Recessionary Fears Bring Life Sciences Back Down To Earth After A Meteoric Rise

The life sciences industry, which rode a massive high during the pandemic, is seeing tempered interest from investors halfway through 2022.

New data from MSCI Real Assets reported by Wealth Management shows the $7.7B in investment sales of life sciences and research and development assets during the first half of this year is down 34% from the same time last year, when a surge of portfolio sales led to record-breaking transaction volume. Experts have yet to raise the alarm, arguing the industry is normalizing, not failing.

“It doesn't mean [the sector is] dead,” Colliers Managing Director of Investment Sales Frank Petz told Wealth Management. “We were going like 120 mph, and now we’re going to slow down to 50 to 60 mph.”

Individual sales of life sciences assets, on the other hand, were up 11% in the first half of 2022. This is indicative of continued interest in the industry, despite steadying demand.

The amount of capital raised in 2021 was an anomaly, making it appear the drop is substantial when, in fact, investment remains healthy, Steve Golubchik, Newmark's executive vice chairman and president of Capital Markets for the Western region, told the publication.

Yet life sciences is not immune to the challenges faced by the rest of commercial real estate. Investors and tenants are letting their feet off the gas as rising interest rates and a looming recession generate hesitancy across asset classes. Commercial property sales nationwide totaled $39.4B in April, a 16% drop year-over-year and the first time in more than 12 months the industry had experienced a decline.

“There’s less product on the market because sellers don’t want to sell cheap knowing they’re going to be discounted,” Petz told Wealth Management. “And there’s not enough buyers to go to market because everyone’s selective and cautious. Those words, selective and cautious, burn my eardrums these days. The bidding pool has diminished greatly.”

Rent growth has slowed from the 10% to 30% per year seen during the pandemic, and asset valuations have declined between 5% and 25% over the last 60 to 90 days, according to Golubchik. But these trends have not yet curtailed demand for new space — there is 21M SF of life sciences space under construction nationwide, doubling the pre-pandemic pipeline, per Cushman & Wakefield. 

“A company going out to look at 150K to 200K SF might now be going out to look at 75K or 80K SF,” Golubchik told Wealth Management. “The amount of expansion might have contracted slightly, but the amount of demand is still very healthy in the market.”

The true impact of a slowdown of activity among investors may not be clear until the end of this year or early next year. The long-term value of life sciences assets, spurred by an aging population and demographic shifts, will likely carry the industry through an economic downturn, according to Josh King, vice chair with the Capital Markets team at Cushman & Wakefield.

“Right now, we’re experiencing a hiccup after what has been an absolutely meteoric growth of capital flows into biotech and healthcare the last several years,” King said, adding the long-term trend remains positive.