Growing Pains - The UK Laboratory Real Estate market

Growing Pains - The UK Laboratory Real Estate market

01.03.2023 | By John Sommerville

The market for commercial laboratory space in the UK has come a long way in recent years, buoyed by unprecedented levels of occupier demand and investor interest. Creative Places managing partner John Sommerville has worked in the life sciences real estate sector for over 25 years. He takes a look at what has changed and provides insight as to how the sector will fare in the future.

A fundamental shift

The life sciences real estate industry has been an exciting sector to work in for the last few years. It was not that long ago that delivery of laboratory space for leasing to business in the UK was largely made up of public sector delivery of small scale fitted space and re-purposing of legacy big corporate space. New buildings designed specifically as labs were mainly only brought forward where larger corporates were able to sign up to 15 year plus leases and invest massively into fit out of spaces beyond the base build shell and core.

In the most successful regions this created a gap where businesses that had grown successfully from incubator stage were not large enough to have the covenant or capital to commit to longer leases and significant fit out costs. Occupiers were forced to accept sub-standard space that they converted or hoovered up the space designed to cater for start-up ventures.

The significant growth in business funding seen in the last few years and a growing understanding of market fundamentals by real estate investors has led to greater focus on delivery of this grow on space and of landlords fitting out space. Understanding has grown of what fit out can be re-used beyond the initial letting, although care has continued to be exercised around what to provide and when. Well advised landlords have become savvier about how to influence fit out either through direct delivery or controlled contributions.

Accelerated Delivery

All this is leading to significant growth in delivery of bespoke lab space. Major investors with years of experience including Kadans Science Partners, Biomed Realty, Oxford Properties, Cadillac Fairview and Longfellow, are making massive investments, alongside new players who have moved up the learning curve fast.  Investors are working hard to deliver new space and to build a portfolio through re-purposing existing buildings.  Retail warehouses and even shopping centres are being considered for conversion, with landlords prepared to invest in fit out of benching, extract systems and other generic fit out.

New space being delivered in the key markets in the UK’s golden triangle is ramping up, to the point of significant supply expected to catch up with unsatisfied demand from 2025. A potential 20m sq ft+ is being considered for development across London, Oxford and Cambridge alone, a staggering growth when you consider a key market like Cambridge has 3m sq ft currently - although in the context of the research strengths of this region compared to leading locations in the US you could argue the UK has a lot of catching up to do.

This matters, as the UK moves to create the industries of the future, building on our fantastic strengths in primary research and business innovation. The UK is home to four of the worlds top ten Universities and is rated 2nd in the world for the quality of those Universities on the Global Talent Competitiveness Index. Choking off that growth through lack of delivery is a genuine risk when businesses tell us that availability of property is one of the top five considerations for location choices.

What to look out for

My views having witnessed this evolution (is it a revolution?) is that there are a few areas to focus on:

  1. Investors will need to be prepared to speculate on upfront costs for design, planning and delivery as many occupiers have short term needs driven by a need to drive return on investment and so struggle to make commitments required for pre-construction agreements for lease. Evidence based advice is needed to make these important decisions.

  2. As large quantities of space are proposed across the golden triangle in particular, location will remain critical to success. Understanding what occupiers of different types and sizes are looking for will be key in the battle to lease future space.

  3. Effort is needed to work out how to deliver lab buildings efficiently, devising new ways to meet the specification requirements of lab buildings but in a much more efficient way, both in construction and use.

  4. The growth in Artificial Intelligence and Digital activity in healthcare R&D is likely to influence the type of space that is needed in Life Sciences clusters. More office space and better infrastructure (most notably energy, delivered sustainably) can be expected.

  5. A move to bespoke manufacture of therapies could lead to a growing need for GMP space close to R&D labs and clinical environments, so that treatments can be made that are tailored specifically for individual patients and delivered quickly.

  6. Government, at all levels, still has a fundamental role to play in the sector. Delivery of early stage space in many locations will still need financial support from the public sector; tax regimes need to remain competitive to retain both R&D activity and high value manufacturing; and the UK needs to conclude arrangements with the EU that give more certainty over our future participation in major funding streams. The recent news that Oxford University, which won €523 million over the seven years of Horizon 2020, has been awarded €2 million in the first two years of Horizon Europe; and Cambridge University, recipient of a total of €483 million from Horizon 2020, has not received any Horizon Europe funding to date, is worrying.