Forget Offices, Invest in Life Sciences Real Estate, Report Says

Spaces for pharmaceutical research and medical device development can generate cash flow, as well as offer downside protection, according to Willis Towers Watson.

Real estate investors scrounging for asset classes other than offices in their portfolios should take a look at life sciences properties, says Willis Towers Watson.

Traditional property assets have taken a hit during the pandemic. Offices suffered a big tumble, with the sector’s real estate investment trusts (REITs) falling 18.4% last year, according to numbers from the National Association of Real Estate Investment Trusts (Nareit). Retail took an even deeper dive, plunging 25% last year, Nareit found.

Investors looking for better returns have turned to alternative assets, such as single-family homes, senior housing, medical offices, and data centers. But they should also train their sights on life sciences properties, which the authors said they are “very excited” about.

“With the current uncertainty surrounding office, retail, and other traditional property types, we recommend investments in life sciences real estate to our clients, as well as a continued search for other opportunities in alternative sectors,” read the Willis Towers Watson report.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Buildings that house life sciences—which, of course, have the admirable goal of protecting and prolonging lives—are configured for a broad swath of uses.

They can include spaces for pharmaceutical testing, biotechnology research and development, and medical device construction. Investors can look at specialist laboratory space or startup incubators. These properties are typically affiliated with universities and other medical hubs.

This sector is a promising one for investors, according to the study’s authors, who believe demand for health care technology will only grow with the aging US demographic. The number of Americans aged 65 and older is expected to jump 40% over the next decade. Authors of the report believe this will boost demand for innovative medicines and medical equipment.

Health care also carries another advantage: It’s recession-proof. While white collar workers left offices in droves last March, life sciences employees can’t do their work from home. Then there’s a reassuring lack of tenant turnover in life sciences. Tenants typically spend a lot of money and care customizing the interiors of their centers, and “as a result of that capital expenditure, they tend to stay in their space longer,” according to Peter Rogers, director of investments and head of real assets research, Americas, at Willis Towers Watson.

Even tenants that may want to move locations will find the process costly and complicated, which compels them to stay put, the argument runs.

An ARE Investor Day report found that life science real estate had an 80% tenant retention rate and 94% 10-year occupancy average, which, the authors say, are higher than other kinds of asset classes.

“It has these secular growth tailwinds, but also what we think is pretty stable cash flow metrics as well in sort of recessionary environments,” said Willis’ Rogers.

All these factors mean that performance for the life sciences sector has been particularly strong over the past five years, the report declared. However, capitalizing on the opportunity will require highly specialized investment managers who understand the sophisticated assets.

Demand for life sciences research is higher than it’s ever been. Investors responded to disruption from the pandemic with record levels of support for health care funding. On an annual basis, venture capital funding for life sciences from 2012 to 2018 went up 20%, the report said.