August 2021 Landscape Summary

“Life Sci­ence” New Asset Class Gain­ing Pop­u­lar­i­ty

Sep­tem­ber 4, 2021

There is a new asset offer­ing with­in the Spe­cial­ty Real Estate and DST space.  Life Sci­ences have been des­ig­nat­ed as a new asset class to han­dle the spe­cif­ic needs of the users.  Tech­ni­cal­ly, Life Sci­ences could be con­sid­ered as a sub sec­tor of office.  Office is one of the four major sec­tors of real estate in addi­tion to Indus­tri­al, Retail and Res­i­den­tial.  Over the years res­i­den­tial has devel­oped sub­sec­tors to include mul­ti­fam­i­ly, sin­gle-fam­i­ly rental, stu­dent hous­ings, senior hous­ing, and man­u­fac­tured hous­ing.

COVID may have accel­er­at­ed the demand for expan­sion of the life sci­ences sec­tor. By def­i­n­i­tion, these real estate prop­er­ties are very spe­cif­ic to the ten­ants who are involved in biotech­nol­o­gy, med­ical devices, phar­ma­ceu­ti­cals, and oth­er research being dri­ven by a host of exter­nal issues and events. There are geo­graph­i­cal as well as phys­i­cal attrib­ut­es that have dri­ven vacan­cies low­er and income growth.

At first glance an investor (and now DST spon­sors) may feel there are too many site spe­cif­ic, geo­graph­i­cal spe­cif­ic, and build out require­ments that may cre­ate a hes­i­ta­tion in devel­op­ment and acqui­si­tion. In nature the term struc­ture and func­tion has been wide­ly used.  The same exist with life sci­ences real estate.  The phys­i­cal­ly prop­er­ty require­ments are very demand­ing. If the ten­ant is a biotech com­pa­ny max­i­miz­ing the build­ing load and reduc­ing vibra­tion many be a giv­en.  Espe­cial­ly if the biotech com­pa­nies are deal­ing with high lev­el sequences of test­ing.  The lev­el detail to pro­tect the sen­si­tiv­i­ty of the instru­ments that may be used in test­ing far exceed the typ­i­cal­ly office ten­ant who may be sim­ply space plan­ning and desk loca­tions.

There is also the clus­ter­ing of life sci­ences real estate.  There is a broad exam­ple of clus­ter­ing when you think of car deal­er­ships.  It is not unusu­al to see sev­er­al car deal­er­ships locat­ed on the same stretch of high­way.  There is syn­er­gy cre­at­ed with dri­ving con­sumer traf­fic to the same loca­tion. Life sci­ences seek a high­er require­ment and may be in a few geo­graph­i­cal loca­tions. The clus­ter­ing may be dri­ven by phar­ma­ceu­ti­cal com­pa­nies as well as elite uni­ver­si­ties and health care sys­tems. Top loca­tions include Cam­bridge, MA, San Diego & San Fran­cis­co, CA.  Recent­ly new emerg­ing areas are in the New York/New Jer­sey area, Seat­tle, and spe­cif­ic areas of Texas. Basi­cal­ly, there may be six areas of the coun­ty that will com­mand 80% of the life sci­ence demand.  There will be emerg­ing areas if the tal­ent pool and phys­i­cal require­ments can be meet.

The ten­ant require­ments or build out are very detailed and spe­cif­ic to each ten­ant. This cost may be 20% high­er than most ten­ant improve­ments.  The cost is com­pound­ed because of the loca­tion in high­er priced areas in the coun­ty. How­ev­er, once a ten­ant moves into a loca­tion the ten­ant tends to stay in the loca­tion for an extend­ed peri­od of time. The high­er reten­tion rate may also be asso­ci­at­ed with mul­ti year cycles for drug com­pa­nies. Ten­ants may be reluc­tant to sim­ply pick up and try to move to anoth­er loca­tion espe­cial­ly if the com­pa­ny is involved in intri­cate research and inter­rupt­ing may be detri­men­tal to pro­duc­ing time­ly results.

Is there future demand? The answer is Yes. The pace of research and bio­log­ics-based inno­va­tion is grow­ing.  Advance­ment in the pro­cess­ing and sequences of test­ing con­tin­ues and knowl­edge-based shar­ing of results cre­ates syn­er­gy.  There is also a major cap­i­tal invest­ment in the sci­ence sec­tor.  This is com­ing from pri­vate sources as we all fed­er­al­ly fund­ed pro­grams. The aging pop­u­la­tion will con­tin­ue to dri­ve demand for a vari­ety of needs.  The needs expand beyond ther­a­peu­tic treat­ments.  Stud­ies had shown that 56% of the health care spend­ing is from peo­ple 55 and over. This same group only accounts for 29% of the pop­u­la­tion.  

The future of rent increas­es con­tin­u­ing are very good.  Lab rent increas­es of dou­ble dig­its in the short terms are very pos­i­tive.

REIT, alter­na­tive invest­ments as well as DST offer­ings con­tin­ue to come avail­able in the life sci­ence clas­si­fi­ca­tion.  There are lim­it­ed life sci­ence offer­ings under the DST pro­gram.  Cash investors as well as investors already in cash have the advan­tage. THE 1031 tax deferred alter­na­tive because of the lim­it­ed sup­ply cre­ates tim­ing issues to investors unless investors are “already in cash”. Mean­ing the investor already has their funds with the qual­i­fied inter­me­di­ary (QI).  Cer­tain DST offer­ings have lim­it­ed equi­ty avail­able which cre­ates short time peri­ods for investors to make deci­sions.  Advi­sors and rep­re­sen­ta­tives who have ongo­ing com­mu­ni­ca­tions with spon­sors can enable investors with poten­tial advan­tages for secur­ing an invest­ment.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031 Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com

DST 1031 con­sult­ing advi­so­ry ser­vices may be offered through: NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC  999 Van­der­bilt Beach Rd, Suite 200  Naples, FL 34108.  Direct:  239–691-8098

Secu­ri­ties may be offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC.  CRD #142927.  NAMCOA® and MSC-BD, LLC are Inde­pen­dent­ly owned and oper­at­ed.