Life Sciences Real Estate Adapts to Federal Funding Cuts

Even medical research isn’t immune to a federal overhaul.

The life sciences have joined DEI efforts, climate laws and immigration policies as a subject for scrutiny under the agenda of President Donald Trump. Since January, the administration has rolled out significant changes to the National Institutes of Health (NIH), the medical research agency within the U.S. Department of Health and Human Services (HHS). Known for investing resources into medical and scientific projects, the NIH is now backtracking on hundreds of millions of dollars in approved grants and laying off thousands of employees.

The agency’s consolidation — intended to increase efficiency, according to Health and Human Services Secretary Robert F. Kennedy Jr. (pictured at left) — could acutely diminish research funding opportunities, though medical innovation may not be the only casualty here. 

The life sciences real estate industry was already experiencing a dramatic decline in demand, resulting in a surplus of vacant laboratory space. The proposed NIH changes are piling onto this already precarious climate, slowing the pace of new deals and leaving that space — and space coming online — empty. 

“The market wants to keep moving forward, but there are just a lot of headwinds — and this NIH uncertainty is one more headwind,” said Scott Metzner, a principal at Janus Property, which owns a life sciences cluster in West Harlem. 

Uncertainty, then, characterizes the short-term state of life sciences real estate, though the sector may ultimately experience less shrinkage than the NIH. Because government funding applies to select kinds of tenants — while the need for scientific innovation remains constant — many life sciences owners are feeling optimistic. Tenants, meanwhile, have seemingly held onto their current leases while holding off on signing new ones. 

The NIH’s announcements have therefore created a limbo period for both owners and occupiers. “The NIH funding cuts certainly are not helpful, but I think it’s more the uncertainty they’re causing that will make leasing more difficult,” said Metzner. “Uncertainty is the enemy of planning and of commitment and certainly risk-taking.”

The stakes of the proposed NIH changes don’t exactly encourage risk-taking in real estate. The NIH’s annual budget of roughly $48 billion goes largely into universities, hospitals and other institutions that conduct medical research. Over the last two months, however, the NIH canceled some 800 projects and announced plans to slash 1,200 jobs on top of 1,000 NIH roles previously terminated by the administration.

Take Massachusetts, which receives the most NIH funding per capita, with more than 5,000 NIH-funded research projects in 2024. In Boston and Cambridge, it’s unclear how, exactly, the NIH changes will impact lab and life sciences real estate, but teaching hospitals are likely to face the most challenges, said Peter Evans, executive vice president and managing principal of Boston-based real estate company Hunneman. 

The funding cuts will also impact early-stage startups more so than later-stage ones, as the livelihood of the former’s research is tied up in government grants, said Austin Barrett, vice chairman and head of life sciences at Savills Boston. Moreover, the U.S. Food and Drug Administration has also cut staff, which could mean longer wait times for drug and device approvals, throwing additional uncertainties and delays into the leasing and development climate. 

“A challenge in funding is going to require the end user of the real estate, which is typically the tenant, to reassess how they’re going to utilize their space,” said Evans. Five years ago, ambitious life sciences companies would take whatever square footage they could get, leasing more space than they needed if that was the only option available. “Now, they’re going to probably look at it a lot differently, just because they know their funding is going to be down.”

Such changes could materialize via the proposed 15 percent rule. If enacted, the rule would limit reimbursements through NIH grants for indirect expenses such as facilities and administration to 15 percent of their cost. (Indirect NIH-funded costs tend to hover at or above the mid-20 percent range.)

A federal judge as of last week has barred the NIH from instituting that 15 percent cap, and the percentage could in fact ultimately settle somewhere between 25 and 33 percent, said Joel Marcus, founder and executive chairman of real estate investment trust Alexandria, the nation’s largest life sciences real estate owner. If the 15 percent rules take effect, however, the demand from public institutions for life sciences space would be significantly muted, he said, while vacant buildings will either get leased up or, more likely, pivot to other uses like office.

Granted, many private universities also have endowment and fundraising capabilities, so some will continue on whatever path they can afford, said Marcus. 

Because many aspects of the NIH overhaul remain inconclusive, the proposed changes have yet to impact real estate’s vacancy rates. Evans, for instance, can’t pinpoint any specific situation in which a lab or life sciences company has backed down from a lease due to the NIH announcements. However, Evans has noticed companies — such as toy manufacturer Hasbro — delaying space decisions in Boston due to President Trump’s tariff policies.

“The problem is the headlines scare everybody, but there’s nothing definitive at the moment that somebody could either act positively or negatively on, and the easiest thing to do is do nothing, which is kind of what they’re doing,” said Marcus.

That limbo period exacerbates vacancy trends that have already defined life sciences real estate. The last quarter of 2024 ended with a national life sciences vacancy rate of 19.7 percent, per a CBRE report. During that same period, Greater Boston’s vacancy rate clocked in at 26.9 percent, according to a Colliers report.

“Vacant space today is more a function of stupid oversupply when we had very low — almost no — interest rates,” said Marcus. Vacancies likewise reflect the pandemic’s surge in life sciences demand and the decline in demand for office space before the spike in interest rates began in 2022 and at a time when remote work seemed more durable. Consequently, many people pivoted to life sciences real estate, but were new to the industry and didn’t understand its fundamentals, said Marcus. 

Yet, oversupply isn’t necessarily a detriment for life sciences tenants. “More supply means more options,” said Barrett, “which means companies have more flexibility on rent terms, are seeing increased concessions from these landlords. They also can be way more strategic in how they lease space.”

Such a variety of options highlights a silver lining to the slowdown of life sciences real estate. Rather than jump into leases unaligned with their business, tenants can now take the time to be smarter about their growth, said Barrett, who — like Evans, Metzner and Marcus — has yet to experience any NIH-motivated lease cancellations.

“When we’ve had conversations [with tenants], particularly institutions, their attitude is: Let’s just wait and see before we look for more space,” said Marcus. 

In fact, Barrett, Metzner, Marcus and Evans all expressed confidence in the future of both the life sciences industry and the real estate that services it. A number of factors inform their hope, including the United States’ life sciences prowess, the long-term nature of laboratory leases, and the variety of life sciences tenants, even those that aren’t explicitly labs. 

Alexandria’s tenant base, for instance, leans more private than public, as government institutions account for roughly 12 percent of the company’s entire annual revenue. “At the moment, I wouldn’t say I’m too worried,” said Marcus. (That low-worry attitude, however, is not likely shared by landlords specializing in university buildings proximal to campuses, which  are more likely to be impacted long-term by NIH changes.)

Then again, even if a landlord leases to public tenants impacted by the NIH, the lease length may act as a buffer for the property’s owner. Of Alexandria’s few NIH-funded tenants, most have signed long-term leases that can’t easily be canceled, said Marcus. 

The kinds of tenants that can operate within a life
sciences-designated building likewise breed the sector’s resiliency. Metzner dubs his West Harlem footprint “a center of innovation” that can handle labs, incubators and accelerators of all sizes. 

“The only difference between a building that can handle lab and an office is money and the cost of the construction,” he said. “There are a lot of innovation options for our buildings that include life sciences — but are not exclusively life sciences.”

Independent of the NIH news, life sciences real estate has seen new leases in recent months. Metzner recently signed five startups in Manhattan’s newly opened Harlem Biospace Mink Building incubator, which is now roughly 70 percent occupied, while Hunneman just inked a 20,000-square-foot office lease that’s related to the life sciences industry in Cambridge’s Kendall Square. 

“I’m pretty confident that people are still going to invest and bet on Boston when it comes to science,” said Evans. “Nobody had heard of Moderna until early 2020 — now everybody knows their name.” (COVID-19 vaccine maker Moderna’s global headquarters is in Cambridge.) 

The gap between life sciences real estate’s supply and demand may reconcile within the next year or two, said Marcus, who referred to life sciences as a crown jewel of the U.S. “I’m hugely, hugely optimistic,” he added. “Otherwise, we wouldn’t be in this business.”