CrowdStreet, an Austin-based commercial real estate investment management company, is increasing its focus on life sciences investments against a backdrop of volatility in the commercial real estate financing market.
“Challenging times present new opportunities and many times they act as a wake-up call [highlighting] you can’t just do things the way you’ve done them in the past,” Tore Steen, chief executive officer and co-founder, tells Real Estate Capital USA.
The firm, which has funded 777 deals and invested $4.16 billion across the real estate landscape to date, continues to see the impact of a pullback in the bank lending market. But the firm also has been able to put together capital stacks with senior lenders willing to originate loans in the life sciences and other niche sectors. Other debt sources, like preferred equity and mezzanine debt, are also part of the capital stack.
“Some of these more niche asset types, such as life sciences, that have many of the right fundamentals behind them, are areas of the market that resonate well with investors right now,” Steen says.
While life sciences transactions are down, there are some are ripe opportunities, he adds. “It’s making sure you find the right ones,” he says.
The firm is working on several life sciences deals including a redevelopment in Dallas with Montgomery Street Partners; and two Boston life sciences lab developments with Cabot, Cabot & Forbes, both of which are in the pre-development phase.
These markets, as well as the San Francisco Bay Area, are consistently considered some of the top life science hubs in the country, primarily driven by the large pool of existing life sciences research talent and per-capita concentration of researchers, according to Steen. Washington DC, New York, San Diego, and Raleigh, Durham, are also markets that are often recognized and may offer compelling opportunities, he adds.
Other established real estate markets with educational centers are starting to see investments in life sciences opportunities. Steen cited Dallas as an example, where the labor pool has grown by 17 percent since 2019 and there has been substantial job creation in the sector.
Lining up debt
Institutional investors have historically deployed capital in this space, but today there is more variety in the types of firms investing in this space, notes Steen.
“There is ample debt available for life sciences deals,” he says. “Financing in this space [however] varies greatly depending on the risk profile of the investment.”
The cost to build out a tenant’s space is typically higher than a traditional office and the build out is specific to each tenant’s needs. Because of the capital necessary to execute business plans in this space, getting a bridge loan or a construction loan is common to get a project to stabilization, Steen notes.
“Upon stabilization, financing can be competitive as history shows the life sciences industry is generally more immune to economic volatility than other sectors.”
Other than life sciences, the firm is focused on malls, multifamily, industrial and some select hospitality opportunities.
Looking ahead
Looking at the broader market, Steen believes over the next six months there will be a lot of firms adopting a wait-and-see approach.
Reflecting on previous cycles, Steen also reckons there will be more interest from individual investors in life sciences and other real estate deals.
“If you think back to the GFC, individual investors typically did not have a chance to participate in opportunities,” says Steen. “But this time around, more and more investors can participate in the upswing because we all know sometimes a good time to get in is at the beginning of that next [cycle].”
Like many of his peers, Steen believes the Federal Reserve will follow through on guidance that it could raise interest rates once or twice more times this year.
“I think, if those do occur in the next six months, my outlook is that by early 2024 we should be coming out of that trough and that’s why we’re starting to see keen interest in special situations and in distress situations as investors are starting to look at those opportunities more seriously.”
He continues: “I’m really looking forward to the upswing that will occur then, and by the second half [of 2024] I believe we’ll see a more positive market environment.”
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