Life sciences real estate and medical office buildings (MOBs) are frequently grouped together as healthcare real estate, but they are operationally and economically distinct asset classes that trade at very different cap rates. Life sciences encompasses wet laboratories (requiring specialized plumbing, HVAC, and chemical exhaust infrastructure), dry labs and computational research space, and GMP (Good Manufacturing Practice) manufacturing facilities subject to FDA or Health Canada regulatory oversight.
Medical office buildings, by contrast, are clinical care delivery facilities (physician practices, imaging centres, ambulatory surgery centres, and specialist clinics) where the principal product is patient visits rather than research outputs. The infrastructure requirements, tenant profiles, lease economics, and valuation methodologies differ substantially across these two segments.
Life sciences lease economics are dominated by tenant improvement costs that are among the highest in the commercial real estate sector. Converting a generic office building to wet lab standard requires $150 to $300 per square foot in tenant improvements, a commonly cited industry range, covering HVAC modifications (dedicated exhaust for fume hoods, 100% outside air systems), reinforced floor loads (300-500 lbs per SF for equipment), upgraded electrical capacity, and specialised plumbing.
Established tenants with Phase 2 or Phase 3 drug candidates and institutional backing can absorb these TI packages through base rent amortisation, but pre-revenue biotech tenants present covenant risk that landlords mitigate through letters of credit (typically 6-12 months of base rent), personal guarantees from institutional sponsors, and staged TI disbursements tied to regulatory milestones. The result is that life sciences landlords are underwriting both real estate risk and the operating risk of the tenant's research pipeline.
MOB cap rate compression is driven by four structural forces that distinguish the asset class from conventional office. Clinical stickiness is the most powerful: a physician practice that has invested in a tenant buildout, established patient referral patterns, and built a loyal patient base within a specific building will almost never voluntarily relocate; CBRE Healthcare Real Estate data indicates MOB tenant retention rates consistently exceed 85%.
Government-backed billing streams (Medicare in the United States, provincial health insurance plans in Canada) provide revenue predictability that private-market tenants cannot match. Long triple-net leases with annual rent escalators provide income stability prized by institutional investors, particularly pension funds and healthcare REITs.
Structural vacancy rates have historically been 3-5% for on-campus MOBs affiliated with major hospital systems, versus 10-15% for conventional suburban office. Cap rates for on-campus MOBs affiliated with investment-grade health systems have ranged from 4.75% to 5.75%, per JLL's Healthcare Real Estate 2024 Investor Survey.
Geography concentration risk is the most underappreciated credit risk in life sciences investing. The life sciences cluster dynamic means that research-stage tenants make location decisions based on proximity to anchor research institutions, established biotech ecosystems, and deep labour pools of PhD scientists and clinical trial managers, not on relative rent economics.
The three dominant US clusters (Greater Boston/Cambridge, San Francisco Bay Area, and San Diego) and the emerging cluster of Toronto/Waterloo in Canada collectively account for the majority of North American life sciences absorption. This concentration means that cluster-specific shocks (a major anchor tenant's pipeline failure, a regulatory hold on a dominant therapeutic category, or the departure of a key research institution) can trigger simultaneous vacancy across multiple buildings within the same submarket.
MOBs affiliated with hospital systems carry a different geographic risk: a health system's decision to consolidate clinical operations or build a new medical campus can shift demand away from older affiliated MOBs in ways that cap rate analysis alone cannot capture.
A wet lab handles liquids, chemicals, and biological materials at the bench, so it needs piped services (specialized water, gas, and drainage), fume hoods and biosafety cabinets, chemical storage, and ventilation designed to move and exhaust large volumes of air safely. A dry lab is for computational work, electronics, and instrumentation; its requirements sit much closer to high-quality office space.
The distinction matters economically because wet labs are far more expensive to build and to run, and they are harder to convert back to generic office. That asymmetry is one reason purpose-built lab space in established clusters commands a rent premium and behaves differently from conventional office in a downturn.
Lab buildings carry infrastructure that ordinary office does not: HVAC systems sized for high outside-air rates (often approaching 100% outside air for wet labs), dedicated exhaust for fume hoods, backup and emergency power to protect experiments and cold storage, greater floor-to-floor heights to house dense mechanical services, and reinforced floor loading for heavy equipment. Chemical storage and safety systems add further cost.
Because of that infrastructure, tenant-improvement budgets are among the highest in commercial real estate; converting generic office to wet-lab standard commonly costs on the order of $150 to $300 per square foot, with recent brokerage cost surveys putting full lab fit-outs higher still. Those costs, amortized into base rent or funded by the tenant, are a core reason lab rents and construction economics diverge so far from conventional office.
Many life sciences tenants are pre-revenue biotech companies funded by venture rounds and dependent on clinical or regulatory milestones, so the landlord is underwriting the tenant's research pipeline as well as the real estate. Landlords mitigate this with security deposits and letters of credit (often several months of rent), guarantees from institutional sponsors, and tenant-improvement money released in stages tied to milestones, since a failed trial or a funding-market freeze can impair a tenant quickly.
The sector also clusters tightly. Research-stage tenants locate near anchor universities and hospitals, established ecosystems, and deep pools of specialized talent rather than on rent alone, which concentrates demand in a handful of markets (Greater Boston/Cambridge, the San Francisco Bay Area, and San Diego, with Toronto/Waterloo emerging in Canada). That concentration is a credit risk of its own: a shock to a dominant cluster can push vacancy up across many buildings in the same submarket simultaneously.
Life sciences real estate is space built for laboratory and research use, including wet labs for chemistry and biology, dry labs for computational and instrument work, and GMP manufacturing. It requires specialized infrastructure well beyond conventional office, which drives higher construction cost and higher rent.
A wet lab handles liquids, chemicals, and biological samples and needs piped services, fume hoods, chemical storage, and heavy ventilation. A dry lab is for computation, electronics, and instrumentation and needs far less specialized infrastructure, making it much closer to high-quality office space in cost and design.
Lab space needs heavy HVAC with high outside-air rates, dedicated fume-hood exhaust, backup power, taller floor-to-floor heights, and reinforced floor loading. Converting generic office to wet-lab standard commonly costs on the order of $150 to $300 per square foot in tenant improvements, among the highest fit-out costs in commercial real estate.
Research-stage tenants choose locations for proximity to anchor universities and hospitals, established biotech ecosystems, and deep pools of specialized scientific talent, not primarily for rent. That pulls demand into a small number of clusters such as Greater Boston/Cambridge, the San Francisco Bay Area, and San Diego.
Many tenants are pre-revenue biotech firms whose survival depends on venture funding and clinical or regulatory milestones, so the landlord underwrites the research pipeline as well as the real estate. Landlords manage this with letters of credit, sponsor guarantees, and tenant-improvement dollars released against milestones.
They are often grouped as healthcare real estate but are distinct. Life sciences is research and lab space whose value depends on specialized infrastructure and tenant funding cycles. Medical office buildings are clinical care space whose value rests on clinical stickiness, high tenant retention, and long net leases.