Commercial real estate spotlight: life sciences

“Two roads diverged in a wood and I – I took the one less traveled by, and that has made all the difference.”¹ 

Following on from my previous blog post - Commercial real estate reflections - history repeats itself, sort of.. – I want to continue to delve into areas where commercial real estate (CRE) investors might find opportunity during a recession or times of heightened uncertainty. Flight to quality, as I have previously mentioned, is a well-known strategy, but not everyone has the deep pockets for the high price tags or the patient capital to endure low yields, especially while interest rates are climbing. Another strategy is travelling a little further, going off the beaten track, where the competition is less intense. This can be done in terms of location, but also in search of niche sectors – cue the alternative asset class.

I recently interviewed Dr. Ralf Nöcker, an experienced pan-European real estate investor who also sits on the board of the European Science Park Group, to ask him about the prospects for the life sciences CRE sector, which has recently witnessed significant growth.

Harry Iles: Hello Ralf, thank you for agreeing to chat. What do people mean when they refer to "life sciences" in a commercial real estate context? It seems like a catch-all definition. What are the typical ways the sector uses commercial real estate? 

Ralf Nöcker: The European Science Park Group (ESPG) is one of the first German real estate companies to specialise in the development of science parks, covering life sciences, green technologies, and digitalisation. Life sciences as we define it, covers everything that touches the human body other than the "care" element. We have a wide range of properties from bio storage to pharma testing. What they all have in common is they are all located close to academic institutions and research institutes. Be it labs or clean rooms for experiments, we’re looking for clusters within the same dominant industry with access to human capital. 

HI: What are the ways to invest in the sector?

RN: We specialise in standing assets via direct purchase. Sometimes we have to convert assets into more science-specific properties, but generally, we’re buying a fully-formed building direct. Of course, one can also invest indirectly through real estate investment trusts (REITs). One such vehicle is Alexandria Real Estate Equities, Inc., a US-listed REIT which focuses on collaborative life sciences, agricultural technology, and technology campuses in various cluster locations.

HI: What are the pros and cons of investing in the sector as you see it? Is there a risk that overly specialised buildings and related infrastructure could lead to obsolescence?

RN: We’re talking about alternative uses here. There can be no doubt that some of our labs have no, or limited, other use than their current use. We have a clean room for example where diodes are developed and tested for self-driving cars. You might be able to repurpose these assets for say storage space, but it probably isn’t worth it. The reality is that in today’s world, these experiments don’t require much space. A lot of experiments are carried out on a 1:10 scale or, for green technologies, even a 1:50 scale. Therefore, the amount of m² that could be deemed to be of limited alternative use is quite small. On the plus side, once a science tenant has moved in, is fully established and has managed to get all the required specialist people and permits to operate, then such a science tenant is very unlikely to move on, even if the rent is a bit higher. We call that a “sticky tenant”. Other obstacles vary as to which country you are in. In Germany, we’ve had issues sourcing specialist contractors: something that I’ve resolved by importing workers from the UK to Germany. In the UK, there is clearly more uncertainty around the planning environment.

HI: Where do you see the most opportunities in the short to medium term?

RN: There is currently a lack of zoned space and a lack of willingness from landlords to adapt their properties to a science use. There are still a number of landlords who don’t understand this market and don’t recognise that they have a great building that would be well suited for science use.

HI: Finally, is there anything we should look out for on the horizon in terms of new developments in the life sciences sector?

Traditionally, floor-to-ceiling ("slab") heights of 4.0-4.5 metres were desired, but lab and science technology has moved on and lower slab heights are now acceptable - making it easier to repurpose existing buildings for science tenants. Biosafety level 3, the second-highest set of biocontainment precautions required to isolate dangerous biological agents in an enclosed laboratory facility, can be integrated in a normal office building. A great example is the Institute for Molecular Science and Engineering at Imperial College London, which is housed in the White City campus, a pure administrative building: world class labs in an office building.

HI: Ralf, thank you for your insights.

RN: It has been a pleasure.

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¹ Frost, Robert. "The Road Not Taken." Mountain Interval, Henry Holt and Company, 1920, pp. 9-12.