed some rent payments, landlords like Alexandria, Brookfield and Blackstone say almost all of their life-sciences tenants are current.
In some cities without major life-sciences hubs, developers are trying to change that. In Chicago, a venture led by Trammell Crow Co. closed in June on the purchase of a site for the $250 million development of a 16-story life-sciences center named Fulton Labs. Construction has begun.