Science and technology lift the gloom for real estate investors
OXFORD NANOPORE MinION is a tiny but powerful device. When an employee at a hotel in Sydney tested positive for covid-19 in March of last year, the cellphone DNA The sequencer traced the infection to a U.S. airline flight attendant, avoiding a blanket lockdown. Successful biotech companies – another celebrity is BioNTech, famous for the Covid-19 vaccine – are sucking capital in the life sciences. When such businesses thrive, they do not do so with offices or stores, but through science labs with white walls and glossy surfaces.
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Investors in commercial real estate have long relied on offices, shops and industrial buildings. Less conventional assets like cell phone towers were the prerogative of specialists. Now the big guns in real estate are competing on them too. Thus, the lab space has become the most desirable property in commercial real estate, along with other facilities fueling the digital economy. Data centers and the infrastructure that connect smartphones are booming.
The motivation of investors is clear. The pandemic has rocked the prices of commercial real estate globally. US retailers closed nearly 15,000 stores in 2020. As of mid-October, with people attached to remote work, offices were only a third full. The risk profile of certain traditional real estate assets has deteriorated sharply.
In contrast, demand for assets like labs and data centers has never been stronger, a trend visible before the coronavirus began to spread. As rent collections for stores and restaurants plummeted last year, data traffic from virtual meetings and online shopping has skyrocketed. Businesses that use underlying data centers and mobile towers demand more. These digital economy winners seem as secure as homes.
This shift is reflected in the changing makeup of the ten largest US real estate investment trusts (REIT). Ten years ago, the most valuable vehicle of this type was Simon Property Group, the country’s largest mall owner. Today, it is American Tower, the rapidly expanding owner of tens of thousands of cell towers around the world. Five of the top ten REIT currently operate either data centers or mobile towers.
The strongest buzz currently surrounds the life sciences and laboratory space. Investors are flooding the health care industry with capital. Drugmakers, medical device makers and other life science companies have raised a record $ 103 billion in venture capital so far this year, up from $ 63 billion in 2019, according to JLL, a real estate consulting firm. A generous slice of capital goes into real estate. JLL estimates that up to $ 87 billion is now spent on life science real estate globally. This equates to a third of all global spending on commercial real estate in the second quarter of this year.
Flagship offers pop up frequently. In October GIC, Singapore’s sovereign wealth fund, bought a 40% stake in Oxford Science Park at Magdalen College, part of the University of Oxford; the deal valued the park at ten times its value just five years ago. Blackstone, a private equity firm, recently doubled its stake in life sciences in Britain, investing more than $ 1 billion in two new locations. Life sciences actions REIT are booming.
Today, laboratory space is increasingly difficult to find. In Boston, where much of it is held in America, less than 5% of labs were available in the third quarter. In the Golden Triangle, as the area between London, Oxford and Cambridge is called, the locals are exhausted. The Harwell Life Sciences Campus near Oxford will add 1.5 million square feet over the next seven years to meet demand, equivalent to three-quarters of all office space the London’s financial district will add this year. Chris Walters, Director of JLL, estimates the unmet demand for laboratory space in and around Cambridge at 1 m², which is equivalent to almost a quarter of the retail space on Oxford Street in London.
When markets are tight, participants will seek to increase supply. In the case of sci-tech property, this is more difficult than it looks. Building new telephone towers means navigating strict planning laws and NIMBYS. New data centers need land with access to cheap electricity and high-speed internet. Life science companies like to cluster around the best universities and academic medical centers that supply the chemists, microbiologists and other experts who populate their laboratories. One solution is to find secondary locations. Cities like Los Angeles, which is quite close to the San Francisco Bay Area, and Pittsburgh, home to Carnegie Mellon, a university known for its prowess in artificial intelligence, are attracting startups flooded with capital. In Britain, life science hubs are emerging in the north, where pharmaceutical giants like AstraZeneca and GSK have manufacturing sites.
Another solution is to convert existing offices and industrial premises. Boston Properties, one of America’s largest offices REIT, says it can convert 5 square meters of conventional sites and buildings into laboratories. This is not an easy process, as laboratories are complex spaces governed by biosafety rules. They need four times more air than offices. Waiting lists in London for “wet” laboratories, facilities in which hazardous chemicals and other hazardous substances can be handled, are growing. But real estate investors are ready to give it a try. In New York City, conversions could nearly double the city’s lab space for rent, according to Newmark, a real estate consultancy.
Even empty magazines are reused. Savills, a British real estate company, estimates that London has at least 1.8m² of commercial buildings that could be turned into laboratories. High store ceilings provide plenty of space for high performance ventilation and service elevators to move hazardous materials. It will probably take years for supply to catch up with demand. But as the place of work and commerce evolves, so do real estate investors.■
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This article appeared in the Business section of the print edition under the title “Laboratory Rats”