Life sciences real estate is booming amid looming ‘patent cliff’, but what lies ahead?

The life sciences sector across Europe has remained remarkably resilient in recent years, with record levels of growth and investment. Driven by technological advancements, new scientific breakthroughs, and a more stable macroeconomic environment, the number of new life sciences companies has risen by 13.5% in the past five years.

This growth is changing the way the life sciences real estate market operates, with the needs of companies growing beyond lab space as supply chains evolve.

However, over the next six years, it is anticipated that $51.2 billion in pharmaceutical revenue will be exposed to generic or biosimilar competition as patents start to expire. As a result, increased partnering and M&A activity is expected over the next few years as companies seek to replace lost revenue and fill their pipeline. It’s not yet clear how this will impact the real estate market, it could drive market demand as more space is needed for research and development; or it could negatively impact the sector as greater efficiency and consolidation reduces the need for space.

The sector today is attracting investment, it’s primed for growth with the real estate landscape evolving rapidly, but the question is: will this continue?

Investment and new medical treatments driving sector growth

Venture capital (VC) investment in the life sciences sector across Europe doubled from $6.8bnN in 2016 to $13bnN in 2020, with more than a third of this being funnelled into UK markets. Despite a slight decline to $10bn in 2023, the average annual rate of capital investment over the past three years has remained higher than the average rate observed between 2017 and 2019. Similarly, government funding schemes have also boosted growth. For instance, the European Union’s ‘Horizon Europe’ has directed €3bn in funding into 1,566 life sciences projects across 338 universities, research institutes, and companies to encourage ground-breaking research.

Generating additional momentum, several novel drug modalities are reaching clinical and commercial stages and showing blockbuster commercial potential: GLP-1 agonists for weight loss, antibody-drug conjugates (ADCs), and radiopharma. After decades of development, these treatments are now showing both clinical efficacity and immense commercial potential, consequently generating more demand for lab space, and logistics and manufacturing infrastructure.

This growth is most pronounced in ‘The Golden Triangle’, comprised of London, Oxford, and Cambridge, where lab vacancies are particularly low – just 1% in Cambridge and London and 4% in Oxford - due to a lack of suitable space. Whilst there is a strong development pipeline to meet this demand, most of these products are not expected to reach the market until at least 2026, so demand will continue to outpace supply.

It’s clear the sector is experiencing huge development that real estate supply currently can’t keep up with and this is shaping how the real estate market operates.

Three key factors shaping the real estate market

As a result of its remarkable growth, the life sciences sector and real estate landscape is evolving fast so companies can scale up, but keep costs down.

This growth manifests itself in three key areas: the development stage of life sciences companies, how they adapt supply chains, and whether they are outsourcing:

• Development stage: Life sciences companies increasingly have diverse real estate needs beyond lab space. As companies grow, they require office space, manufacturing units, storage facilities, and distribution centres – though, this is dependent on its business journey. Therefore, a comprehensive real estate ecosystem now needs to offer a range of spaces to cater to different growth stages.
• Supply chains: Efficiency within the supply chain is proving vital for life sciences companies' continued success as they grow. To achieve this, some firms are changing property portfolio strategies by, for example, bringing materials closer to production and sales points. This saves time, reduces costs, and ensures compliance with legal requirements across various markets.
• Outsourcing: As life sciences companies evolve, we’re seeing more and more turn to outsourcing to save time, cut costs, and find skilled workers. Many firms collaborate with CRO (Contract Research Organisations) and CDMOs (Contract Development and Manufacturing Organisations) to develop, make, and deliver pharmaceutical and biotechnology products on a contract basis. This approach gets its products to market quickly and at a lower cost.

The level of growth is clear and, as a result, pharmaceutical companies will be looking to capture this through partnerships and M&A activity. Given these dynamics, there is a growing need for flexibility and a more asset-light approach, with more rented spaces, instead of owned ones. However, how the ‘patent cliff’ could affect this activity is currently unclear.

The ‘patent cliff’ conundrum

The impact of the forthcoming ‘patent cliff’ on the sector remains to be seen. However, it will likely be decided by the M&A activity it is beginning to inspire, as big pharmaceutical companies seek to ensure they can renew their drug pipelines. Pharmaceuticals are currently seeking to partner with or acquire start-ups to secure valuable intellectual property from early-stage companies facing a difficult fundraising market. This activity has the potential to create larger companies with increased research and development capabilities, positively impacting market demand. As businesses across Europe clamour for sufficient space, investors could be presented with a valuable opportunity, as this demand exacerbates the need for suitable supplies.

Conversely, increased M&A activity could also lead to consolidation and downsizing of product lines or research programmes, negatively impacting market demand. It has the potential to encourage life sciences businesses to rethink their business strategies and streamline their property portfolios in a bid for greater efficiency. To meet this challenge, the sector will likely shift towards greater flexibility, with investors and developers favouring leased properties over owned spaces – ultimately creating further investment opportunities in the corporate life sciences infrastructure.

What lies ahead?

At the moment, it’s too early to predict the impact the ‘patent cliff’ will have on the real estate sector – although it will undoubtedly be significant. What is clear is that the sector is continuing to grow, and with it demand for varied life sciences real estate products. Life sciences will likely remain a resilient sector with valuable opportunities for occupiers and real estate investors in Europe, particularly as demand continues to outpace supply.