Real estate déjà vu

A bit more than a decade ago, in 2011, a (at the time) somewhat obscure real estate sector was in the initial stage of its S-shaped growth trajectory. Its share in global real estate investment portfolios was less than 10% and concentrated in the US.¹ This was the industrial (logistics) sector.

Every real estate investor knows what happened next. Inflation-adjusted (at today’s price level) e-commerce retail sales in the US increased from USD 65.8 billion in 1Q11 to USD 289.2 billion thirteen years later, an annual real growth rate of 12.1%.² Warehouse rents in the US rose as leasing demand outstripped supply. The development in many other countries was similar and is still taking place.

Now the industrial sector represents nearly a quarter of global commercial real estate investments, second in weight to only the office sector.

The growth of e-commerce called for more warehouses than existed in 2011. Thus, real estate investors built warehouses all over the world to meet leasing demand from online retailers that were selling all sorts of goods online. Industrial real estate investors were also rewarded: the global non-levered annual return of industrial properties over the time period 2011–2023 was 11.8% compared to 6.8% for the global commercial real estate market.³

The growth and the outperformance of the industrial real estate sector took place because the real economy was changing: people wanted to buy more goods online than before. This led to changes in the composition of real estate assets that the economy needed.

There are parallels between the industrial sector more than a decade ago and the life sciences sector today. Life sciences is facing a clear growth path due to increased demand from companies developing and producing goods, e.g., drugs and vaccines, that the real economy increasingly needs.

On one hand, there are macrotrends, such as improved prosperity in developing countries and a proportionally aging global population, that drive the life sciences growth rate. On the other hand, trends in the industry itself, e.g., mRNA vaccines, AI-assisted drug development and home-shoring of pharmaceutical manufacturing, are also important as they are likely to increase the sector’s demand for dry labs, wet labs and manufacturing sites in the near future. This is reflected in the fact that the number of life sciences companies has grown by double digits in e.g., Switzerland (17%), the UK (15%) and Germany (15%) over the last five years.⁴ Output is also on the rise: pharmaceutical production in the EU grew from EUR 290 billion in 2020 to EUR 340 billion in 2022, which represents a growth of 17% over two years.⁵

This growing industry needs appropriate premises, i.e. real estate, to house businesses, development and manufacturing. In many cases, these premises do not exist today, which means that there is a structural deficit of appropriate buildings. In conclusion, the European life sciences industry needs to have, literally, more room to grow.

One of the most developed life sciences markets in Europe is the Golden Triangle region (Oxford, Cambridge and London). Due to the rise in demand from companies in the industry, rents have expanded at a much faster rate than in many other sectors, including the logistics sector (see Figure 1).

We do not expect annual rental uplift of this scale in the long term, simply because new supply will eventually kick in to meet the demand. However, the ongoing shortage of immediately available laboratory space is likely to support rents in the medium term. This is especially notable in Cambridge, where the vacancy rate for labs is below 3%.⁶ Markets in continental Europe, such as Paris, Berlin and the greater Zurich region, are also seeing increasing leasing demand while appropriate space is in short supply.⁴

Figure 1: Prime annual rental growth, selected market segments

Source: CBRE; Savills, May 2024.

As for the industrial sector in 2011, the life sciences industry is entering a growth stage, driven and supported by macro and sectoral trends. It would be rash to believe that the life sciences real estate sector will ever become an as important share of real estate investors’ portfolios as the industrial sector has now become. But as the industry develops, also its real estate needs will expand and change. This development will take place in an environment that currently does not supply the buildings that the sector is looking for. As was the case for the industrial sector more than a decade ago, the opportunity for real estate investors is to build the premises that will be in strong demand a few years from now.

For further insights, please see our newly published paper on the European life sciences real estate sector.

¹ Based on data from the MSCI Global Annual Property Index, as at June 2024.
² Based on data from the US Census Bureau and US Bureau of Labor Statistics, as at June 2024.
³ Based on data from the MSCI Global Annual Property Index, as at June 2024.
⁴ JLL, EMEA Life Sciences Industry & Real Estate Perspective, 2024.
⁵ The European Federation of Pharmaceutical Industries and Associations, The Pharmaceutical Industry in Figures, 2023.
⁶ Savills, Life Sciences: Trends & Outlook, May 2024.