‘Not Seeing Any Activity At All’: Once-Hot Life Sciences Leasing Market Freezes

The life sciences industry, one of the pandemic's fastest-growing commercial real estate sectors, is now facing a sharp slowdown in demand as biotech firms grapple with economic pain.

Developers in the industry's largest hub, Boston and Cambridge, say they are having a hard time leasing their buildings as growth has begun to drop off in recent months, executives said Tuesday at Bisnow's Boston Life Sciences Real Estate Conference at 33-41 Farnsworth St.

As macroeconomic factors put pressure on small biotech companies to re-evaluate growth strategies — and as one of the sector's biggest banking partners has collapsed — the biotech market in Boston and around the country is facing a daunting challenge: leasing up the available space and the millions of square feet of new construction that are about to enter the market.

“There’s no doubt that demand is significantly off,” Related Beal Executive Vice President Stephen Faber said at the event. "We are essentially not seeing any activity at all in a number of our projects, both existing buildings with space and the development sites.”

Related Beal, the local arm of national real estate giant Related Cos., has several major projects in the Boston area: the 1.4M SF Innovation and Design Building, which it owns in partnership with Jamestown; the 344K SF 22 Drydock Ave., which is fully leased by Vertex Pharmaceuticals; and the 275K SF One Kenmore Square. The firm also filed a proposal last month for a new 99K SF life sciences building at 6 Elkins St. in South Boston.

In the first three months of the year, Cambridge's lab market has recorded net absorption of 6K SF, according to new quarterly data from CBRE. This was down from 51K SF in the fourth quarter, which already marked a slowdown from the rest of last year, with Cambridge recording full-year net absorption of 1M SF. 

In Boston, net demand ticked up from 38K SF in Q4 to 51K SF in Q1, according to CBRE. But those quarters were also much slower than the prior pace, as Boston recorded 773K SF of net absorption for all of 2022.

CBRE Director of Research Suzanne Duca said in a statement that leasing activity in the market is reverting to previous norms after the pandemic-era boom. 

Daniel McGrath, director of asset management at Berkeley Investments, said leasing agreements are taking longer to close and tenants are being more particular about the space they look for.

“Eighteen months ago, if you talked to a broker or two, they might say there was 7M SF of demand for life sciences or lab-type tenants, but now if you look at a report, it’s a million or million and a half,” McGrath said.

Boston life sciences companies laid off more than 3,000 people last year, putting downward pressure on lab demand at the same time that the market also saw its largest increase in inventory, with 6.2M SF coming online, according to Newmark’s Q4 life sciences report. This has led some to believe that leasing activity will continue to slow.

“The days of shooting fish in a barrel are over,” Faber said. “Proactive leadership in representing your client today is what it’s all about. I think that there is an absolute re-education of the life sciences brokerage to have to realize that they now need to be engaging directly with lab tenants on a regular basis in order to try to generate business.”

Although the life sciences market nationally finished 2022 stronger than expected, according to CBRE, recent economic events have sent shockwaves through the sector. The collapse of Silicon Valley Bank, a big player in financing biotech startups, has left experts in Boston and around the country worried about the health of the startup scene. 

Bill Hunter, executive managing director at Lightstone Life Sciences, said that 79% of his company’s clients banked with SVB before the collapse. He said that it left a massive hole in the sector's financing market.

“It’s a glaring illustration that funding biotechs is not easy,” Hunter said.

SVB was one of the largest institutional backers of biotech startups, helping to finance, invest and educate the companies. With its collapse, many wonder who will take its place or if it will cause long-term pain for tenants moving forward.

“The long-lasting effect is psychological,” JLL Americas Head of Life Sciences Travis McCready said. “We all know that Silicon Valley Bank played an enormous role as a banking institution, figuring out how to underwrite biotech. They’ve been at this for a couple of decades. They were the leaders of all of the institutional banks in really figuring out the mechanisms necessary in order to bank this risky asset class.”

McCready said that without SVB, there aren't as many institutional players willing to finance riskier companies, and there will be some pain moving forward. 

“Credit is going to tighten, and there will be less institutional bank liquidity,” McCready said. “That’s just a reality, not just with Silicon Valley Bank but First Republic and the entire banking crisis, it’s just going to get a little bit harder for some of our clients.”

National funding for life sciences companies dropped 28.2% last year, according to Savills, as investors are more hesitant to fund research from smaller biotech startups. This has led to a drop in leasing activity in industry hubs like Boston and Cambridge as these smaller companies look to secondary markets.

“We needed a little bit of a correction,” said Chris Gorczyca, corporate managing director for Savills. “The plus side is companies that are still in growth mode will have opportunities.” 

Gorczyca said that tenants, especially smaller companies that didn't have the space to grow a year or two ago, now have more options and can be more particular with new and sublet spaces.

“We have some clients now that are still going through the battle of, 'How much space do we need? What is the right size? How do we get the office folks to come in just as much as the lab folks?'” Gorczyca said.

For many developers, although they face slowing demand and a heavy supply pipeline, they are confident about the market's long-term outlook, as Boston and Cambridge continue to be major hubs for Big Pharma and growing companies alike.

“Over the long term, the demand drivers are still here for Boston," said Jason Tilley, senior vice president of development for The Davis Cos. "We've got to get through the next couple of years, for sure, as that supply pipeline comes in.”