A Record Amount of Lab Space Will Be Added in the U.S. This Year. Will There Be Enough Tenants?

The wave of life sciences construction completions arrives just as employment in the sector dips and demand for space moderates

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The U.S. life sciences real estate market has proven its resiliency after a year of simmering doubts and concerns. But there are serious challenges in 2024 as an ominously large amount of lab and research and development space comes online at a time when employment in the sector resets and demand returns to pre-pandemic averages.

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After rapid growth from 2020 to 2022, the sector is set to continue to moderate this year in step with last year’s cooldown, caused by a softer economy and a dropoff in funding, according to CBRE’s 2024 U.S. Life Sciences Outlook. Market fundamentals remain solid and will be bolstered by increased federal funding this year, a growing pipeline of FDA-approved drugs, and more corporate spending on research and development.

But CBRE (CBRE) expects a record level of construction completions to flood the market this year, amounting to an incredible 21 million-plus square feet of life sciences space added in the nation’s 13 biggest markets. That’s a jump of more than 50 percent compared to the nearly 14 million square feet completed last year, and it’s four times higher than the 5.6 million square feet added in 2022. The pipeline is expected to drop dramatically in 2025 and allow for stabilization, but the deliveries this year will cause vacancy to rise and asking rents to decline. 

CBRE’s analysis found that 79 percent of the construction that’s set to be completed this year is in the three largest biotech hubs: Boston-Cambridge, the San Francisco Bay Area and San Diego County. The total amount of space already underway in those markets represents significant spikes to their existing inventories.

“It’s unlikely there will be enough demand in 2024 for the nearly 38 million square feet of new lab/R&D space currently under construction,” CBRE’s report said. “While the potential for oversupply is greatest in Boston-Cambridge, the San Francisco Bay Area and San Diego, supply and demand should remain more balanced in the 10 other primary markets.”

The life sciences vacancy rate for Boston-Cambridge was at 6.6 percent at the end of the third quarter, according to CBRE. The market has 15.9 million square feet under construction, which represents a 28 percent increase in existing inventory in just one year. 

San Francisco’s vacancy rate is at 14.2 percent with 7.6 million square feet of life sciences space under construction, representing a 20.5 percent increase in that market. San Diego’s vacancy rate is at 11.9 percent, and has 4.8 million square feet of life sciences space under construction, which represents a 20 percent increase.

At the same time, tenant demand for lab and R&D space is down from the highs seen in 2021 in all of the top seven markets. Demand is consistent with pre-pandemic averages between 2016 and 2019 even though new space has skyrocketed by 345 percent since then. There was already negative net absorption of 1.5 million square feet nationally of lab and R&D space in the third quarter of 2023.

Additionally, the sector’s once-surging job growth has slowed drastically. CBRE forecasts a 0.2 percent decline in U.S. life sciences employment in this year’s first half, followed by mild job growth in the second half. For perspective, life sciences employment growth averaged 10,000 jobs per month nationally in 2021.

Investment sales have also fallen back to earth along with all other asset classes, down 64 percent in the third quarter of 2023 compared to the first quarter of 2022, when the interest rate increases started. CBRE expects that interest rate cuts this year might spark some transactions that have been delayed recently.

San Francisco saw the biggest decline in investment sales, decreasing 85 percent from a peak in the third quarter of 2021. Sales volumes in Boston-Cambridge and San Diego are down 70 percent and 66 percent, respectively, in that time.

“No doubt, 2024 will continue to see mergers, acquisitions and partnerships as the preferred strategic option given capital constraints and this interest rate environment,” Matt Gardner, CBRE’s Americas life sciences leader, said in a statement. “The underlying science still is strong following a decade of rising investment, as shown by recently robust levels of drug approvals and early-stage clinical trials. Construction completions will peak this year and then drop off substantially, benefiting the life sciences real estate market.”

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