Curious to hear if anyone has any exposure to this niche. Seems like an interesting niche with sound long term fundamentals. Work for a multifamily developer and getting a little bored of the asset class.
-Has anyone transitioned to a healthcare/life science group from another asset class, how easy was the transition?
-What are the demand drivers for this asset class?
-Design standards for a lab/drug manufacturing facility seem pretty stringent, wondering if anyone has any insight on this?
-I've noticed that a lot of groups are structured as REITs (public or private) and wonder why this is- maybe its challenging to raise debt in the space?
Any takers?
I worked in medical office for 2 years with some exposure to rehab facilities and hospitals, not much life science though. Happy to answer anything that might be helpful though
Some HC sectors are basically core sectors with a twist:
You can definitely train people with more generalist skillsets to invest in these, I think bigger issue would be convincing people of your interest.
Source: Not an expert, but I’m a HC investor at a corporate PE GP and also have some personal LP investments in the underlying real estate
I have worked for a private healthcare real estate firm for 5 years. Not much exposure to life science. Shoot away with questions and I will do my best to answer.
With a LLM PE firm summer internship and dual degree with health science/business, what steps could I take to learn more and potentially break into this sector of investing?
do you think it would be tough to move away if you wanted to from HC?
Healthcare re
Here is a rundown on the medical sector. We always fight the reits on acq, but I don’t know as much about them.
a list of top private GPs:
Remedy - top developer and pretty strong on acq side. A lot of their money comes from Kayne Anderson and I think they have a fund
Monticito - they are a volume shop and esentially brokers. They will buy anything in any market with the hopes of portfolio premium saving them at some point. Our LPs would never let us bid what they do on projects. Generally unsophisticated in my view. Not sure where most of their capital comes from but they might have a fund. They don’t develop to my knowledge
NexCore - very strong developer. I think they have some good insurance LP (Nuveen?) money and are very competitive
Anchor - newer shop but have hit the ground running. They win a lot of big dev deals and their acq team does volume. Think their money is Harrison street, Carlyle, and a pension. I think part of their operating platform was purchased last year
PMB - top developer on the west cost. They pretty much always get to final rounds. Not sure if they have an acq team. Not sure where money comes from
Hammes - they seem more legacy in the space. They do a lot of acquisitions on really strong assets but I don’t hear about them developing a ton. I think they have their own funds
There are other private firms but those are the big boys.
The sector is lower beta and thus the return threshold is lower than multi. Our biz dev guys have had 20+ year careers getting to know healthcare execs across the nation, and that alone doesn’t win deals because guess what, the competition is doing the same. Credit, location, and Walt are the name of the game. I’ve seen medical office building (mob) development deals with 20 year leases in top markets with ig health systems pencil and get through ic for less than a 13% project irr. Acquisitions for a similar deal high 9s irr. This business is VERY relationship heavy. Debt is generally easy to get and cheap. Think s+150-225 for acq and s+200-275 for dev. A lot of it comes from traditional banks. I’ve never seen cmbs employed or debt from private funds. There is a decent amount of lifeco debt in the space too but frankly it isn’t as competitive as banks unless you’re looking for really long term notes. Top health systems often issue bonds or use credit tenant leases to access the best cost of capital, but this has shown down in this credit environment.
Different product types command different returns as the risk and cash flows generated can greatly vary. You have single tenant mobs which if master leased some LPs love, but others hate because they would prefer a multi tenant building with less risk on a single credit. In either scenario, you can have admin space which is not as desirable as say an ortho group or an oncology group. The higher the acuity generally the more desirable the tenant. Multi specialty buildings can have a host of complimentary and synergistic services - say you have an ortho group to do surgery’s and then a physical therapist that can be the preferred referral source. That’s valuable and a simple example. There are a handful of other product types too like ambulatory surgery centers, freestanding emergency departments, inpatient rehab, behavioral health, urgent care, micro hospital, etc. Depending on the state, you might have to get licenses to put new beds in a hospital (a lot of what I mentioned in the list are specialty hospitals) This process can take ages depending on the politics from not only a state level, but lobbyists from the competition or other hospital systems.
I feel like that’s a lot and I’m rambling so let me know if you have questions
Thanks for sharing your insights- very informative. Here are some follow up Q's:
-What is your role at your current company and how did you get involved with healthcare real estate?
-Your comment on lower beta than multi surprises me. Class A multi in core markets (what I'm in right now) is typically referred to as low risk. I understand that a building with quality medical tenant on a long lease term would be considered pretty safe, especially compared to other CRE asset classes, but its still office/industrial space. Have a hard time seeing how development of a biotech lab is viewed as less risky than Class A multi.
-What are the different types of asset classes in the healthcare/life science space in order of least risk to most risk?
-Healthcare, life science specifically, has seen a surge in demand after Covid. Read somewhere that the development pipeline of medical and lab space is at all time high, and is still falling short of demand- but will this demand be sustained over the long term? If the Pharma Industry slows R&D as a whole, the demand for space would plummet.
So I’m in healthcare. I know virtually nothing about life science and consider them very separate. What I do know of life science is that it’s the opposite of hc - very high beta and very boom or bust. That might be an over generalization but I hear that often.
I am on the development team and we kinda do it all. Usually big health systems have land that they ground lease, so often entitlements are done. I deal with health system execs, bankers, LPs, brokers, but less on the construction side. I really structure deals once we win them or in responding to RFPs and deal with the money. I had a friend at this company and needed a job. No crazy story
So I was referring to mob. Life science is much higher risk than both mob and multi. I know multi pretty well and I find it more attractive to own personally, but in terms of cap rate movement mob is generally more stable than multi
So there are a lot of permutations of tenant profiles, so for this ex assume I’m talking about an ig non for profit health system. This is also my own view no cut and dry answer from most desirable to own to least imo
Medical office building
Ambulatory surgery
Freestanding emergency dept
Inpatient rehab
Behavioral health
Micro hospital
Urgent care
We don’t do any life science or senior living so won’t rank
So again, won’t comment on life science. Yes healthcare development is booming right now. There are more RFPs in the market than any firm can chase. Our analysts are getting cranked lol. Traditionally health systems has big campuses. I’m sure your town has one if you live in a primary or secondary market. The shift has been to a more hub and spoke off campus or outpatient model, so many groups are building in the suburbs so their docs and patients don’t travel as far and to massive campuses they have to navigate. Work from home and the more relaxed work lifestyle has accelerated this also.
Idk how much you care about an interns perspective but I did have the chance to work on a life science project during my internship. The LS space is really a different beast compared to the other product types. There’s not much public research information on it because it’s a relatively new space and most of the current assets in major LS markets such as Boston or San Franc are Class B or C but we are seeing some trophy Class A assets being built which is really cool to see. LS is very operationally intensive where you have to implement various types of machinery into your development to avoid cross contamination/ safe guard whatever these people are creating on the labs. Not to mention, the extremely high TI allowance that you’re giving to prospects because it costs millions to build out their space but if all goes well, then a life science asset will command the highest rents in the city.
Thanks for your insights. Most current assets in the top Life Science Markets being Class B/C sounds like a really good opportunity for development. That is a demand factor I was not aware of. Today's real estate environment probably diminishes returns a bit. Was your project built spec or did you have tenants lined up?
It was more on the basis of building out whatever a prospective tenants needs, cause there’s different sectors within LS like biomedical research, pharmaceutical manufacturing, etc. And so each space would need to be “customized” to fit the tenants needs. So the way the LS project I worked on was designed was that the shell of the tenant space is left undeveloped aside from HVAC and basic operational needs then when a tenant signs a lease, then their space will be built out.
There is a lot of Class A in Boston/SF, I don't know what this guy is talking about. Plus, leasing has been down significantly since the boom Covid days, which makes new deals hard to pencil. There is definitely the ability to specialize in life science, look at firms like Alexandria, DivcoWest, and BPX. You need to understand how lab users value their space; the height, column spacing and HVAC requirements are all super specific and can make or break a space. You don't need to be a life science VC, but understanding the general business strategy for a variety of life science verticals is important, too. You don't want a building that's 100% drug R&D, you want to split between a variety of uses so there is balance as far as deliveries, pressure on building systems, equal mechanical roof usage, economic protection, etc. It's a steep learning curve, but if you're young and willing to learn I'm sure you can make the jump. Besides the stuff mentioned above, it's still just real estate and the economics of it are no different from office, you just get to charge crazy high rents because there is no WFH in life science: no one is experimenting on rats in their apartment (at least legally?).
Also… the demand drivers are really emerging markets with a significant amount of research funding, specifically NIH (National Institute of Health) as well as being in a market with a strong demographics of undergrad/ grad students with a degree related to the life science sector. Also being within the vicinity of research institutions or medical areas play a role as well
My last role was with a large developer that develops MF, Retail, Office, LS and I was staffed on a LS development, but I didn't see too much because the project was put on hold due to interest rates and I wasn't at the firm for very long, so I have limited knowledge but I can try to answer your questions.
1.) Transitioning: I think this depends on what level you are at. As an Analyst/Associate, it probably isn't too difficult since the dev manager is the one who needs to have more knowledge on LS. We also hired an LS architect/consultant to advise us on LS development and would speak with the LS leasing team at CBRE/JLL if we had more strategic questions on design or what LS
2.) Demand Drivers: The LS market. If you are in a market like Boston or SF which have the largest LS markets, then demand for LS will be strong, but if you are in Roanoke, Virginia then there will probably be no LS market at all. Another driver is the general economy as a whole. When the market/economy is doing well, then it is easier for LS companies to raise capital and finance R&D and expand, but when interest rates started rising and the economy starting going south, capital markets dried up and the LS companies abandoned their expansion plans or were even planning on downsizing and subleasing extra space they had. The size of the space also matters. Developers leasing sub-50k SF are still doing okay, but for larger spaces, it is tougher to find tenants.
3.) Design: Tbh idk much about designing a LS space because I wasn't on the team during the design phase, but I know that a popular trend nowadays is developing lab space with GMP space, since it is more convenient for some LS companies to have manufacturing capabilities on-site.
4.) REIT: Idk if this is true or not. The only LS REIT I know is Alexandria Equities. I don't think debt is too hard to raise; however, debt has become very difficult to raise recently, but that has more to do with interest rates and the current environment
Biomed is another major LS REIT. BX company.
Ventas has a lot of LS exposure as well but is mostly senior housing and MOB.
Sed et aut provident explicabo. Doloribus qui dolores molestiae unde. Culpa possimus dolor qui aut sit ipsum. Temporibus laborum cum ut voluptas ut sint.
Magni aut adipisci eos quia. Accusamus eos deserunt autem quo omnis nam numquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...