Can the Thriving Life Sciences Sector Help Your CRE Portfolio?

For centuries, many cultures used mercury, a highly toxic and harmful element, to treat a range of ailments — from inflammation to mood disorders. At certain points, it has even been regarded as a miracle cure for severe diseases. However, advances in medicine and awareness of its negative impact on our health have led to much of its use being discontinued. Driven by discoveries in biotechnologies, consumer products, sustainable materials, and pharmaceutical and medical research, developments in the medical and life sciences industries continue at an exponential rate, fueling business growth. The resultant demand for commercial real estate (CRE) from life sciences businesses has the potential to redefine the CRE market as we know it. High interest rates, low office occupancy, declining values, and increased default risk post-pandemic continue to put pressure on the CRE market. Given their high exposure to this market, many community financial institutions (CFIs) are changing their CRE strategies. For some, this includes exploring more niche real estate sectors experiencing considerable growth. We mentioned the booming life sciences sector in the BID this past spring; we now take a closer look at this growing niche sector and the associated opportunities for CFIs.  Growth Trends in the Life Sciences SectorThe world’s population isn’t getting any smaller or younger, and life expectancy is rising. As a result, demand for healthcare products and services is going to continue to increase. What’s more, artificial intelligence and other technological innovations are supporting the development of new solutions for healthcare and driving further growth in the sector. Although down from the highs of 2021, organizations across the industry continue to attract venture capital. In fact, $583B was invested in life sciences companies in 2023 alone. Despite having to deal with an uncertain economic environment, inflation, and high interest rates, M&A activity in the sector has also been robust: 745 M&A deals with a total value of $389B were announced during 2023. While global M&A took a hit in 2023, life sciences M&A increased 23%.

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, CBRE Research, CBRE Strategic Investment Consulting, Q1 2024.Impact on the CRE MarketLife sciences organizations often need bespoke, high-tech, and flexible facilities to meet their specific needs. Locations near universities and research centers are ideal for collaboration, knowledge exchange, and attracting and acquiring new talent. The growth in the sector has led to an increase in purpose-built research and development laboratories, manufacturing facilities that meet complex requirements, and dedicated developments in strategic locations. Retrofitting of existing buildings — often a more affordable option — to suit this niche sector’s needs is also booming. According to CBRE, a commercial real estate and investment firm, life science assets are now reported to be the main alternative asset in institutional real estate portfolios, comprising more than one-third of the value of alternative assets. Potential for Your CRE PortfolioThese custom-made, specialized facilities tend to attract long-term, stable leases that justify premium rents and provide a stable and consistent income stream. Life sciences companies are also well suited to meet environmental, social, and governance (ESG) commitments, a key focus for many organizations and stakeholders. The development of dedicated research parks also attracts similar businesses, provides jobs, and can be an important catalyst in supporting and revitalizing the local economies in which they are situated. In the last 10 years, life science real estate has achieved better risk-adjusted returns than other major real estate asset types. In a challenging economic environment, particularly in the CRE sector, CFIs may want to consider the opportunities provided by the robust and growing life sciences market. Making loans to this growing market could provide the boost and stability your institution needs in its portfolio.