The U.S. life sciences real estate sector entered 2024 in a state of significant disarray, characterized by a burst development bubble that has led to a high level of vacancy and declining rents. Over the past five years, the sector has faced a tumultuous period of rapid development that greatly surpassed demand. This imbalance became more pronounced, with record-high vacancies and consistent declines in asking rents for more than two years in major markets. What initially appeared as an unprecedented boom in the life sciences infrastructure has inevitably led to an oversaturated market grappling with the consequences of overdevelopment.
The Overdevelopment Crisis
Entering the fray in 2023, major pharmaceutical companies reduced their leasing activities to the lowest levels in over a decade. According to JLL’s latest U.S. life sciences market report, the sector saw a stunning addition of 20.5 million square feet of space — 13.6 percent of the total U.S. inventory — in the twelve months leading into summer 2024. Paradoxically, occupied space nationally decreased by 200,000 square feet during the same period, underlining the oversupply issue.
An alarming new trend enhanced the overall demand decline: the rise in sublease space. From summer 2023 to summer 2024, life sciences tenants introduced over 3 million square feet of sublease space into the national market, elevating the national lab availability rate to a destabilizing 30 percent. JLL’s forecast suggests approximately 45 million square feet of vacant space by the end of 2024, potentially with more spaces coming online in 2025.
Adding to the problem were flamboyant billion-dollar developments in major life sciences hubs that failed to secure tenants. This reality pushed Alexandria Real Estate, the U.S.’s largest REIT focused on life sciences, to divest billions of dollars worth of properties unrelated to its core campuses, contributing to substantial portfolio valuation losses. The combination of these factors has left the sector in a precarious position, questioning the feasibility of new developments and the viability of existing investments. As the sector grapples with this oversupply, stakeholders are forced to reassess their strategies in hopes of steering towards recovery.
Signs of Recovery
Despite these challenges, there are encouraging signs on the horizon. Lease terms and rents are projected to continue their downward trajectory into next year, but the stark descension may have hit its nadir. Notably, the Federal Reserve’s easing of borrowing costs in September 2024, coupled with a significant rise in venture capital (VC) funding, signals the sector’s potential recovery. Michelle Westoby, senior vice president of JLL’s West Coast life sciences team, mentioned an uptick in property tours and transaction volumes. She noted that a 14 percent year-over-year increase in national deal volume and a 34 percent rise in VC investments in the first half of 2024 are positive signs. Emerging from hiding, venture capitalists, especially in Greater Boston and the San Francisco Bay Area, are introducing funding levels surpassing historical trends.
Life sciences real estate is intricately tied to interest rates due to its dependency on debt as a funding source. Therefore, a reduction in borrowing costs by the Federal Reserve is a critical precursor to demand recovery. Daniel Maldonado, managing director at Unispace Life Sciences, foresees a resurgence in investments with more financiers poised to inject capital into startups and biotech companies, further benefiting real estate investments. These developments hint at a cautious optimism within the industry, suggesting that while recovery may be gradual, it is within reach. The renewed interest and rising investments could provide the necessary catalyst to rejuvenate the sector, helping it regain its prior momentum.
Regional Market Variances
Analysts underscore that the recovery will not be uniform across all markets. Factors such as biotech equity values, VC deployment, and scientific advancements will influence the demand variances. San Diego is touted as a strong candidate for early recovery due to several advantages: a smaller inventory compared to Boston and San Francisco, lower rent per square foot in comparison to these markets, a robust network of educational research institutions, favorable weather, and a diverse population which aids in drug approvals. Specific regional markets, particularly San Diego, exhibit promising recovery indicators with significant IPOs, mergers, and investments boosting the local economy.
The overall sentiment is gradually improving within various submarkets, with long-term projections reflecting a much more positive outlook than witnessed a year prior. Market experts, however, caution that the sector’s revival will be a gradual process, and significant optimism might only fully materialize by late 2024. Investors and stakeholders are advised to closely monitor regional developments as they could provide critical insights into the broader recovery trends. The nuanced differences across regions highlight the need for targeted strategies, ensuring that investments are channeled into areas with the highest growth potential while mitigating risks in slower-recovering markets.
The Role of Venture Capital
Venture capital investments are playing a pivotal role in the potential recovery of the life sciences real estate sector. The significant rise in VC funding in the first half of 2024 has been a beacon of hope for the industry. Venture capitalists are increasingly willing to invest in promising startups and biotech companies, which in turn drives demand for specialized real estate. Michelle Westoby highlighted that the increase in VC investments is particularly notable in key markets like Greater Boston and the San Francisco Bay Area. These regions have seen funding levels that surpass historical trends, indicating a renewed confidence in the sector’s future.
This influx of capital is expected to stimulate growth and innovation, further bolstering the demand for life sciences real estate. The strategic infusion of funds into high-potential ventures could accelerate developments in biotechnology and pharmaceuticals, indirectly benefiting the real estate market by raising occupancy rates and sustaining rental incomes. The symbiotic relationship between venture capital and real estate underscores the importance of a robust investment ecosystem, indicating that the revitalization of the sector might be heavily reliant on continued VC interest and backing.
Strategic Institutional Decisions
The U.S. life sciences real estate sector began 2024 in turmoil. A development boom that outpaced demand over the past five years burst, leading to high vacancies and falling rents. This sector experienced rapid growth, with new facilities being built at a pace that far exceeded the needs of the market. For more than two years, major life science hubs have seen unprecedented vacancy rates and continuous decreases in asking rents, reflecting an oversupply. The initial excitement over massive investments in life sciences infrastructure has transformed into a challenging period of oversaturation. This dramatic imbalance between supply and demand highlighted the risks associated with unchecked development, and the market now finds itself grappling with the consequences of this overbuilding. As a result, property owners and stakeholders are facing significant adjustments to navigate this period of correction and balance out the excess supply with real demand.
