US Life Sciences Market Starts to Feel a Chill

Taking its temperature, CBRE found slight cooling in the US life sciences sector, with vacancy rising, but still well above pre-pandemic levels.

At the same time, venture capital funding declined by 29 percent in the third quarter from the second, though funding volume remains on course for the third-highest annual total on record after 2021 and 2020.

Matt Gardner, CBRE Americas Life Sciences Leader, said in prepared remarks, “Life sciences real estate is a valuable asset. It’s important to keep in mind that the pandemic set a new floor for the life sciences industry. Funding remains at high levels, and job growth continues.

He said it’s simply a normalization of the market after multiple quarters of breakneck growth.

Top 12 Hubs See Rising Vacancy Rates

The average lab vacancy rate across the top 12 US life sciences hubs increased to 5.3 percent in the third quarter, up 30 basis points from the second quarter. In comparison, the vacancy rate in the first quarter of 2020 before the COVID-19 pandemic struck was 6.2 percent, according to the report.

The vacancy rate rose partly because developers completed 2.1 million sq. ft. of space last quarter in the 12 markets, outpacing new absorption of 363,047 sq. ft.

Labs under construction now total 37.4 million sq. ft., of which more than a quarter is under lease.

U.S. life sciences employment increased by 5.4 percent in the third quarter from a year earlier.

For Investors, a Transition from Niche to Mainstream

Tim Wang, Managing Director, Head of Research, Clarion Partners, tells GlobeSt.com, “While VC funding has declined substantially year-to-date, big pharma companies continue to expand and are injecting billions of dollars of capital by acquiring smaller platforms for drug pipelines and R&D technology.

Wang said that despite the near-term market volatility, he continues to like the life sciences real estate sector over the long term.

“After decades of scientific research and technology breakthroughs, the biotech industry is ready for commercialization and will add tremendous value to the overall economy and our healthcare needs,” Wang said.

Clarion Partners believes that this sector will transition from niche to mainstream for institutional investors over the next 15 to 20 years.”

Start-Ups Taking a Harder Look at Cost

Amber Schiada, Americas Head of Work Dynamics and Industry Research, JLL, tells GlobeSt.com that there’s been a bit of a slowdown, but it’s really more of a ripple effect of the macro economy and the funding environment.

“What is important to note is there’s such a long runway ahead in terms of scientific advancement and funding comes from a variety of other capital sources like philanthropic sources, federal government funding and more,” Schiada said.

“There is a strong desire to keep this sector afloat, so even though there’s some slowdown happening now, it’s not the start of a precipitous drop as far as we’re concerned.

“Given the macro environment, venture capital volumes have slowed quite a bit, but we’re still well above the historical trend. The funding environment is one of the strongest leading indicators for leasing activity in the life sciences space because there’s speed to market needs, and much of the activity we saw in 2021, which was all-time high leasing and was really correlated pretty strongly with the venture capital trend, also at all-time highs.

“Now that venture capitalists are telling their startup companies to be cash conscious to preserve runway, they’re taking a harder look at cost. Some of those costs are real estate costs, of course, so we’ve seen demand in terms of tenant touring activity decline year over year by about 35% across the top markets. It aligns perfectly with the venture capital trend slowing down during the same period.”

She said there was also an acceleration of demand in 2021, as tenants were securing space or pre-leasing on developments not yet delivered to make sure that they got that space.

“There was such a rush of demand that some tenants even oversubscribed on space with the intention to release some of it to the sublease market, and they’ve done just that,” Schiada said. “So, we’ve actually seen an uptick in sublease activity, too.”

Companies Holding Leverage Over Landlords

Sanchita Sarker, Market Analyst at Raise, tells GlobeSt.com that though in some markets, supply is outpacing demand, it gives companies some leverage with landlords.

“Jobs and funding are still strong, indicating the life science sector is recession proof,” Sarker said. “Rising interest rates have impacted investment activity, however, the total amount of funding to date is still 52% higher than the total VC funding in 2019.

She said another important metric that points to the health of the life science sector is NIH funding, which has steadily increased since 2013.

“The decrease in leasing activity is partially due, in some markets, to a lack of viable product,” Sarker said.