One of the biggest commercial real estate (CRE) stories coming out of the pandemic is the demand for life science space, which is sparking new development and redevelopment by the millions of feet while demand for traditional office space and retail brick-and-mortar craters.
A new report chronicles in detail the accelerated demand for space for wet labs and business incubators to biomanufacturing and research and development. It lays out a detailed case on why this sector has just begun to boom.
The thought leadership arm of the Newmark (NASDAQ: NMRK) real estate advisory company issued the report in January, titled "2020 Year-End: Life Science National Overview & Top Market Clusters."
The report says demand was rising before COVID-19 arrived and chronicles activity it says shows how immune this trend is to one of the major disruptions in commercial real estate arising from the pandemic.
"One of the realities responsible for this shift in this demand is that life science tenants have managed to circumvent work-from-home disruption impacting other office users and are less able to conduct vital research and development from home," the report observes.
The 52-page report details activity in 14 different markets and lists the 10 top life science property owners in the United States. Three of the top four are publicly held real estate investment trusts (REITs), including the largest owner of such property in the country: Alexandria Real Estate Equities (NYSE: ARE). No. 3 on the list is Healthpeak Properties (NYSE: PEAK), immediately followed by Ventas (NYSE: VTR).
Market booms for development and redevelopment
Life science investment volume as a percentage of total office volume hit a record high of 16.4% in 2020, more than twice what it was in 2019, the Newmark researchers found. They report more than 36 million square feet of new construction is expected to be delivered in the top 14 life science markets across the United States alone.
Redevelopment is a hot ticket, too. The report says, "Institutional investors across the largest life science markets are actively reevaluating 'highest and best use' for their office, flex, and industrial portfolios and are considering converting their properties to meet immediate life science demand."
Reflecting that demand is the cost for that space. Average monthly pricing for United States life science investment sales has more than tripled from the May 2020 trough, reaching $627 PSF (per square foot) in December, says the report.
The 52-page report provides street-level analysis and granular detail on each of the markets it addresses, such as vacancy rates and rents, as well as who owns what. For instance, on pages 26-27, you'll learn San Diego is the third-largest biotech cluster in the country, and REITs are the largest block of owners, with 33% of the market's life-science assets by value. The largest tenants are Illumina (NASDAQ: ILMN) and Pfizer (NYSE: PFE), and the largest owner is Alexandria, at 6.1 million square feet. Capital markets info is included, too, such as sales volume of $880 million in 2020 with a square foot price of $426 in that specific market.
The Millionacres bottom line
At Millionacres and Motley Fool, we've been following the three REITs mentioned here through the pandemic, including, for instance, diversification into life sciences and collaboration campuses by Ventas and Healthpeak, both companies that had been heavily focused on senior living and traditional care providers. The wealth-building prowess of Alexandria Real Estate Equities also has been well-chronicled here in our space.
But don't stop there. This report makes a fine primer for someone who wants to see what's happening in and around these markets and can serve as a roadmap for investors interested in putting their money directly into those markets or investing through a REIT.