Is AI impacting the Life Sciences real estate market?

by Travis McCready    Contributor        Biopharma insight

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Artificial intelligence (AI) is one of the most disruptive technologies the Life Sciences sector has ever seen. It’s having a profound impact on the whole industry.

It’s not yet clear, however, how the adoption of AI will impact the Life Science real estate market. On one hand, AI could drive greater demand for space, by boosting activity and accelerating the rate of entrepreneurship in the sector, enabling growth and expansion for Life Sciences companies. On the other hand, AI could also create greater efficiency in the R&D process, reducing the space needed by some companies.

These effects could balance each other out – or one may outweigh the other. Only time will tell. There are, however, some noteworthy factors that might provide clues as to the potential impact of AI on the sector’s real estate needs.

 

Structural differences between US and Europe that will affect the impact of AI

The availability of risk capital and venture capital plays a significant role in how companies use space. This effect is most marked in the United States, particularly as we’ve seen a more risk averse investment landscape over the last couple of years.

European markets, however, are generally less exposed to fluctuations in venture capital. The Life Sciences sector in these markets is instead more reliant on government funding, which, while historically not as abundant as the venture capital market, tends to be much slower to change and fundamentally more risk averse.

Take the example of the UK government’s £100 million fund to capitalise on AI’s potential in Life Sciences towards the end of last year. This sounds notable – and it is – but to put it into perspective, this is the size of a single funding round for a venture capital company in the US.

These differences are reflected in the European Life Sciences real estate market, which lags the US by about fifteen years. Europe has only recently started to see an emphasis on innovation districts; commercial, leasable lab space that is privately owned; and a growing venture capital sector.

In 2022, for instance, the UK market garnered more risk capital than the city of San Diego for the first time. While this may not seem impressive, given the comparison of a country vs. one city, this was hugely significant and indicated that the market was ready to receive this type of capital.

This context is important to remember when we speak about Life Science development in Europe – Europe is starting from a lower base. Nevertheless, it’s seeing strong momentum.

What does this mean when it comes to the impact of AI on Life Science real estate? The pace and rate of disruption of AI will probably be slower in Europe – and so its effect on the commercial real estate market is likely to be delayed, too.

 

Four things to watch

There will, however, be clear indicators to look out for to determine if AI will accelerate or decelerate the need for real estate. One such indicator is the rise of new research areas or diseases – we need only look to the impact of Covid-19, which prompted a huge spike in demand for real estate. The challenge of anti-microbial resistance may soon have a similar effect.

Secondly, and relatedly, there’s the need for greater manufacturing infrastructure as new drugs are developed. Globally, there is a shortage of this manufacturing infrastructure – and governments are increasingly aware that this is a national security issue; they can’t necessarily rely on globalised manufacturing capabilities to supply the drugs their citizens need. Nation states will be assessing the rate at which they’re manufacturing and the need for more space domestically to avoid needing to outsource.

Thirdly, government policy – in the US and elsewhere – will play an important role. Regulatory bodies, their approach to diseases and how they deploy investment can also drive research and development and, consequently, the need for real estate.

Finally, the convergence of sectors around Life Science technology is a key indicator to watch. In other words, the degree to which we’re starting to use Life Science technologies not just for biopharma applications but for industrial applications. For example, some Life Sciences developments will be industrialised in the food industry, in viticulture, in textiles and the perfume industry. This proliferation of applications accelerates the need for space.

AI has an important role to play each of these four factors – and so tracking developments in these areas can help indicate the impact AI is likely to have on Life Sciences real estate needs.

 

In conclusion

The Life Sciences real estate market’s response to AI is currently uncertain. However, we are likely to start to see indicators over the next couple of years that will provide us with a better understanding of the effect it will have. For now, watch this space.

 

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