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Life Science Property Investment, an Office Market Bright Spot, Seen Slowing From Record Pace

Fewer Biotech Deals Close in First Half With Decline in Venture Capital Fundraising

A slowdown in venture capital funding is contributing to reduced life science property investing. (Getty Images)

By Mark Heschmeyer CoStar News August 22, 2022 | 4:13 P.M.

Following a record year of investment in 2021, the pace of life sciences real estate acquisitions and capital markets activity slowed in the first half of 2022, according to a new study.

Less venture capital and a mixed outlook have led to a decline in deals and fundraising, brokerage Newmark found. The results track with trends seen by industry executives and CoStar analysts.

The shift is significant because growth in life sciences has been one of the few bright spots across the U.S. office market, which has been hampered by a move toward flexible work arrangements in the pandemic. Now, though, according to the new data, the flow of funds that spurred medical and biotech startups and that backed property investment is weakening.

Life science property investment fell almost 34% to $7.7 billion from January through June compared to the first half of last year, according to Newmark data. Mirroring the drop in life science investment, venture capital funding in the sector declined 18.5% year over year to $20.8 billion in the first half of 2022.

The pace of life science fundraising activity also slowed. More than $3 billion in fund targets were announced in the first half of this year, but that was down from $7.1 billion for the first half of last year, according to Newmark.

“It looks like investment could simply be normalizing after a record-setting 2021,” Elizabeth Ptacek, senior director of market analytics for CoStar Group, said in reaction to Newmark’s report. “I think that the sector will continue to attract investment capital and assets will continue to trade but it does not surprise me that the pace of activity is slowing, especially when you consider financial market volatility and rising cost of debt.”

Despite the reduction of investment activity, pricing for life science and research and development properties remains at a record high, hitting $564 per square foot in the first half of the year, underlining some investor demand, according to Newmark.

“Although bidding pools have thinned compared with 2021, investors are still attracted to laboratory assets, in part due to supply-demand imbalance that still exists in the largest cluster markets,” Newmark said. Mixed Outlook Newmark reported that the life science sector remains well positioned for future growth as the occupancy and expansion risks that affect tenant demand for conventional offices do not seem to exist for lab space.

Several cities with a particularly large tech, biotech and healthcare presence — such as Austin, Texas; San Diego, California; and Tampa, Florida — have seen above-average rent increases and faster recovery in office employment than the national average since the fourth quarter of 2019, according to CoStar Advisory Services.

On average, since 2019, areas with the highest concentrations of office space used by tech, biotech and healthcare firms offer more favorable vacancy rates and strong net absorption, or more tenants moving in than moving out, according to CoStar analysis.

“However, the sector is not completely immune from the negative impacts affecting virtually every asset class in" the first half, Newmark’s report said. “The rising costs of debt driven by increasing Treasury rates are impacting top-priced deals and underwriting, leading to some retrading activity.”

The concept of “retrading” in commercial real estate refers to the practice of a buyer renegotiating for a lower purchase price after initially agreeing to a higher price.

“The deceleration in venture capital funding will have an uneven impact on tenant demand and will affect early-stage companies that are unable to raise sufficient funds in later venture rounds,” Newmark said. “The pullback will also impact less well-capitalized firms and recently public biotechnology companies that might taper their future leasing activity.”

Other real estate brokerages besides Newmark have said the life science sector may not be able to sustain the pace of 2021 in the near term.

Greg Bisconti, who spent the past 28 years at Cushman & Wakefield, joined rival JLL in April to lead a San Diego-based life science tenant representation group. He sees the slowing as natural after such strong growth. ‘Much Needed Setback’ “I think what we saw in 2021 and into 2022 was the tail end of an anomaly in the life sciences market fueled by record funding, record investment, record IPO activity and unfettered growth of the sector,” he told CoStar News in an interview. “I think this is going to be a much needed setback, or recovery, from what was unsustainable growth.”

In July, Los Angeles-based Kilroy Realty, a major West Coast office owner, said it was pausing development of two projects as leasing weakens. On hold are a roughly 125,000-square-foot creative office development at 1633 26th St. in Santa Monica and an approximately 180,000-square-foot life science and office campus called Santa Fe Summit in San Diego.

The top buyers of life sciences properties in 2022 have been a mix of existing top owners, such as Alexandria Real Estate Equities, but also emerging players such as Canadian pension plan the Ontario Municipal Employees Retirement System and institutional groups such as CBRE Investment Management.

Alexandria has completed about $3.6 billion in acquisitions this year, according to CoStar data, on the same pace as last year. Alexandria also reported strong second-quarter leasing despite an otherwise volatile economy.

The Pasadena, California-based company, which oversees a nationwide biotech property portfolio of more than 41 million square feet, said second-quarter revenue rose more than 26% from the year-earlier period, buoyed by rising rents.

The Ontario retirement system last week reported earning a 6% return on investments for the fiscal year ending in June. Among the highlights for the year, the pension fund cited its life science investment activity.

The retirement system announced a strategic partnership for the Navy Yard in Philadelphia that will, over time, own and develop up to 3 million square feet of life sciences properties, as well as the acquisition of a 13-building life science portfolio in San Diego. Since the end of June, it completed the conversion of the Boren Labs office building to a fully dedicated life science facility in downtown Seattle.

This year’s fundraising included a $2 billion commitment from Taconic Investment Partners to expand its life sciences operations outside of New York City.

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