Business, political, regulatory and funding uncertainties have created a ‘disquieting’ environment for the U.S. lab property market during the first half of this year, including a sharp decline in demand and an increasing oversupply, according to a JLL report. This follows a year that saw slow but sustained gains in demand and leasing activity, according to the CRE firm.
Elevated vacancy in the sector is being driven by a sustained period of oversupply. Some owners have begun to consider different uses for struggling properties. The report said that about 3.2 million square feet of lab space is in the process of changing uses.
While this will alleviate oversupply slightly, the report estimates a combination of 20 million to 25 million square feet of net absorption or supply reductions would be needed to return the market to equilibrium. JLL said lab space has reduced by 1.2 million square feet over 13 buildings during the past four quarters and even more of the 200 million square foot lab market is likely to leave in the near future. However, barring substantial growth in demand, it is more likely that well-built and well-located buildings will gain market share while other properties will face increased odds of distress over the next two years, JLL noted.
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Downward pressure on rents is most apparent in markets where supply is the highest, including Boston, the San Francisco Bay area and San Diego. A stable middle ground is more common in mid-sized markets, including Washington, D.C., New Jersey, and Raleigh-Durham. The Los Angeles market is an outlier, with single-digit availability spurring rent growth as tenants struggle to find space to grow, said the report.
Policy shifts have led to an increase in the reshoring of biomanufacturing facilities. More than $270 billion in sector investments are planned for the next five to 10 years and JLL said there has been a significant uptick in touring activity for built biomanufacturing space in key markets.
Direct relocations are down 61% as many users are electing to remain in place, and shorter leases are growing in popularity. Seven-year-plus leases are down 69% from a mid-2022 peak. Subleases are also plentiful, JLL said.
Market dynamics are allowing tenants to be choosy about submarkets and buildings. In Boston, the Bay Area and San Diego, newer, purpose-built assets are seeing the largest share of leasing. During the past two quarters, availability in this segment has dropped 130 basis points while other assets continue to have new space added, said the report.
“For tenants relocating premises across the U.S., location matters,” said the report. “Core, long-established submarkets are seeing an increasing share of deal volume.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
