Big Pharma Becoming ‘Saviors’ Of Boston Lab Market As Biotech Pulls Back

After years of rapid growth, Boston’s biotech industry this year has faced plummeting stock market values and macroeconomic pressures that could slow its leasing activity.

Several public biotech companies have laid off employees, and many have pulled back on real estate growth this year amid pressure from investors and looming threats of a recession, experts said last week at Bisnow’s Greater Boston Biotech event.

“There's no doubt right now the industry is going through a challenging time,” JLL Managing Director Robert Coughlin said at the event. “Their boards are cutting back, they're trying to extend capital, decrease burn. Decisions are being made slower, and companies that took on additional space to grow into are not.”

Through the first six months of this year, small- and mid-cap biotech stocks were down 34%, compared to the 20% drop in the overall S&P 500. 

While smaller biotech companies are struggling, experts said the largest pharmaceutical companies have returned from a pandemic pause and are gobbling up big blocks of space this year. This could help counteract the potential slowdown of biotech leasing and help fill the massive amount of lab space that developers are building in the region. 

In Boston alone, more than 30M SF of new lab space is either under construction or announced, about half of the overall metro area pipeline, according to Colliers’ Q2 report. Boston and Cambridge both have a vacancy rate of less than 2%, while vacancy in the suburbs is about 5%. 

Big Pharma companies have signed huge deals for space in the most sought-after locations in Greater Boston. Takeda Pharmaceutical Co. signed a deal in June for 600K SF of research and development space in Kendall Square. In May, Vertex Pharmaceuticals signed a full-building, 344K SF lease in the Seaport. In October, Moderna signed a lease for 462K SF in Kendall Square.

The Boston-area lab market has experienced 2.1M SF of positive absorption through the first half of this year, according to Colliers, and Colliers Executive Vice President Curtis Cole said Big Pharma companies have been driving that demand. 

“One of the saviors that have occurred, in the institutional world, is Big Pharma,”  Cole said. “It pulled out of the market in 2020 because of the uncertainty, but they’re back, and we should expect that they will boom. … They are now in the market big time and we expect more Big Pharma deals. They are flush with cash.”

While Big Pharma companies are expanding, experts say that growth isn't occurring across the life sciences industry.

Smaller publicly traded biotech companies that are earlier in their growth and don’t have as much established revenue and profit as Big Pharma are facing more pressure, and experts don’t foresee them continuing to grow their footprints. Coughlin said many companies are now looking to give back space.

“We've got about over 1M SF of subleased space on the market right now that's built out that didn't exist last year,” Coughlin said. “It’s not a great thing overall for the real estate industry.”

Since January, there were 1,098 layoffs in the biotech industry alone, according to JLL’s Boston Job Market report. Some of the biggest layoffs included 155 people at Bluebird and 143 at Acceleron, according to the report. Eisai Co. is reportedly closing its oncology arm, H3 Pharmaceuticals, after announcing it would lay off 88 of its employees earlier this month.

For many small to midsized companies that don’t yet have products on the market, growing investor pressure has led them to burn through cash and try to make discoveries as fast as possible to stay afloat, the Boston Globe reported in April. 

Some believe that this is just a correction period for the industry. The past two years have led to a historically high number of biotech startups, thanks to record venture capital spending and the Greater Boston cluster being one of the most sought-after locations for life sciences. In an area like Boston where the life sciences market is hot, many companies have leased property that they might not need.

“Over the last 10 years the process for most tenants has really been unhealthy from the standpoint of if there's a lack of space, they just gotta grab it,” Cole said. “That's just the availability. They didn't have time to really evaluate anything else.”

Developers are also seeing pressures from inflation and interest rates that make it harder to close deals, leading to more of a reliance on joint ventures. Boston Global Investors CEO John Hynes III said that joint ventures are helping to alleviate some of these pressures by adding equity to the deal.

“The rules of the game will change as we come out of this. The underwriting requirements get tougher,” Hynes said. “It’s not an easy challenge to stitch all of these pieces together.”

For Coughlin, this is just a temporary issue within the industry. The continued influx of venture capital funding means private companies still have opportunities to grow, but investors may be more conscious of how close the startups are to commercializing their discoveries.

“The VCs have already raised a huge amount of funds, so there's going to continue to be new company creation. It's just going to be more vetted science,” Coughlin said. “The sky is cloudy, but it's certainly not falling. Good science, good ideas and good companies will continue.”