Life Sciences Real Estate Exiting 2024 On a Symphony of Low Notes

The U.S. life sciences development bubble burst at the start of 2024, and it is going to take some time simply to pick up the pieces. There are already signs of recovery for the new year, though.

Biotech, lab and research & development space has been on a five-year roller coaster that saw rapid and rampant development far outpace demand. The market shifted quickly from record levels of investment to record-high vacancies and consistently declining asking rents — every quarter for more than the past two years in some of the major markets — with pressure rising after each new lab was delivered to the market. Even Big Pharma retrenched, its leasing activity hitting a decade low last year.

JLL (JLL)’s most recent U.S. life sciences market report shows an incredible 20.5 million square feet — representing 13.6 percent of the total national inventory — was added to the market in a 12-month span leading into this summer. But, even with that infusion, total net occupied space actually declined nationally by 200,000 square feet, an alarming sign that effectively meant none of the new space was required.

While the sharp overall decline in demand has been well documented the past 18 months, perhaps the dirty secret of the life sciences market is the growing sublease space: JLL reported that life sciences tenants added more than 3 million square feet of sublease space to the national market from summer 2023 to summer 2024. That raised the national lab availability rate — which measures the sum of the total vacant space, space available for sublease, and space under a soon-to-expire lease or nonrenewing tenant — to 30 percent, which is unsustainable for any asset class.  

By the end of the year, the U.S. could have roughly 45 million square feet of vacant space, with more potentially delivering in 2025, the report found. 

The situation was made more apparent with flash, billion-dollar developments being added in major hubs without any tenants. At the same time, Alexandria Real Estate, the nation’s biggest real estate investment trust dedicated to life sciences space, has been unloading billions of dollars of its real estate — anything not attached to its maga-campuses — while suffering major losses in value to its portfolio.

Lease terms and rents are expected to continue to deteriorate over the next year. But the drop may have finally reached its bottom, with the Federal Reserve and venture capital lights beaming at the end of the dark tunnel. 

“I think that the worst is actually behind us,” said Michelle Westoby, senior vice president of JLL’s West Coast life sciences team. “We’ve been seeing an uptick in tour activity recently and increased transaction volume. We’re definitely heading into 2025 much stronger than we went into 2024. Tenant demand is also up, and, nationally, deal volume is up 14 percent year-over-year.”

Venture capital funding is one of the most important signals in understanding and predicting demand for lab space, and the first half of 2024 saw a 34 percent increase in total venture investment in the U.S. life sciences sector, JLL reported. More venture capital firms are coming out of hiding around Greater Boston and the San Francisco Bay Area, and bringing funding levels back above historical averages. 

“VC funding is all over the news right now,” Westoby said. “San Diego [the nation’s third-largest life sciences hub] has seen $3.6 billion of VC funding through the third quarter, and we’re on track to close out 2024 with the second-highest VC funding since COVID times.”

The biotech sectors are also particularly sensitive to the interest-rate environment, as the main source of funding for commercial lab users is debt. And the first domino for demand to recover fell when the Federal Reserve started easing borrowing costs in September. 

“We definitely are going to see a recovery on investments,” said Daniel Maldonado, managing director at Unispace Life Sciences. “There have been many people on the sidelines waiting for that to happen. … We’re going to see more money flowing into startups and biotech companies. We will see some approvals of medicines, and that will trigger the real estate investments.

“We have already seen a steady recovery in San Diego when it comes to IPOs and mergers and investment that is coming to startups. But, first, we need the overcapacity to be filled.”

Analysts explain that the life sciences real estate sector will not bounce back uniformly. Different factors will play roles in determining the demand in each market, including biotech equity values, venture deployment and scientific advancements.

“We certainly believe San Diego is going to be the first hub to recover, to the extent that we just opened a new office in San Diego because we see some prospects that we want to materialize,” Maldonado said. “I believe over the long term, San Diego is going to be very beneficial of the situation because it has about half of the amount of space as Boston and San Francisco, and rent per square foot is much more expensive in those markets.”

But rent is just one factor in a recovery, Maldonado added. 

“San Diego has a good set of educational research institutes, amazing weather you can’t find in Boston, and the diversity of the population in San Diego is important in helping getting new drugs approved,” he said.

Optimism is growing in other submarkets as well, and long-term outlooks are far better than they were a year ago. But, as the issues weren’t created overnight, experts say it’s going to take some time for the lab market to demonstrate its return to growth.

“I don’t expect that optimism to come earlier in the year, but, most likely, by the end of the year, we’ll start to see more things coming,” Maldonado said.

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