How Life Sciences Startups Have Changed Their Leasing Strategies

Life sciences startups looking for real estate are entering a vastly different market than existed in 2022, and they have changed their leasing strategies as a result. 

Companies are more hesitant to leave incubator spaces and sign new leases, and they are delaying expansions and taking smaller spaces to preserve capital as funding has remained slow, industry experts said last week at Bisnow's Boston Life Sciences Conference at the Seaport Hotel.

"We've seen that people really want to extend their runway by staying within that [incubator] system as long as possible," LabCentral Chief Operating Officer Maggie O'Toole said. "The bottom line, when you boil it all down, it is more beneficial to stay in that incubator space."

LabCentral is an incubator operator with more than 225K SF in Cambridge and Boston. O'Toole said that companies in their program graduate at much slower rates, taking 24 to 36 months to leave for their own spaces, compared to 18 months previously.

She said that companies looking to sublease space outside of these incubators meet with the reality of how expensive it is. And with the longer graduation times and reluctance from tenants to leave incubators, landlords are finding it harder to attract tenants to traditional lab spaces.

"What can that space do for them to attract them? Because obviously the longer they stay, the longer they are actually stalling," CannonDesign Senior Vice President Tzveta Panayotova said. "What services do we need to integrate in order to make people feel comfortable? Because ultimately it comes down to, are they comfortable leaving the nest?"

The bulk of tenants in the Greater Boston life sciences market are looking for space under 20K SF, according to JLL's first-quarter life sciences report. These deals are taking longer to close and taking up 30% less space compared to two years ago.

"I think the square footage numbers are realistically declining a bit, too, as these companies do raise money," said Ben Bradford, head of external affairs at MassBio. "I think they're being a little more conscientious of how they spend it. Spend it on the R&D, spend it on that human capital, as opposed to spending it on square footage."

The total square footage of life sciences leases signed in the Boston area surpassed 6M SF in 2021 and 2022, but last year it was less than 2M SF, according to JLL.  

Leasing activity in the region picked up in Q1 compared to last year, with more than 650K SF committed, including Takeda's 223K SF renewal in East Cambridge, according to JLL.

Total life sciences vacancy in the Boston area rose to roughly 25% in Q1 and is predicted to rise to just under 30% regionally by the end of the year.

Seismic Therapeutic moved into 250 Arsenal Way in Watertown after tripling in size from 14 to 47 employees, the Boston Business Journal reported. The young biotech company moved out of its space at LabCentral 238 in Kendall Square.

"We have been really careful about not overhiring, making sure that we're really conscious about our spending and try not to have 'champagne taste,' as my CEO would like to say, in terms of preserving our runway as much as possible," said Maude Tessier, chief business officer of Seismic Therapeutic.

John Sullivan, partner at architecture firm SGA, said that the types of tenants landlords are trying to attract are different than they were two to three years ago.

"I think that at this moment in time, that middle ground may be on pause, and we're thinking about the younger companies that are getting some of this funding," Sullivan said. "There's a million square feet of sublease space on the market in Boston and Cambridge. That's the space that's going to work for these small companies."

The same trend has played out nationally, with smaller biotechs looking for leases smaller than 10K SF and more flexible options to preserve capital, Bisnow previously reported. The switch has also led to more opportunities and interest in incubator spaces.

CORRECTION, APRIL 3, 6:20 P.M. ET: A previous version of this story used an incorrect title for Ben Bradford. The story has been updated.

Flexible life sciences developer SmartLabs, which specializes in smaller spaces, won $48M in Series C funding in January. In March, Chicago-based life sciences incubator Portal Innovations entered Boston and signed a 58K SF lease at Beacon Capital Partners' Southline development in Dorchester.

Many of the projects that broke ground in the later stages of the pandemic-era life sciences boom still have large blocks of space available, leaving tenants with more options to move into spaces quickly than they had two years ago. 

By the end of this year, the Boston area will have added 22M SF of life sciences space over three years, growing the market's inventory by 67%, according to JLL. 

Part of the market shift has been caused by a slowdown in the funding to help grow companies, especially in the middle stages of their expansions. 

Total venture capital funding to Massachusetts-based life sciences companies was $7.7B last year, down from $8.7B in 2022 and $13.7B in 2021, according to MassBio.

Seed funding stood at $10M for Massachusetts-based companies at the end of 2023, down from $11M in 2022. O'Toole said funding deals are taking longer to close, leading to more hesitation in leasing. 

"We see tremendous activity in the early stage," LabCentral's O'Toole said. "The seed money is still there. Companies are still applying. Our application pipeline has not diminished. But what we see is that companies are staying at that middle range, so they're not able to close their Series A and B as quickly as they have in the past."

Nick Cassaro, vice president of life sciences development at BGO, said tenants can explore options on the market rather than taking whatever space is available.

"Tenants 18 months ago were looking for space, and they didn't have their funding yet," Cassaro said. "They needed to get in because they knew they were going to get their funding up to a certain point. I think today, people are touring and looking at what they can afford based on a range once they get their funding."