The pandemic upended the office market. Companies quickly pivoted to working remotely, leaving investors unsure if they'd fully return to their office high-rises in a post-pandemic world. Many companies unveiled plans to offer their employees the ability to permanently work from home.
However, while some industries can work remotely, the life sciences sector cannot. It requires specialized lab space and in-person collaboration. This means office properties leased to life science companies have become a hot commodity in the pandemic. That's leading office REIT (real estate investment trust) Boston Properties (NYSE: BPX) to pour more than $500 million into new life science development projects, with even more opportunities in the pipeline.
Benefitting from a pandemic booster shot
Life science properties have been hot commodities during the pandemic. For starters, they're immune to disruption from remote work since life science companies need specialized lab space to develop and test therapeutics, vaccines, and diagnostics. Meanwhile, money is pouring into the sector because the pandemic highlighted the need for investment to end the current health crisis and prevent future ones, giving the industry the funding to expand.
Boston Properties discussed the scorching-hot demand for these types of properties on its first-quarter conference call. CEO Owen Thomas stated: "There were $15 billion of significant office assets sold in the first quarter, though volumes were down 37% from the first quarter of last year. Assets with limited lease rollover and anything life science-related currently receive the best pricing, often better than before the pandemic."
One notable deal was The Exchange building in San Francisco that sold for $1.1 billion, valuing it at a record $1,440 per square foot. While it's currently 100% leased to a technology company, the tenant is trying to sublease the property. Thomas stated that the buyer "may attempt a life science conversion" of the property, given the current demand from that sector.
Another recent notable deal was Blackstone Group's (NYSE: BX) purchase of Brookfield Asset Management's (NYSE: BAM) life science portfolio at the end of last year for $3.45 billion.
Building out a world-class life science portfolio
Boston Properties already owns a sizable life science platform. It has 3.3 million square feet of space across 46 buildings leased to more than 85 tenants. These campuses are in major life science clusters like Cambridge and Waltham, Massachusetts, and South San Francisco.
Thanks to strong demand for life science space, "we had a very active first quarter launching three new lab developments and redevelopment projects," according to Thomas. That brought its current life science development pipeline to four projects.
Overall, it plans to invest $558.1 million on those projects, three in Waltham and one in South San Francisco that will add 920,000 square feet of life science space. It expects to complete the lone holdover project, a 138,000-square-foot redevelopment in Waltham, by the fourth quarter of this year, with the three new ones slated for initial occupancy in 2023 and 2024. Thomas pointed out that "a large portion of our active development pipeline is now lab" projects.
The company aims to "make life sciences an even more meaningful component of our overall business" in the future as it continues moving forward with redevelopment and development projects. Thomas noted on the first-quarter call that the REIT has: "approximately 2 million square feet of current and future office to lab conversion projects, and sites for approximately 4 million square feet of life science ground-up development, primarily located in among the strongest life science markets in the U.S., namely Cambridge, Waltham, and South San Francisco."
Building a leader in life science
Boston Properties has quietly built up the second-largest life sciences portfolio among publicly traded office REITs. However, it sees plenty of growth ahead, with four projects under construction and an extensive pipeline of office conversions and ground-up development opportunities. That makes the company a compelling way to invest in this fast-growing office subsector that's working hard to put an end to the pandemic and prevent future ones.