Science and technology lifts the gloom for property investors

Nov 13th 2021

OXFORD NANOPORE’S MinION is a tiny but powerful device. A portable DNA sequencer tracked down the covid-19 infection of a Sydney hotel worker last March. This allowed the airline to avoid a general lockdown and saved the employee from being hospitalized. The success of biotech firms—another celebrity is BioNTech, of Covid-19 vaccine fame—is sucking capital into life sciences. When these companies expand, they don’t do so with offices and shops but with white-walled and shiny-surfaced scientific labs.

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Commercial-property investors have been investing in offices, retail, and industrial buildings for a long time. Specialists could only manage less traditional assets, such mobile-phone towers. They are also being sought out by the big guns in real estate. Thus laboratory space has become commercial real-estate’s hottest property, along with other facilities that power the digital economy. The demand for data centres and infrastructure to connect smartphones is high.

The investors’ motivation is clear. Globally, the pandemic shook commercial-property markets. Nearly 15,000 American retailers closed their shops in 2020. Offices were only one-third full in mid-October with remote workers. Some conventional property assets have seen their risk profile decline sharply.

In contrast, demand for assets like labs and data centres has never been stronger—a trend visible before the coronavirus began to spread. Online shopping and virtual meetings have exploded as data traffic has increased and rent collections for restaurants and shops plummeted. Companies that rely on the mobile towers and underlying data centres are demanding more. These digital-economy champions look as safe and secure as their homes.

The shift is reflected in the changing make-up of America’s ten largest real-estate investment trusts (REITS). A decade ago the most valuable such vehicle was Simon Property Group, the country’s biggest mall owner. It is American Tower, which is rapidly expanding and owns tens of thousands more phone masts around the globe. Five of the top 10 REITS currently manage mobile towers and data centres.

Life-sciences and laboratory space are currently the most talked about. The capital market for health-care is being overrun by investors. According to JLL (a property consultancy), drug manufacturers, medical-equipment makers and other life science firms have raised a record $103bn of venture capital so far this fiscal year. This is an increase of $63bn in 2019, which was the previous record. A large portion of capital is going to property. JLL estimates that life-sciences real property is receiving up to $87bn worldwide. This amounts to a third total global spending on commercial property during the second quarter.

Landmark deals are appearing more often. In October GIC, Singapore’s sovereign-wealth fund, purchased a 40% stake in Oxford Science Park from Magdalen College, part of Oxford University; the deal valued the park at ten times its worth just five years ago. Blackstone, a private equity firm, recently doubled its life-sciences floorspace ownership in Britain and invested more than $1bn in two additional sites. Life-science REITS have a booming market.

Lab space is becoming increasingly scarce. Boston, where most of America’s labs are located, saw less than 5% of available lab space in the third quarter. In the Golden Triangle, the area that lies between London, Oxford, and Cambridge, premises are running out. The Harwell life-sciences campus near Oxford will add 1.5m square feet over the next seven years to meet demand—equivalent to three-quarters of all the office space London’s financial district will add this year. Chris Walters, director at JLL, estimates unmet demand for lab space in and around Cambridge at 1m square feet—equivalent to nearly a quarter of retail space on London’s Oxford Street.

Participants will try to increase supply when markets are tight. This is more difficult than it sounds in the case of scitech property. Constructing new towers for phone calls requires you to comply with strict planning laws as well as NIMBYS. New data centres will require land with easy access to electricity and high-speed Internet. Life-sciences companies prefer to cluster around top universities or academic medical centres that supply the chemists, microbiologists, and other experts that populate the labs. Another solution is to find secondary locations. Los Angeles, which lies close to San Francisco Bay Area, as well as Pittsburgh, where Carnegie Mellon is located, are both attractive locations for startups that are flush with capital. The north of Britain is home to life-sciences hubs, where pharmaceutical giants such as AstraZeneca or GSK have manufacturing facilities.

Converting existing industrial space and offices is another option. Boston Properties, one of America’s largest office REITS, says it can convert 5m square feet of conventional sites and buildings into laboratories. This is not an easy task, as labs are complex spaces that must be governed by biosafety regulations. They require four times the airflow as offices. London has waiting lists “wet”Labs, which contain hazardous chemicals or other substances, are getting longer. However, property investors are open to the idea of investing in them. In New York conversions could almost double the city’s lab space for rent, according to Newmark, a real-estate advisory firm.

Even empty shops are being repurposed. Savills, a British property firm, reckons London has at least 1.8m square feet of retail property that could be refashioned into laboratories.Shops’ high ceilings mean plenty of room for high-performance ventilation, and service lifts for moving dangerous materials. It will take years for the supply to catch up to demand. Real-estate investors are moving with the changing locus of work, commerce.

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This article was published in the print edition’s Business section under the headline “Lab rats”

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