The COVID-19 outbreak has had a notable impact on the office-property sector. Tenants aren't fully utilizing these buildings because most are allowing their employees to work remotely during the pandemic. Some investors worry that this trend might become permanent since a growing number of companies are offering their workers this option.
However, not all industries can function remotely. One sector where that's the case is life sciences, which need specialized laboratory facilities to research and develop vaccines, treatments, and diagnostic tests. Because of that and the fact that cash is flowing into this sector due to the pandemic, life sciences campuses are hot commodities these days among real estate investors. That's evident in the sector's latest deal: Blackstone Group (NYSE: BX) is buying a portfolio of lab office buildings from Brookfield Asset Management (NYSE: BAM).
Cashing in on a hot commodity
A real estate fund managed by Brookfield is selling a best-in-class, 2.3 million-square-foot portfolio of lab office buildings to a fund managed by Blackstone for $3.45 billion. About 90% of the portfolio is in Cambridge, Massachusetts, a hub in the life sciences industry. The companies expect the deal to close early next year.
That sale price represents an excellent exit value for Brookfield. The company had reportedly hoped to fetch about $3 billion when it started exploring a sale of the portfolio in October. It enabled Brookfield to realize some of the value of its investment in Forest City Realty Trust. A fund managed by the company paid $11.4 billion in cash for Forest City in 2018, adding 18,500 multifamily units and 10.8 million square feet of prime office, life science, and retail real estate space to its portfolio as well as five large-scale development projects.
The fund, which also counts Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU) as one of its investors, can redeploy the proceeds elsewhere, including returning it to investors. It's the second major asset sale from a Brookfield-managed fund this year, as the company also sold its investment in Simply Safe Self Storage to another Blackstone fund for $1.2 billion.
Betting big on life sciences
Blackstone is buying this portfolio in a fund that also owns BioMed Realty, a life science-focused real estate company. A Blackstone fund initially bought BioMed Realty Trust for $8 billion in cash in 2016. The company recently recapitalized BioMed, valuing the life science real estate company at $14.6 billion.
With the addition of Brookfield's life science portfolio, BioMed will have an enterprise value of around $20 billion. Further, it will bolster its presence in the Cambridge area, as two-thirds of BioMed's portfolio will be in the Boston/Cambridge market. It's one of the fastest-growing lab- office submarkets in the country, thanks to its proximity to some of the leading research universities and pharmaceutical companies.
Meanwhile, Blackstone is reportedly close to buying two more life science buildings in the Cambridge area, according to a report by the Wall Street Journal. That deal could be worth as much as $1 billion, which would further expand BioMed and its presence in this key life sciences hub.
A fast-growing real estate market
According to JLL Research, the life sciences real estate market will grow from $140 billion to $170 billion over the next five years. That's something real estate investors won't want to miss. It's why they should check out companies focused on this opportunity, which includes Blackstone and real estate investment trusts (REITs) like Alexandria Real Estate Equities (NYSE: ARE) and Ventas (NYSE: VTR). These companies could thrive in the coming years as they continue expanding their life science portfolios.