CHICAGO—The US life sciences sector is in a period of flux; namely, it's growing, and in some cases outgrowing the space available to it. This has wide-ranging real estate implications, JLL says in its latest report on the sector.

“In their US operations, biopharmaceutical companies are being squeezed by rising costs for highly trained talent, more expensive real estate markets and a shrinking supply of available laboratory space,” says Roger Humphrey, executive managing director and leader of JLL's life sciences group. “Many are willing to pay a premium for proximity to the leading research institutions and scientists, but the lack of space is compelling companies to look at secondary sites that are a little less conveniently located.”

Among other factors, JLL notes an increasing demand for generic medications, “causing major players to rethink the way in which they conduct business.” The report shows that generic drugs constitute nearly 80% of all prescriptions filled in the US, whereas in Japan, it's almost the inverse.

“The industry is characterized by continued M&A activity, as large companies seek to engage in new, diversified research and manufacturing,” according to JLL's report. In turn, the company says, “the rise of small and mid-sized biopharma firms provides opportunities for large companies interested in M&As to invest in niche research.”

It's thanks to smaller firms that the vacancy rates normally associated with increasing consolidation are at a minimum. Some markets are seeing high occupancy rates on account of their being very little rentable stock. Indianapolis and Minneapolis are two examples, JLL says; both have high rates of owner-occupied space and, in the case of Minneapolis, “nearly no available space for rent in its submarkets, as firms like Bayer complete huge build-to-suit properties.”

In some life sciences markets, such as the Bay Area, low vacancy rates have led developers to suburban submarkets to break ground on new developments, says JLL. “In the future, space restraints may push demand toward new clusters like Dallas, Houston and Portland where talent pools are available and real estate conditions are becoming increasingly favorable to life sciences companies looking to expand their footprints.”

Along with pressures from the strong dollar and competition from generics, biopharmaceutical operations in the US are faced with rising labor and real estate costs. The average rent for laboratory space rose by an average of 3% nationwide in the past year, but in top-dollar Boston, the year-over-year increase was 7.4%.

That's a pretty modest increase, though, compared to the 16.9% rise in San Francisco or the 15.5% increase in San Diego. Rents in the Raleigh-Durham and New York/New Jersey life sciences clusters have also appreciated faster than those in Boston, although both are still lower-cost by comparison.

Rising rents are one reason small and mid-sized biotech companies are heading to Philadelphia, Denver and other more affordable locales, thereby “saving their dollars for talent recruitment,” according to JLL. “As rent growth increases, low interest rates make construction a reasonable option in some locations, such as Minneapolis or Indianapolis, and those locations with available land and few life sciences facilities for rent.”