Investment in life sciences innovation at all-time high, driving demand for new real estate concepts

CHICAGO, August 19, 2019 – U.S. biopharmaceutical research and development (R&D) spending reached a record $179 billion in 2018 and is expected to grow by $34 billion by 2024, an indication that companies are investing now to improve their future pipelines, according to JLL’s eighth annual Life Sciences Outlook. The impact can be felt across the drug development landscape, as the total number of drugs in development increased by 46% over the last five years. Real estate and facilities continue to play a vital role in gaining access to essential talent, capital and other resources for growth.

For Big Pharma, every real estate and facilities decision is critical because R&D returns have fallen to their lowest levels in nine years. Returns among 12 large-cap biopharma companies fell to 1.9% in 2018 – down from 10% in 2010. Concurrently, the cost of bringing a new drug therapy to market has reached record highs, growing from $1.2 billion in 2010 to nearly $2.2 billion in 2018. While growing demand for healthcare innovations is projected to increase pharmaceutical sales by 45% in the next five years, smart real estate strategies, along with access to state-of-the-art facilities and talent, will be necessary to offset the high cost of innovation.

“Demand for highly sophisticated lab space and cutting-edge pharmaceutical production facilities has exploded with the expansion of life sciences R&D. The advent of personalized medicine has spawned a subset of early-stage companies focused on developing and manufacturing ‘small batch’ pharmaceuticals, adding even more pressure to the demand for lab space within or near life sciences clusters,” said Roger Humphrey, Division President of JLL’s Life Sciences group. “The high real estate prices and low vacancies in the top clusters create opportunities for real estate concepts to become more innovative to provide a critical path for growing companies.”

In Philadelphia’s King of Prussia suburb, for example, MLP Ventures is expanding the coworking concept to address rising real estate costs, the dearth of lab space and need for collaboration. The developer recently announced its ambitious plan for Discovery Labs, the United States’ largest coworking ecosystem for healthcare, life sciences and technology-enabled companies. When fully built out, the $500 million, 1.6 million-square-foot campus will comprise 12 connected buildings. It will offer R&D spaces in the 50,000- to 125,000-square-foot range – 20 times larger than the average office coworking space – to provide critical infrastructure for life sciences innovators.

War for talent intensifies as life sciences becomes economic driver

The boom in funding has also further exacerbated the talent war among life sciences companies. Despite skyrocketing rents in the top clusters, the cost of real estate comes second to finding talent among location criteria. While technical expertise remains important, employers also seek people who can navigate complex external and internal R&D processes while driving innovation.

Job growth in the fastest-growing life sciences clusters far outpaces the overall U.S. job growth of 11%, with growth rates of 26% in the San Francisco Bay area; 16% in Denver and Boston; and 12% in Raleigh-Durham. In aggregate, the life sciences sector comprised 2.1 million jobs in 82,300 companies in 2018, evidence of the sector’s strength as an economic driver.

Additionally, life sciences industry wages are higher and growing more quickly, on average, than those of the overall economy. Median wages for life sciences occupations in 2018 were more than 70% higher than the national average of all other occupations, according to the U.S. Bureau of Labor Statistics.

A new era of deal-making accelerates to drive next-gen therapies

As industry giants look for ways to extend the cutting edge of innovation, life sciences mergers and acquisitions (M&A) activity totaled $198 billion in 2018, according to EY’s 2019 M&A Firepower Report.

Almost every major industry player was involved in at least one merger or acquisition over the past five years. In fact, the top 10 pharma companies spent an average of 35% of their total R&D investments on M&A transactions over the last 10 years. Consolidations are expected to accelerate over the next five years as companies attempt to broaden their product lines and take advantage of growth opportunities in emerging markets, requiring complex real estate strategies to consolidate facilities while optimizing access to talent and resources.

Top U.S. life sciences clusters

In most markets, the top issue facing life sciences tenants is a lack of suitable lab space for research. With average vacancy across the U.S. life sciences clusters hovering at 9% and vacancies below 2% in the tightest submarkets, rents are reaching breathless heights. In the Mid-Peninsula area of San Francisco, for example, rents have nearly doubled from $32 per square foot to $58 per square foot since 2014, while vacancy has remained below 6% over that period. In 2018 alone, lab rents increased across Greater Boston by 26%.

The top-ranked clusters of Boston and San Francisco also top the list for new life sciences development, with both seeing more than 3.3 million square feet of new lab space under construction this year. However, developers in these and other top markets haven’t been able to build new space or convert office properties quickly enough to meet demand. Nonetheless, Boston and San Francisco continue to thrive as the top centers of talent and innovation.

Less-established markets are also making impressive gains in sector growth. In Houston, for example, the number of life sciences establishments has grown by 15.5% over the past five years, trailing only Boston and Raleigh-Durham. While the two top clusters struggle with a lack of lab space, the fast-growing clusters of Denver and Raleigh-Durham are uniquely positioned to accommodate growth, with vacancy rates of 14% and 16% respectively. Both grew more than 15% in the last five years in terms of jobs growth, trailing only San Francisco.

Each cluster is unique, boasting different expertise across a variety of subsectors and offering its own real estate solutions in tight market conditions. The common theme among all clusters is a mixture of world-class academic institutions, top-notch research facilities and a tight-knit medical community.

Despite uncertainty and turmoil beyond the sector, the life sciences industry is expected to be more resilient than many other industries because of the constant emergence of novel approaches to healthcare and new areas of innovation. Technological advances that offer hope of real cures, along with growing demand from emerging economies, are expected to propel worldwide prescription drug sales from $900 billion in 2019 to $1.2 trillion by 2024.

JLL’s annual Life Sciences Outlook tracks geographic shifts in life sciences innovation, operations and facilities investments, including an analysis of markets actively investing in their life sciences sectors. It includes a ranking of the top U.S. life sciences clusters, as well as an analysis of global trends. To learn more, view the complete findings of the Life Sciences Outlook.