“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
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