The speed of technology advances within the healthcare sector has been remarkable over the last several years. Today, apps can monitor and regulate diabetes. Robots can perform surgeries, reducing the risk of human error, while 3D printers can customize arm casts. Our smart phones can track our steps, heart rate and blood pressure. And like the patches that help smokers break the nicotine habit, a wearable patch is even in development to burn body fat.
Medical technologies (MedTech) aren’t new to the healthcare sector—they’ve been improving and prolonging lives for years. EEGs, EKGs, pacemakers, dialysis, ultrasound technology and prosthetics are just a few examples. However, several factors have accelerated the growth of MedTech, including the intersection of three major developments: the increasingly global accessibility of the internet through mobile devices and cloud computing, especially in areas that have previously been lacking medical care; a quickly growing aging population in need of additional medical care; and the global pandemic, which propelled the need for such connections much more quickly than would have otherwise happened.
In tandem with these conditions, an entire ecosystem of technologies continues to proliferate around digital health and wearables within the greater MedTech sector. To take advantage of the massive potential these opportunities present, companies like Apple, Google and Medtronic are ramping up their research and development, targeting both the healthcare industry and retail consumers.
That growth is likely to continue to have rippling effects on commercial real estate. As a subsector of life sciences, MedTech has already generated significant real estate demand. Over the last five years, MedTech companies have signed more than 11.4 million square feet (msf) of leases across several markets in the U.S. alone. What’s more, the global pandemic, which impacted leasing in other sectors, did not dampen the pace of leasing in this sub-sector. In fact, 33% of leases were signed pre-pandemic between 2018 and 2019, with the other 66% signed between 2020 and 2022.
What Makes Up MedTech? MedTech encompasses medical devices, diagnostics and digital health. More recently, artificial intelligence (AI) and machine learning has been integrated into MedTech, improving diagnostic capabilities.
The San Francisco Bay Area has been at the epicenter of much of this activity in the U.S., recording 1.8 msf of leasing in the last five years. Approximately 43% of that activity—780,000 square foot (sf) — has taken place over the last two years.
While requirements of MedTech occupiers depends greatly on each business model, most companies generally need a mix of dry lab and clean room space. The scope of those improvements can vary greatly depending upon the type of product the company is developing and the level of air particulate/ISO required in the clean room. Lab requirements, therefore, are very specific to each company’s product and the respective manufacturing process and production line. Freenome, for example, recently signed a 300,000 sf, 12-year lease in the Genesis Marina, a life sciences campus under construction in San Mateo County. Freenome, a cancer diagnostics company, aims to develop blood tests that will make cancer testing routine, and the requirements dictated a more bespoke build-out because of the nature of the product.
A solution for the flight-to-quality conundrum?
Could MedTech growth be an opportunity for other segments of the real estate sector? It’s possible. The flight-to-quality phenomenon has been prominent in headlines for some time as office-using companies are increasingly interested in higher quality offices. The preference for the best office buildings in the best locations is a response to new ways of hybrid working, a strategy to entice employees into physical office environments. Some voices are already suggesting this shift to quality may be a fundamental change in the industry. Regardless, the trend is already bifurcating office properties in two segments: the best of the best and everything else.
If demand for those offices in the everything else category remains weak, it’s likely many of those properties will need to be repositioned at some point. Alternative uses will no doubt vary—life sciences, residential, biotech, medical and education are just some potential directions. But the demand for life sciences space has already spurred several office conversion projects for life sciences use in cities like San Diego, Boston and San Francisco. Conversions more specifically for MedTech use could be an additional solution, even though those projects are challenging, given the space needs of MedTech companies.
While uneven, funding continues to flow
Of the 18,325 companies globally that operate in the MedTech sector, nearly half (48.9%) are headquartered in the United States according to Pitchbook data. While some MedTech companies are public, most are privately held and backed by venture capital. Access to this capital has allowed many of these companies to either expand their real estate footprint or move to new locations. How much funding is available to privately-held MedTech companies in the next few years will greatly influence demand for office and lab space.
For the time being, the trend looks positive. Even though flow of funds to the MedTech sector has been uneven this year, mirroring a general pullback in the overall funding in the markets, 2022 is on pace to being one of the highest funding years on record. And capital continues to be attracted to opportunities in the MedTech space. California, where most privately-held MedTech companies are located, has enjoyed a lion’s share of recent transactions—a total of $8.1 billion in deals were funded relative to California-based companies through Q3 in 2022.
A promising future
Revenue in the MedTech sector has grown 5.1% annually at a compound annual growth rate (CAGR) in the last five years and is forecast to grow an additional 6.5% rate in the next six years. As of 2022, revenue is forecast to total more than $200 billion, an 11% growth year-over-year and 22% higher than pre-pandemic levels in 2019.
Digital health, a sub-sector of MedTech, has experienced its own rapid growth in both the consumer sector and the greater healthcare sector. Overall market size has nearly quadrupled since 2014 and is forecast to more than double again by 2024. Growth in mHealth technology within the digital health sector —that is, mobile health or apps—has seen the fastest growth and is expected to garner more than 50% market size by 2023.
Further, as of publication, more than 650 active clinical trials around the U.S. are focused on medical devices and diagnostics, including studies of wearables, digital therapeutics and diagnostics. Over the last five years, more than 200 new device and diagnostic approvals have been granted by the FDA. Although COVID-19 caused delays in FDA approvals in 2021 when the agency struggled with surges in volumes, social distancing and travel restrictions, most of these hurdles have been cleared. As the approvals process picks up momentum, it will mean new market opportunities and presumably additional growth for the industry.
It's an open question how large of an impact MedTech growth will have on real estate in a post-pandemic world—whether spurring new development or filling a potential gap for existing buildings left behind in the flight-to-quality migration. But if the last five years are an indication of the sector’s potential, it seems a safe bet that MedTech will not only significantly influence human health, but the health of the property sector.