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Real estate

Labs: Specialized spaces offer growth in innovation

Graphic of lab equipment

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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Endnotes

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

Important information on risk

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.

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