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Labs: Specialized spaces offer growth in innovation
The global spotlight shines on the life sciences sector, thanks to record mobilization to deliver life-saving vaccines. This unprecedented success was the culmination of decades of research performed in just a handful of laboratory clusters in select cities across the U.S.
Medical research is driven by macroeconomic tailwinds as well. The rapidly aging global population will continue to demand breakthroughs in treatments for degenerative diseases. This megatrend has led to record levels of both public and private funding for the life sciences, more than doubling over the past decade. This has created an unprecedented demand for laboratory R&D real estate.
Market fundamentals are currently healthy, with low vacancy, strong funding and above-average tenant demand. A wave of supply is set to deliver this year, which has tempered near-term growth projections. However, it’s important to note that three-quarters of this supply is in the three largest laboratory markets of Boston/Cambridge, the San Francisco Bay Area and San Diego. Tighter capital markets have increased the cost of debt, and stricter lending standards are leading to less new supply breaking ground moving forward that should aid market fundamentals in absorbing the new supply.
Strong demand tailwinds should propel this sector forward over the long term. Life sciences sector employment is 16% above its pre-pandemic level. The sector is more robust and less volatile than average, and it is less correlated with business cycles due to the long-term nature of the R&D process. Additionally, rents have grown by 40% cumulatively over the past two years.
Life sciences real estate remains a compelling opportunity
Several key factors continue to favor the life sciences sector, namely jobs, demographics and funding. The many years of strong rent growth have led to wide leasing spreads for existing lab properties and even wider spreads when compared against in-place rents for target flex and office property conversions. From a capital markets standpoint, the pricing reset occurring across commercial real estate sectors presents an opportunity for current buyers given the more favorable cost basis.
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