Chapter 4
Life Sciences
U.S. Healthcare & Life Sciences Capital Markets
5 Minute Read
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Question 20
What types of life science real estate properties meet your acquisition criteria? Check all that apply.
The rapid growth of the life sciences sector in recent years is expected to continue in 2023 but at a more moderate pace. Venture capital funding totaled $21.6 billion in 2022, down 34% from the peak in 2021 ($33.0 billion), and 4% above funding levels in 2020 ($18.8 billion), but well above pre-pandemic venture capital funding of $14.6 billion in 2019. New life sciences laboratory/R&D construction is at an all-time high, mostly in the premier clusters of Boston-Cambridge, the San Francisco Bay Area and San Diego. Biotech/R&D properties continue to be the favored life sciences product type in 2023, followed by single-tenant net-leased lab space (57%) and multi-tenant lab space (53%).
Figure 28: Acquisition Criteria – Life Science Real Estate
Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.
Question 21
What will be a market cap rate for the following single-tenant life science investments in 2023? Assume 10 years of lease term remaining and investment-grade credit.
The asset class with the most competitive pricing, pharmaceutical businesses are the most attractive life sciences investment, with 56% of respondents anticipating a market cap rate of 6.00% and below. Most of the life sciences asset classes ranged from 5.50% to 7.50%, a 200-bps spread, indicating that there is still significant pricing discovery in the market.
Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.
Question 22
What will be a market cap rate for multi-tenant life science property in 2023?
Primary life science markets still demand the lowest projected cap rates in 2023, but at a slight discount to pricing from 2022. In 2023, 25% of all respondents chose 5.50% and below, down from 65% in 2022. Most investors and developers (68%) anticipate primary life science cluster cap rates between 5.00% and 6.50%. Boston, the San Francisco Bay Area and San Diego remain the premier markets, experiencing the strongest demand and tightest space availabilities. The majority of secondary life science clusters project cap rates in the 6.00% – 7.00% range (60%), with tertiary life science cluster assets pricing at 6.50% – 7.50% (50%).
Figure 29: Life Science Cap Rates
Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.
Question 23
For 2023, how would you characterize your life science investment activity?
Of the 40 investors and developers who answered this question, 52% indicated they were net buyers of the life science product. Some 40% of respondents are mostly healthcare investors with no planned life sciences activity in 2023, while only 5% of respondents are net sellers of life sciences product.
Figure 30: Life Science Investment Activity for 2023
Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.
Supply vs. Demand
Question 24 & 25
Where do you see investment demand and supply for the following product types in 2023 compared to 2022?
Many respondents believe that demand for behavioral health centers and medical office conversions will increase in 2023. Since the COVID-19 pandemic, mental health has received increased attention. As a result, billions of dollars have been invested in new behavioral health initiatives and startups. In 2022, several REITs shifted their portfolios to favor behavioral health. That trend is expected to continue in 2023, as companies are bullish on the prospect of redeveloping and repurposing assets into addiction recovery properties, considered a higher and better use for some real estate assets.
Overall, demand is expected to soften this year compared to last year: responses anticipating that demand will increase across all product types dropped on average from 43% in 2022 to 17% in 2023. Expectations that demand will stay the same remained relatively constant, from 46% in 2022 to 43% in 2023.
Figure 31: Investment Demand for Healthcare Assets
Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.
On the supply side, investors anticipate a decrease in the supply of all healthcare real estate assets for sale, responding with “lower” at an average rate of 48%, compared to 2022, when 12% of responses were “Lower” and 63% of responses expected supply to stay the same. This is largely due to investment dynamics: The bid-ask spread that widened over the last 10 months has narrowed, but most investors have decided to hold unless they face a maturity (fund or loan) or need a liquidity event.
Figure 32: Investment Supply of Healthcare Assets
Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.
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