Life sciences – Lessons from across the pond

But what can the UK, and south east region in particular, learn from vast and well established US life sciences sector?

Similarities between the growth of life sciences in the south east and the top tier markets of the US, from both an occupational and investment perspective, were the topic of recent conversations with Jonathan Mazur, Head of National Research at Newmark. Comparisons were drawn and four main trends were identified that are defining market behaviours on both sides of the Atlantic. These were: cluster expansion, repurposing in undersupplied markets, greater competition in the life sciences real estate sector and growing demand for bio-manufacturing space.

Growing occupational demand

The Covid-19 pandemic has served to accelerate both investor and occupier demand for life sciences real estate in the US. Jonathan noted “one of the realities responsible for this shift in demand is that most life sciences R&D work cannot be done within a home setting. Furthermore, the sector has seen record amounts of public and private investment as Covid-19 reinforced the critical role the sector plays in helping combat current and future pandemics. As this capital is deployed, occupier requirements have risen”.

In the UK, H1 2021 equity investment into high-growth life sciences companies has already exceeded the whole of 2020, at over £2bn. Funding is translating into strong expansion activity and therefore growth from a real estate perspective.

Increasing investor appetite

In the US, traction with institutional investors and property developers remains substantial, despite the high barriers of entry to owners, given the technical requirements of the space and knowledge needed. In Q4 2020 alone life sciences investment volumes reached nearly $4bn. As well as the sectors resilience to the pandemic, it also has secular growth characteristics that make it attractive from an investment perspective.

Activity in the south east region of the UK looks set to follow a similar path. In 2020, investor appetite galvanised toward the top-tier life sciences markets of Oxford and Cambridge and this has carried into 2021. Brockton Everlast, who outbid an extensive list of interested investors, acquired 214-240 Cambridge Science Park in Q1 2021. More recently, Oxford Properties Group acquired 310 Cambridge Science Park for £45m and, tellingly, represents the companies’ first investment in the european life sciences sector. Competition to partner with Magdalen College at Oxford Science Park has been fierce attracting over a dozen bids translating to over £2bn of capital.

Investor appeal in the US life sciences sector has been increased as a shortage of built and available laboratory inventory has fuelled rising rental levels and driven increased construction, redevelopment and conversion activity, particularly in the most undersupplied markets. Asking rents for laboratory space in the San Francisco Bay Area, Chicago, Raleigh and Boston have subsequently increased by more than 60% since the first quarter of 2016 while office rents increased by only 15–30% over the same period.

This dynamic should give investors great confidence that best-in-class life sciences ecosystems in the right locations within the M25 and south east market will see similar upward growth in rents. Indeed, rental growth is already apparent in undersupplied markets. In Oxford, office rents have risen by a third to £48 per sq ft, while lab rents are attracting premiums due to the shortage of specialist space. This is creating new speculative pipeline development. For example. Thomas White Oxford, soon to be in conjunction with Stanhope, will bring forward Oxford North with around 1mn sq ft of commercial space for life sciences. Elsewhere Begbroke Science Park will have a new focus with L&G and Bruntwood SciTech investing and Harwell campus is progressing its 5mn sq ft masterplan to consolidate Harwell as one of the fastest growing sites dedicated to space, energy, technology and science in the UK.

Transferable trends

Jonathan identified four emerging trends in the US which are becoming visible in the south east markets of the UK.

1. Repurposing in undersupplied markets:

Jonathan observed that in the US repurposing is viewed by some groups as a viable method to achieve superior returns with space being available for rent potentially years before under construction, or proposed ground-up development is completed. Examples of this repurposing in the south east include BentallGreenOak and Mission Street’s acquisition of two retail warehouse assets in Oxford for conversion into laboratory space. Elsewhere, Legal & General is preparing to sell the Grafton shopping centre in Cambridge with the project positioned as an opportunity to create a £300mn life sciences-led ecosystem, with labs, education, office, co-working and leisure uses. Finally The Clarendon Centre in Oxford is being considered by Lothbury for similar uses.

2. Growing demand for bio-manufacturing space:

Bio-manufacturing is an emerging growth spot within life sciences real estate. Jonathan noted that “as we look at 2021 and beyond, on-shoring and domestic supply chain adjustments for vaccine makers and pharmaceutical companies, are expected to require additional life science manufacturing and distribution facilities”.

Recent development activity in the UK also points to growing demand in this area and includes the construction of the Vaccines Manufacturing Innovation Centre at Harwell and the further expansion of Autolus Therapeutics operations at the Cell and Gene Therapy Catapult manufacturing centre in Stevenage.

3. Greater competition in the life sciences real estate sector:

Jonathan expects more institutional groups to enter the life sciences real estate market in the US. As well as outright acquisitions, real estate groups will look to create life sciences platforms, strategic joint ventures, minority interest transactions and/or recapitalisations of existing life sciences product.

In the south east, strategic joint ventures are being formed with academia who often own land in locations suitable for life sciences. Legal & General, for example, is partnering with the University of Oxford to deliver a number of projects including the creation of science and innovation districts in and around Oxford, while Magdalen College is looking for a strategic partner to accelerate the development of the Oxford Science Park.

4. Cluster expansion:

Seattle, Philadelphia and Raleigh are growing US clusters while New York City, Los Angeles, Houston and Denver are emerging as the sector evolves and matures. These markets are growing independently from the traditional clusters in Boston, San Diego and The Bay Area.

Within the UK, Oxford and Cambridge are undisputed top-tier life sciences clusters. However, in the south east smaller hubs are emerging such as Stevenage, with its specialisation in the fast-growth cell and gene therapy segment, and west London, anchored by Imperial College as emergent centres.

The US is home to the world’s most successful life sciences clusters. Regularly observing and comparing trends with activity in UK markets provides a useful barometer for performance as well as enabling the early identification of sector trends. In the case of the south east, top-tier locations are following the same positive trajectory: significant growth in funding, will bring new and expansionary occupational demand which will, in turn, translate into upward rental growth and increase the viability of assets ripe for repurposing.