Funds That Raised Billions For Life Sciences Real Estate Recalibrate In Rocky Market
The market turmoil caused by rising rates and continued uncertainty has soured growth prospects in nearly every sector of the economy, including life sciences, biotech and lab real estate.
After record-setting raises, cresting at $43.3B in 2021, the biotech industry started 2022 with growth curtailed, shifting expectations and venture capitalists and fund managers altering investment strategies.
“Life science, by its nature, is a volatile industry, and we’re starting to see a little bit of that re-emerging,” Colliers Director of Research Aaron Jodka said. “It’s kind of like interest rates. We’re coming off all-time lows, but they’re still very attractive compared to history. That context matters. If you’re going 150 mph and take your foot off the gas a bit, you may slow down to 100 mph, which is still pretty fast.”
It is vital to put into context the closing of these funds, the largest ever raised focusing on life sciences properties, from some of commercial real estate's biggest companies.
Tishman Speyer and Bellco Capital raised $3B for their Breakthrough Properties joint venture to develop a global life sciences real estate portfolio, doubling their initial goal of $1.5B, they announced last month. The aggressive appetite from institutional investors, sovereign wealth funds and high net worth individuals made the raise one of the largest ever focused on the sector, and it has already funded investments in Cambridge, UK, and Cambridge, Massachusetts.
“There is an acute and accelerating need for well-located, cutting-edge lab space,” said Tishman Speyer CEO and Breakthrough co-Chairman Rob Speyer in a statement. “The Breakthrough Life Science Property Fund can enable us to deliver more of these projects across the U.S. and Europe.”
Coming on the heels of other biotech-based funds and investment, such as the California State Teachers Retirement System (CalSTRS) sinking $500M into a real estate fund run by Longfellow, Bain’s late 2021 announcement of a $3B fund that will target life sciences assets, and a $1.6B Blackstone fund aimed at life sciences firms with approved therapies, Breakthrough’s large raise shows continued hunger for the relatively safe harbor of life sciences lab space.
It’s a change that underscores long-term confidence in biotech, but also a fundraising and investing environment that favors bets on ground-up development and established startups, perhaps to the detriment of smaller, younger firms. As Newmark Associate Director of Capital Market Research Daniel Littman told Bisnow earlier this year, there’s hunger for secular growth possibilities “that’ll grow beyond economic cycles and regular ups and downs.”
While firms may find a formerly frothy market, agitated by outside investors seeing a pandemic-era boost in biosciences, harder to navigate, real estate assets have still proven to be robust.
“I don’t see a white flag on the real estate side,” Jodka said. “The fact that Breakthrough doubled their target fundraise tells you everything you need to know. Life science is an institutional asset class today. It’s specialized, but it’s no longer this niche property type people aren’t paying attention to. CalSTRS putting half a billion into one fund is an example of the increased attention this asset type has and its importance to a portfolio.”
The specifics of the slowdown in biotech VC funding can be nuanced. The market is coming off a record year, said Silicon Valley Bank Managing Director Jon Norris, and the trajectory of raises in Q1 is actually on pace to meet 2020’s fundraising pace, the second-highest in history.
But part of that early performance is a bit of artificial inflation by the $3B Altos Lab raise, a secretive anti-aging startup, Norris said. He’s seeing less activity from known investors in early stage raises and more investors hanging back. IPO activity has frozen, and even though 75 firms are applying to go public on the Nasdaq exchange, experts believe activity will stay relatively dormant until the end of the year.
“Reading the tea leaves, it definitely seems like there’s a slowdown in investment,” Norris said. “People are taking their time, instead of a deal frenzy of the past, we’re seeing a slower investment pace with fewer deals and more pauses to question where the money is going. It just won’t be the same rocket ship of 2020 and 2021 going forward.”
It’s becoming harder and harder to get returns on venture capital investments, Norris said. While he’s not seeing a ton of new funds right now, those with money have lots of dry powder.
The current funk in the market means that mid- to late-stage startups can’t go public as easily, meaning venture investors can’t cash in on an IPO and exit. What used to be a sure bet just isn’t there anymore. This could play into the hands of Blackstone and their new fund, he said, who now have the capital to keep companies afloat until they can truly cash in on commercialization.
The Blackstone fund is filling a funding gap for companies that in years prior may have looked to an IPO as an exit strategy, but now need more cash and funding to hold onto their talent and real estate and get through this market lull. Jay Chok, an associate professor at the Riggs School of Applied Life Science, who wrote his thesis on biotech IPOs, called it “long-horizon investing,” with companies deciding to, in effect, become VCs themselves by investing in such a fund.
“Blackstone is looking to fill funding gaps,” Jodka said. “It’s for those who have a true product in hand, not an early stage startup hoping to eventually cure cancer, or whatever it may be.”
Norris added that Big Pharma firms, which also have mountains of available capital, could go on a very strategic buying spree, and “gobble up a lot of mid-stage companies at a very attractive price,” which could create a wave of consolidations and spinoffs. These companies are already anchoring large new projects, like Eli Lilly's $700M genetic research center in Boston's Seaport and AstraZeneca's 570K SF build-to-suit deal last week in Kendall Square.
Reduced enthusiasm for funding startups may leave much more room for investment in lab space. Jodka said the sizable Breakthrough fund isn’t the last of its kind. With so many life sciences markets currently in single-digit vacancy, they have, or soon will, hit a tipping point where the lack of vacancy impedes the market, limiting firms and their ability to find suitable space, and ultimately slow down innovation. There will be “winners and losers, likely multiple losers,” he said, until more real estate gets developed.
“Hopefully we’ll see other funds like Longfellow come together to build more,” he said. “This is just the beginning. You’re going to see a lot more fundraising.”
Jodka expects the impact of these billion-dollar fundraises to vary market by market, but largely remain concentrated in the big, established markets. Breakthrough is focused on funding and acquiring ongoing projects, such as the 515K SF Torrey View 10-acre research and development campus in San Diego, but with that much capital entering the ecosystem, it may free up more space for smaller markets to attract more funding and interest.
Different funds may come along with different strategies; value-add, more opportunistic funds, further out on the risk spectrum, may seek out new construction or partner with a developer, and focus on tertiary markets.
“There will be pockets of development all over the country, with lots of specialization taking place,” Jodka said. “Salt Lake City, Houston, St. Louis, or Columbus, Ohio, this moment offers strong growth potential for many regions.”
Jodka is optimistic about where things go, predicting that the overall fundraising environment stays on track to meet 2020’s overall raise, though he won’t be surprised if Q2 is another down quarter relative to last year. Ultimately, VC funds will continue to invest capital, and real estate will see continued demand.
“Other countries can’t compete with us,” Chok said. “They can’t keep throwing money after bad bets like we can. “