Many investors know there's money to be made by investing in commercial real estate. However, what may not be as obvious is the fact that there are plenty of investment opportunities to be had outside of traditional office space. To that end, one of those opportunities is the life sciences sector.
Read on to learn more about what the life science industry is and how it relates to real estate investing. Below is an explanation of the benefits of investing in this industry as well as some geographical suggestions for where your money might have the best return on investment. You can use this information to decide whether investing in life sciences could be the right choice for you.
What is life science in real estate?
Generally, the life sciences industry encompasses a wide range of medical fields, including biotechnology, pharmaceuticals, biomedical technologies, life systems technologies, nutraceuticals, and the manufacturing of biomedical devices. From a real estate perspective, the life sciences sector has potential for investment.
With that in mind, many real estate investors will choose to invest in the life science space by buying up laboratory space and leasing it to life science companies. However, as digitization has become more prevalent in the sciences sector, there has also been a push for what's known as "flex" lab space, where the building is set up with some traditional laboratory space and some regular office space.
In either case, the end result for investors is being able to purchase and rent out these spaces to tenants such as life sciences companies or biotech companies.
The potential benefits of investing in the life sciences industry
For real estate investors, there are many reasons to consider investing your money in the life sciences industry. Here are three of the top reasons for your consideration.
1. It's a top-performing sector
From a financial perspective, venture capital investment in the life sciences industry has exploded over the last decade. According to a 2020 industry overview by Cushman & Wakefield (NYSE: CWK), the total investment in 2019 was $17.4 billion, up from just 3.7 billion in 2008.
At the same time, employment numbers are also growing at a fast rate. Per the study, from 1990 to 2010, employment in the life science sector grew at a rate of 1.0%, just above the national average of 0.9%. However, since that point, the industry has added more than 70,000 jobs and is growing at an average rate of 7.5% per year.
2. It seems to be recession-resilient
Another overview by the commercial real estate advisory firm Newmark Knight Frank suggests that this sector might be more resilient than others in the face of economic downturns. Though it wasn't totally immune to the economic impact of COVID-19, declining 21.8% from its pre-pandemic peak in late March, that number is relative. For a basis of comparison, the overall S&P 500 declined by a total of 33.9% over the same period. Plus, after the initial drop, the life sciences sector hit pre-COVID-19 highs several days over the period between April and June.
3. The need is growing
Pandemic aside, the need for the services associated with life sciences industries is going to be growing. Put simply, the population of senior citizens is growing and the population as a whole is getting older. The median age of Americans is now 38.2, and by 2030 it's expected to rise to 40. Additionally, an estimated 10,000 baby boomers reach age 65 every day. By 2030 the United States is expected to have 73 million senior citizens who will account for 21% of the total population.
The implication of these numbers is that as the population ages, people will have an even greater need for things like pharmaceuticals and medical devices.
Top geographic locations for life sciences investment
If the reasons above are enough to convince you to invest in a commercial real estate building that would be well suited for a life sciences company, you're in luck. Below you'll find a shortlist of the top geographic locations for life sciences investment. These cities should be among your first choices if you're looking for locations where your rental income will be high and your vacancy rates will be virtually nonexistent.
The Greater Boston area has long been considered among the top life sciences clusters in the world. In particular, its wealth of hospitals and universities in Boston and Cambridge makes the area a global leader in both research and venture capital investment. In particular, the area garnered $6 billion in venture-capital funding in 2018, and the total market size is an estimated 23.3 million square feet of laboratory space, per the overview from Newmark Knight and Frank (NKF).
San Francisco, California
San Francisco is also an established life sciences cluster. However, according to the NKF overview, it's suggested that large and experienced landlords such as Alexandria Real Estate (NYSE: ARE), BioMed Realty, and Healthpeak Properties (NYSE: PEAK) tend to dominate the market share. The venture capital funding rocketed over $7 billion in 2018 and the total market share measures 29.8 million square feet of lab space. In addition, the vacancy rate measures below 5%.
San Diego, California
The NKF overview posits that San Diego is the third-largest life sciences market in the country. It suggests that 1 million square feet of life sciences space is currently under construction in the metro area. Venture capital funding is admittedly smaller in this market, coming in at just $2 billion in 2018. However, the data suggests there's 14 million square feet of lab space needed in the primary market and another 19 million square feet needed in the Greater San Diego area.
The bottom line
If you're thinking of investing in commercial real estate, you may want to consider investing in properties that can be rented out as life sciences facilities. The data suggests that, despite economic downturns, this sector has been growing for years and shows no signs of stopping. With that in mind, use the information contained in this article as a tool to help you weigh the benefits of investing in the life sciences industry.