The demand for specialized buildings that can combine laboratory research, production and office work is growing steadily. The new spotlight of the CORPORATE REAL ESTATE INITIATIVE sheds light on the complex segment of life science real estate.
Real estate in the life sciences industry is becoming increasingly important, not only due to current challenges such as pandemics, but also due to demographic change and the need for innovation in medicine, biotechnology and pharmaceuticals. However, the quality and safety standards due to regulatory requirements, especially in the pharmaceutical and biotech industries, such as laboratories, clean rooms and production areas, require very specialized real estate.
The technical specifications, such as increased safety standards, sophisticated ventilation and cooling systems, and special infrastructures for media such as gases and compressed air, are essential for the operation of life science facilities.
Wide range of property types and requirements
Life science real estate includes various types, including pharmaceutical logistics centers, research and development space, and office and production space. Meeting the high regulatory requirements and safety standards makes the properties expensive to build and operate. This poses a particular challenge for investors, as high initial investments are required and the properties often have to be strongly adapted to the needs of individual tenants. At the same time, however, these properties also enable investors to diversify their own portfolios at both property and tenant level.
Types of space in a life science property
Pharmaceutical logistics: Specialized areas for the logistics and storage of pharmaceutical products, with a controlled environment to ensure the integrity of the substances.
Research and development areas: Laboratories and technical facilities for experimental or product tests, with a high degree of specialization.
Office and conference space: For administrative and strategic activities, often with additional conference or open-plan spaces for collaboration.
Production areas: Specialized production areas, e.g. with clean rooms, which are subject to strict EU quality standards for pharmaceutical and biotech production.
Challenges for investors
High technical requirements and limited third-party usability limit flexibility and make an investment complex. In addition, tenant retention is often long-term, which increases profitability but also entails risks.
- High initial investments and specialized expansion: The high technical requirements and safety precautions in life science properties, such as clean rooms or special ventilation systems, cause considerable costs that go beyond the typical construction costs. These investments are often only justified by long-term leases. As a result, start-ups in particular are less attractive tenants, as they often have a smaller capital base.
- Low third-party usability: Due to the high level of specialization, life science properties are not easy to relet when the original tenant moves out. The areas that are strongly tailored to the user, such as laboratories or clean rooms, are difficult to transfer to other industries. This makes it more difficult to re-let and increases the risk of vacancies.
- Location dependency: The choice of location is crucial for the success of life science real estate. These properties often have to be located in the immediate vicinity of research clusters or universities in order to enable synergy effects and access to highly qualified specialists. However, these clusters are often located in urban conurbations, where there is also strong competition for space with other types of use.
- Uncertainty due to the dynamics of the industry: Life science companies, especially in the start-up and scale-up sector, are often subject to dynamic developments. Your space requirements can change quickly, which requires flexible construction. However, this flexibility in construction is expensive and requires forward-looking planning on the part of investors and developers.
- Tenant structure and creditworthiness: Investors prefer tenants with a stable market position, as the risk of rent defaults is significantly higher for start-ups. However, start-ups are often important drivers of innovation, so that they can still be an attractive target for investors in the long term, provided that suitable funding programmes and partnerships are used.
Conclusion: Growth market, but for specialists
The demand for specialized buildings designed for research, production and office work is growing steadily. However, these properties also pose challenges for investors, as high technical requirements and limited third-party usability limit flexibility. In addition, tenant retention is often long-term, which increases profitability but also entails risks.
Life Science is a strong growth market from which a high demand for space is also expected. It is becoming apparent that this demand cannot be met to a sufficient extent. The market is still very owner-occupier-driven in parts. Due to the specifics of life science space, project developers are still hesitant when it comes to this asset class. Here, corporate real estate, which is already characterized by flexibility in terms of types of use, can help to compensate for this excess demand.
Contact: Daniel Sopka, consultant in the field of corporate and logistics real estate, sopka@bulwiengesa.de and Felix Werner, team leader, werner@bulwiengesa.de
