Olivia Drew
Portfolio Manager, UK life sciences

High interest rates, cooling venture capital and an oversupplied market — Will the UK follow the path of the US life sciences real estate market?

Olivia Drew, Portfolio Manager, UK Life Sciences

The definition of life sciences real estate

For the purpose of this article, life sciences is defined as an industry that comprises companies involved in the research, development and manufacture of pharmaceuticals, therapies and medical devices, which help to foster medical innovations with the ultimate aim of extending the length and quality of human life. Life sciences real estate is property specifically designed and built for companies within the industry.

Life sciences hits reset in a year of global headwinds

2023 was a year of prolonged high inflation, sharp interest-rate hikes and a weak economy, with looming fears of recession. Most countries, however, proved resilient and avoided recession. Now, as most markets can see disinflation and signs of interest rates at their peak, there may be light at the end of the tunnel and a path to improved market conditions in 2024.

While the life sciences real estate sector has traditionally remained resilient to challenging economic environments, it is not immune. A year of economic headwinds, combined with continued challenges from geopolitical tensions, has resulted in a large-scale market correction across all asset classes. Although we think the bulk of the correction occurred by the end of 2023 in the UK, we expect capital values to continue to bottom out in 2024.

Of course, not all markets, geographies or sectors in real estate are equal. The US market has always been a bellwether for the UK market, even if the UK market is dwarfed by the USD 774 billion US life sciences market. Similarly to the rest of the global real estate industry, both the US and UK life sciences markets have faced a challenging year. Despite the UK traditionally following the trends of the US, we see the two markets in markedly distinct positions in 2024.

2023 was a challenging year: US vs UK life sciences markets

Life sciences companies were forced to do more with less in 2023. The US leasing and real estate capital markets felt this pull back just as new life sciences supply was delivering at scale to the market. The US market, the largest in the world, contains 193 million square feet (18 million square meters) of R&D lab space, with another 38 million (4 million square meters) under construction. The top three US markets of Boston, San Francisco and San Diego account for a combined 117 million square feet (11 million square meters), or 61 percent of all lab space in the US.

These three markets are contributing 75 percent of the new supply pipeline, indicating they are increasing their already dominant share of the life sciences real estate market. 2024 will serve as the peak supply year in the US. Speculative construction has slowed materially as debt markets retracted, construction costs peaked, vacancy rates hit between 6 percent and 12 percent, supply rose, and life sciences companies moderated expectations and sidelined real estate expansions in favor of capital preservation.

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