Canadian life sciences -- and its adjacent real estate sector -- has lagged considerably behind its American counterparts due to public health's dominion over the space, but the COVID-19 pandemic has changed that, fostering new opportunity for leasing and investment.

"The government has now allocated funds to biomanufacturing and research and development, and the thesis there is if you support the tenants and allow them to incubate and grow in Canada, then folks like us will provide real estate for them and that ecosystem can thrive,” Randy Hoffman, Senior Vice President of Canada at Oxford Properties, told STOREYS.

Oxford Properties is the major real estate player in Canada’s life sciences space, carving out a niche early, but it hasn’t been seamless. In the US, the sector is propelled by the private sector, particularly medicine, and there are strongholds in Boston, San Francisco, Washington, DC, and the Virginia area. However, in Canada, the public healthcare system gives the federal government more oversight, severing opportunities for the private sector in the process. Moreover, in Canada there are fewer life sciences facilities, which makes it a relatively modest asset class, albeit one with immense ROI potential for investors who jump in early.

Read: Commercial Investors Have Life Sciences on the Radar. Here's Why

Reversing the Brain Drain

The pandemic has persuaded public health to loosen the reins, with the federal government investing $1.2 billion for COVID-19-related vaccines and therapeutics last year, and allocating $2.2 billion in this year’s budget for biomanufacturing and life sciences more broadly. Hoffman lauds the investment, stating that it will also aid in the retention of talent.

“For us, the biggest shortcoming in the Canadian space has been on the real estate side, and that’s a huge opportunity for us. There’s a brain drain of some of Canada’s best doctors to the US, and part of it is there hasn’t been an ecosystem for them in Canada. These businesses thrive in ecosystems where they can work together and collaborate,” Hoffman said.

“Going through the pandemic, that’s become clear to the government, which has put money up to support [the sector]. Canada had a pretty big hole and they wanted to reverse that and we want to be part of that solution by providing real estate opportunities.”

Tight Toronto Market Makes Finding Suitable Space a Challenge

It isn’t always easy, though. Part of that collaboration is establishing facilities near universities and hospitals, which in downtown Toronto is a tall order. If that isn’t achievable, then proximity to similar users, Hoffman says, is critical.

“That was important learning for us early on,” he said. “One of the great lessons, for me in particular, but I think for all of us, is how many calls we got from folks who had heard we invested in Boston, San Francisco, Seattle and parts of the Carolinas, and said, ‘I’m Canadian and I’d love to be able to do what I’m doing in Canada, but there’s been no opportunity because the ecosystem didn’t exit, so how can you help me?’ We’d like to reverse some of the brain drain that’s been occurring here for, going on, decades.”

Oxford Properties didn’t dive headlong into the space; in 2017, it had an exploratory phase during which it tapped its New York-based credit book and subsequently learned all it could about the sector, paving the way for equity investment two years later. Historically, there were scant opportunities for life sciences in Canada. The industry is still relatively nascent, having begun in Boston and migrating to California before Washington State.

Unlike most other asset classes, it requires project-specific sites that require substantial capital for equipment because everything from gasses and fluids to infectious diseases could be present. Given how scarce land is becoming in the GTA, Hoffman says it might be more economical to retrofit existing facilities to accommodate tenants working in specific areas of the sector.

“We’d love to be around [University of Toronto] and around MARS but buildings and land are expensive, and density matters but it’s difficult,” he said. “There’s UofT Mississauga and McMaster University with Pill Hill in the middle. It’s about pricing accordingly.”

Keith Reading, Director for Research at Morguard, previously told STOREYS that while upfront capital costs are prohibitive to some, there’s ample opportunity to recoup it as an investor.

“In Canada, rents go in the CAD$35-45 [per square foot] range, which is still a pretty high range,” Reading said. “In Canada, prime real estate is controlled by pension funds and a few other institutions, so if you’re an investor who wants to be in real estate, you have to look at other alternatives, and we will see growth in life sciences.”

The GTA isn’t the only market. In Montreal, Canderel purchased the Gare Centrale and plans to build additional density that, among other uses, will include life science facilities. Hoffman says that in addition to Montreal—specifically citing the high-tech industrial area, Technoparc Montréal—Vancouver is a viable market. In fact, Oxford Properties concentrated its investment monies in the city last year, honing in on the False Creek and University of British Columbia areas.

Lenders Remain Hesitant on Unproven Sector

Finding the right parcel of real estate for a price that makes investment worthwhile isn’t the only obstacle — lenders, inherently conservative, are circumspect about life sciences, having not seen enough to comfortably finance ambitions in the space. Unproven firms, a problem Oxford Properties doesn’t have, will have trouble establishing their footing in the space, at least until the Canadian sector sheds its reputation as inchoate and, therefore, risky.

But Hoffman says that institutional capital entering the picture could be a game changer for Canada’s life sciences sector.

“It’s not a very mature space, and we’re a leverage animal, like all of us in real estate, so getting lenders up to speed on the space is a bit of a challenge,” Hoffman said. “There are certainly groups now that understand it, including Canadian groups that have followed us to the US. But for the lending community in general, part of it is transforming some of the nodes that exist today, either partially or by accident, and bringing institutional capital to fragmented ownership.”

There hasn’t been a worthwhile opportunity for institutional investors to get involved because the space is still too small and their profits would be paltry compared to other segments of the real estate market in which they’re active, but the landscape is changing, as evidenced by the federal government both investing in the life sciences and allowing competition.

“The pandemic has certainly highlighted Canada’s lack of life science infrastructure and our dependence on international vaccine supply, and that was the impetus for the government announcing grants and capital they would put into the space, and it expedited an additional level of expectation for us around the space,” Hoffman said, adding that he believes Oxford’s early involvement in the space will help it evolve respectably in Canada.

“It’s not a flash in the pan for us if it has helped expedite some of that Canadian growth.”