Finance  ·  Leases

US Life Sciences Industry Still Expanding, Just Not as Quickly as 2020-2021

Recent banking turmoil to hamper VC funding this year, but CBRE still forecasts continued market growth

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Demand for lab and research & development space in the United States remains well above pre-pandemic levels, and evidence shows the life sciences industry — and the real estate that houses it — will be resilient through the current economic slowdown. But the sector isn’t immune to the turbulence, as overall growth has returned to a more normal pace in 2023 after record years in 2020 and 2021, a new report says.

The cumulative lab space in the 13 largest U.S. life sciences markets have expanded by 47 percent in the past five years to 181.7 million square feet, and CBRE (CBRE) forecasts that figure will jump another 22 percent in the next two years to 220 million square feet, with almost a third of the space currently under construction already preleased.

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CBRE’s 2023 outlook released Tuesday also points to a growing number of clinical trials for new drugs, persistent job growth, surging federal financing and ample cash reserves for the industry’s larger companies. However, investment sales dropped in 2022; lab vacancy rose and is expected to continue rising; initial public offerings by life sciences companies are disappearing; venture capital financing saw big declines; and employee growth slowed.

“The life sciences industry and the broader economy have hit choppy waters in recent months, but the industry’s most important gauge — the product pipeline — signals sustained, underlying growth,” Matt Gardner, CBRE’s Americas life sciences leader, said in the report. “Many metrics have receded from their 2020 and 2021 highs, but they’re still above their pre-pandemic levels. There is a lot of promising science in the works to propel this industry forward once the lending environment settles.”

U.S. lab vacancy rose to 5.7 percent in the fourth quarter of 2022 from 5.1 percent in the third quarter. It remains low relative to most other real estate sectors, and it’s well below the long-term average. But lab vacancy is likely to rise more in many markets due to record construction rates. Rents are still rising in most markets, but also at a slower pace than in the past few years.

Life sciences investment sales are down to pre-pandemic levels, but sales volume dropped 43 percent year-over-year to $14.4 billion in 2022. A flurry of mergers & acquisitions is expected this year as valuations for smaller companies fall, CBRE reported.

There was a 34 percent annual decline in VC funding last year to $21.7 billion, and recent turmoil in the banking sector is likely to hamper financing this year for startup life sciences and tech companies. Also, the combined value of life sciences company IPOs last year fell by 79 percent from 2021, and was 27 percent below the pre-pandemic annual average between 2015 and 2019, which suggests 2020-2021 was an aberration, according to CBRE.

However, VC funding during the first quarter of this year is on pace to exceed pre-pandemic levels by roughly 20 percent. Also, annual funding from the National Institutes of Health continues to grow, increasing to $47.5 billion this year. Additionally, CBRE said life sciences companies have roughly $200 billion in cash and equivalents on their balance sheets for business development and mergers and acquisitions.

Finally, in a similar arc, life sciences employment reached a record high at the start of 2023, but employment growth has been slowing since June 2022 due to higher interest rates and the pullback in funding. And life sciences companies have also announced many more layoffs in the first two months of 2023 than in 2022. 

CBRE concluded that industry growth this year depends on whether there’s a recession, as well as the stability of financial markets. 

“But history shows the life sciences industry is more immune to these challenges than other sectors,” the report said.

Market comparisons
With 52.7 million square feet, the Boston-Cambridge market has by far the most lab space, with a tight 3 percent vacancy rate and average asking rents of $99 per square foot. Boston-Cambridge has about 19 million square feet more than the next-largest market, the San Francisco Bay Area.

Takeda Pharmaceuticals signed the nation’s largest lab lease of the year in 2022, taking 600,000 square feet with BioMed Realty, and AstraZeneca signed the second largest with 575,000 square feet with Boston Properties (BXP). Both were in the Boston-Cambridge market.

Boston-Cambridge also has the most space currently under construction with 15.3 million square feet, followed by the San Francisco Bay Area with 9.3 million square feet and San Diego with 5.4 million square feet.

The San Francisco Bay Area, Boston-Cambridge and Seattle were the fastest-growing markets last year. In terms of total number of people employed in the life sciences industry, the San Francisco Bay Area was the leading metro, followed by Boston-Cambridge, New Jersey, San Diego, Washington, D.C.-Baltimore, and New York City.

The Washington, D.C.-Baltimore market has the fifth-most lab space with 12.6 million square feet, and a 1.7 percent vacancy rate. Los Angeles is the ninth largest in terms of the amount of lab and research and development space, with more than 5.6 million square feet. New York City is the eleventh largest with 2.7 million square feet.

“This year is a belt-tightening year for most industries, including life sciences,” Jeff Pion, a CBRE vice chairman, said in a statement. “But the industry … has demonstrated resilience before and will again. The floor has risen for life sciences. Even with this year’s turbulence, most measures are still above pre-2020 levels.”

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.