The resilience of real estate solutions

The resilience of real estate solutions to changing life science industry dynamics: Agents of positive change by providing solutions to two major trends impacting the life science sector.

Change in exit strategy

Global venture capital life science activity in 2021 broke all previous records, from both a capital flows perspective (£113 bn in VC in 20211) and a real estate perspective (60% increase in real estate transaction volumes in UK alone2). However, in 2022 there has been a cooling o of VC and IPOs which is changing the landscape. IPO activity in the US and Europe is slowing3,4,5,6. The days of the likes of Moderna, with their rapid rise and speed to market from establishment in 2010 to IPO in 2018, is changing7. Part of the reason this happening is a stabilising of the market because riskier ventures, with not yet proven clinical data, backed by “tourist” investors during the pandemic have quelled, leading to an overvaluation of Life Science companies8. It’s not all doom and gloom though. VC in 2022 is still higher than prepandemic levels and the recalibration in the industry has stabilised its growth and shone a spotlight on other types of IP generating activity such as mergers and acquisitions (M&As) and the strategic partnerships between R&D giants and SMEs.

One such change to real estate comes in the form of the convergence of tech and life science through M&A or strategic partnerships. There has been an increase in acquisitions of tech companies by large life science corporates rather than them developing tech-based solutions from scratch. Global cross-industry acquisitions peaked in 2021 with 334 tech companies acquired by Life Science companies, representing https://reactnews.com/article/life-sciences-resilient-as-investment-soars-61/ https://www.wsj.com/articles/biotech-ipos-slow-after-record-breaking-2021-11645700402

1PitchBook Data, Inc.

14% of the M&A deals in the life science industry. This is nearly 6x that of acquisitions in 2011. This increasing convergence will have stark changes for the industry – radicalising the way medicine is created, how medical solutions are applied, and how patients are monitored. More so, this will have implications for the real estate provided. This increasing reliance on tech could push the need for more highly connected, high specification o ce space, near data centres, or could drive the requirement for more labs fully integrated with automated equipment and technology rather than traditional lab space. The growth of cloud labs – those which are fully automated and accessed by researchers via cloud infrastructure – is an example of this trend developing. Those with life science assets in the industry will need to understand the implications of integrating these types of business into their own real estate portfolio and understanding the unique dynamics of companies within individual markets will be key.

Linking to M&A activity, companies need to be proactive in acquiring innovation to stay up to speed with the ever-changing market but the process of M&As can be slow and complex and as we have seen in the US, regulation can create uncertainty. As such, a less integrated approach that de-risks ventures is where companies absorb this innovation through strategic partnerships or alliances. Often in the form of large corporates partnering with or funding small, highly innovative enterprises.

4https://reactnews.com/article/life-sciences-resilient-as-investment-soars-61/

5PitchBook Data, Inc.

6PitchBook Data, Inc.

7https://www.biopharmadive.com/news/biotech-ipo-venture-startup-investors-market-downturn/618205/ 8https://www.ft.com/content/c90d17c6-6196-4c8a-

This includes partnerships such as AstraZeneca scaling its digital innovation through a $33 M investment in Human Therapeutics and their Software as a Medical Device (SaMD) companion apps9. GSK has partnered with NVIDIA to integrate advanced computing platforms and increased AI in its drug discovery process – the new arm is the GSK AI hub located in the Knowledge Quarter in London10. Unlike M&A activity these partnerships will unlikely require an integration of the smaller partner company assets, but the partnership will likely assist in growing their real estate portfolio and footprint. This trend may keep the balance between owner occupied and commercial space, rather than complete absorption into owner occupied space, as well as cause clustering or collocation of these partnerships to create an ecosystem. What is evident though is that it is changing the real estate landscape.

Environmental Sustainability in a challenging industry

Real Estate has a proportionally large impact on the environment, contributing 40% of global carbon emissions. As such, those in real estate are strategically placed at the forefront of the industry to make impactful and positive changes to the environment. The life science industry has however historically struggled with embracing environmental sustainability in their real estate portfolios given the inherently higher energy, water, and waste usage of the assets. Despite this, in a prior JLL report Embracing Sustainability, we outlined that taking a proactive approach to sustainability can ensure the long term viability of an asset. Investors and landlords that act early to future proof assets can find increased rental and investment value, help secure green finance, attract and retain tenants, reduce operational costs, and gain a competitive edge on portfolios versus their peers. From an occupier perspective, embracing environmental sustainability can also attract and retain talent, help di erentiate from competitors, and reduce supply chain and operational costs.

Given the clear future proofing benefits of embracing sustainability, solutions need to be enacted to reduce the environmental impact of life science real estate assets. Real estate solutions are at the forefront. In our subsequent JLL report, Achieving Environmental Sustainability, we outline ways in which life science occupiers, developers, and landowners can begin to mitigate the climate impact of their portfolio by measuring and setting appropriate targets, reducing their operational and embodied carbon, curbing their waste and water usage, and preparing and managing for a sustainable future. We also outline the impact that these changes and a wider embracing of environmental sustainability can have on the value of real estate.

Establishing benchmarks is the first step to achieving environmental sustainability in the life sciences sector. It is futile to set a Net Zero target without first creating benchmarks to measure achievements against. Whether you are an occupier, investor, developer, operator, or a landlord this entails measuring and monitoring to help understand the current climate impact of the asset, as well as interventions needed to achieve sustainable targets. Once benchmarks have been established and targets set, those in the life science industry can begin to mitigate the environmental impact of their assets. Decarbonisation comes in many forms but where many are now focusing their e orts is towards Net Zero commitments. This can be through reducing their operational or embodied carbon – both of which are vital to the process. Decarbonisation is only part of the picture when it comes to addressing climate impact, however; water usage and waste output are also key considerations. Finally, a theme that runs through each aspect of these focus areas is the change in behaviour that is vital for the aftercare of an asset. Open communication, collaboration, and engagement as well as training at every step are key to ensuring both landlords and tenants share responsibility and accountability for achieving sustainable targets.

What is interesting is that each of these sustainability factors are becoming increasingly important to liquidity and pricing in real estate investment. Avoiding value obsolescence for life science buildings in the future will become a critical factor as pressures from occupiers, landlords, lenders, and legislators increase over time. Nevertheless, life sciences is an integral part of the knowledge economy, where innovation thrives. In an industry ripe with new ideas, there is real potential for research and development to help provide solutions to the climate impact of assets as well. To truly achieve this though, there needs to be a unified approach between all aspects of the life science value chain.