Cheryl V. Reicin
From R&D spaces to manufacturing sites, the exponential growth of Canada’s life sciences industry is giving way to new opportunities for investors to diversify their portfolios and take advantage of the current shortage of quality life sciences workspaces. In this article we explore the current environment, costs, risks and other considerations for developers, investors, landlords and tenants.
The life sciences industry has seen exponential growth in investment due to several factors, including an aging and increasingly health-conscious population, shortcomings exposed by COVID-19, and an acceleration of research and development using AI.
The Canadian market has become among the most desirable, and because the life sciences sector is rapidly growing, additional lab space, new manufacturing sites and physical life sciences clusters are sorely needed. There is a major opportunity for real estate developers and investors to take advantage of the current undersupply of quality life sciences workspaces.
COVID-19 has highlighted the importance of a strong life sciences ecosystem, which necessarily requires quality infrastructure such as biomanufacturing, R&D and lab spaces. Earlier this year, the Canadian government announced it would direct $2.2B over seven years towards biomanufacturing initiatives.
In the United States, the approximate market cap of publicly-traded REIT-managed life sciences real estate was around $30.4B as of June 20211. Moreover, in 2020, life sciences investment comprised 16.4% of total office volume—a record high.
Life sciences companies require real estate suitable to support their R&D initiatives, product testing and manufacturing. The COVID-19 pandemic exposed the country’s undersupply of quality, specialized life sciences laboratory and manufacturing space, as well as office space to match the sector’s growth.
Premises hosting life sciences companies are highly specialized and operate in a tightly regulated sector. The requirements for the premises can be technically complex and the spaces can be costly to build, retrofit, and maintain. While conversion of office space to lab space is possible, there are issues relating to the time and complexity associated with conversion projects, as well matters such as rezoning entitlements and approvals for a change of use. Life sciences premises require more space than traditional offices and likely require higher ceilings to accommodate mechanical, electrical, plumbing and fire systems. They also often require unique HVAC systems and may require that humidity and temperature levels stay within certain ranges2. Cooling towers and hazardous waste storage may also be necessary. Additionally, spaces should contain amenities that foster collaborative work environments that stimulate innovation and are ideally situated in urban locations in order to attract top talent. Additional regulatory considerations applicable, as well as specific insurance requirements, may be needed in order to adequately protect the premises and the equipment.
The life sciences industry can be financially risky because in early stages, life sciences companies are typically testing and research-driven based on a single idea. Needs can then change quickly once proof-of-product is achieved and product development and manufacturing become a core part of their business strategy. When there is a change in the activities being conducted, a facility may require new or amended regulatory licenses, necessitating further changes to the building systems to meet applicable standards. For example, once commercial manufacturing begins, the facility may require an establishment license. If a facility begins to process or perform diagnostic tests, a provincial laboratory operating permit may be necessary. Life sciences buildings are therefore often flexible hybrid arrangements.
Landlords and tenants operating life sciences spaces should consider and negotiate specific provisions into their leases regarding such matters as compliance with law, incorporating sufficiently accurate descriptions as to use of the premises and any exclusivity and radius restrictions, if applicable, in addition to any financing or other unique considerations a lender may require. Additional factors that landlords and tenants should consider are tenant improvements, storage and safety of any hazardous materials being stored on site, and responsibility for building services.
Developers and investors can review their portfolios to determine the various types of life sciences investments that may work best for them. Not all life sciences real estate projects need to be as capital-intensive and complex as some biotech or pharmaceutical companies may require. A company producing simple medical devices may only require assembly in a clean room, whereas a company operating in digital healthcare or a biotech company that relies heavily on outsourced activity may only require regular office space. Contract manufacturers tend to be profitable and stable tenants, but the upfront investment is significant.
Global trends are pointing to massive growth opportunities in the life sciences sector. At a time when losses are being incurred in traditional commercial real estate such as retail and office, investors have an opportunity to leverage existing spaces and diversify their portfolios by focusing on the life sciences industry.
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