'2 Steps Back': Boston's Life Sciences Market Sees Rise In Sublease Listings, Vacancy

Boston’s life sciences market continues to feel pain, and researchers and brokers say it could be some time before it is back to full health.

Layoffs in the biotech industry accelerated last quarter, and companies continued to cut their real estate footprints and put hundreds of thousands of square feet back on the market, new reports from CBRE and JLL found.

The Greater Boston life sciences market recorded 445K SF of negative net absorption last quarter, its second consecutive quarter of occupancy losses, as more companies added sublease space to the market, according to CBRE’s Boston Metro Lab report. The driving factor for this was the lack of funding and capital for these companies, which has led them to re-evaluate both their workforce and their footprint. 

In the third quarter, tenants put more than 400K SF of net new sublease space on a market that also saw 1.5M SF of new space delivered vacant, according to JLL. With these additions, the vacancy rate in Boston rose to 17.6%, according to JLL's report, which said it will likely reach 20% in the next quarter.

“It’s a market where sometimes it feels like we’re one step forward and then two steps back,” JLL Executive Managing Director Bob Richards told Bisnow. “Something gets snapped up and then two other things come on the market.”

In the third quarter, 11 of the 28 companies that announced layoffs also added sublease space to the market, which CBRE's report said seems to suggest “the biotech industry comeback may still be several quarters away.”

For East Cambridge specifically, negative net absorption stood at 304K SF last quarter, with sublease availability reaching 6%. Although the leasing market was relatively active, overall availability jumped to 13.9% in the submarket, according to CBRE.

“I don’t think we are out of this quite yet,” CBRE Research Director Suzanne Duca told Bisnow. “Based on what we've been seeing from some of that smaller demand that seems to be percolating around now and picking up, there are some signs that there's activity out there, but I still think there’s still some muddy waters to kind of look for the next couple of quarters.”

The largest amount of sublease space put on the market in Q3 was from 2seventy Bio, which in September said it would slash 40% of its workforce after declining sales of its only commercial drug. The company added a full-building, 262K SF sublease availability at Alexandria Real Estate Equities' 60 Binney St. to the market, according to CBRE. 

There were also multiple companies that closed their doors for good. In August, BAKX Therapeutics announced it was shutting down, laying off 12 employees and closing its Watertown office, the Boston Business Journal reported. In September, Lyndra Therapeutics cut down its workforce by 23% and closed its former 14K SF headquarters in Watertown to consolidate operations in a facility in Lexington. 

Richards said the market is seeing a slowdown from the historic amount of demand it saw in previous years, and with the 2.4M SF of sublease availability on the market now, it will take time to see that all leased up.

“It’s not the crazy 2019 and 2020, 8M SF of demand, one choice if you’re lucky market,” Richards said “With the amount of supply that has come on the market and the amount of existing subleases on the market, even when it comes back, it’s going take awhile to really solidify.”

The rise in sublease space isn't only because of the accelerated pace of layoff announcements last quarter. Companies have been hesitant to take space as capital has dried up and macroeconomic pressures persist. 

“The same issue that’s driving the overall life sciences market not only locally but nationally is the difficulty in raising additional equity in companies,” Richards said. “They want to try to monetize that or certainly cut their burn to help them extend their runway.”

Companies' venture capital funding stood at $1.4B in the third quarter, down from $2B in Q2 and $1.5B in Q1, according to CBRE. This has led companies to be less focused on commercial real estate growth and more on cutting where they can to extend their production timeline.

“The pace of the subleases has increased for a number of reasons,” CBRE Senior Vice President McKenna Teague said. “We continue to see groups that may or may not have hit their scientific milestone and produced the data that got investors excited struggling to raise additional capital.”

Although JLL reported a bump in tenant requirements with 2M SF of demand on the market, it said that hasn't translated into signed leases. The third quarter's 214K SF of leasing activity was the lowest in the last decade, according to JLL. 

With more space available in the market, midsized companies that have historically not been as active as early stage and Big Pharma are starting to look at space, JLL reported. 

Not all was gloomy for the Boston life sciences market, as some promising announcements shined a light on the region as an “epicenter for life sciences," Richards said. These included the Advanced Research Projects Agency for Health choosing Cambridge as its investor catalyst hub and Northeastern University being chosen to lead research for a national center focused on detecting new infectious diseases.

On top of that, Massachusetts companies Apogee Therapeutics, Curiox BioSystems and Neumora Therapeutics launched their initial public offerings last quarter. This marked the first wave of IPOs this year, according to JLL.

“Those are just good for longevity,” Duca said. “It’s still yet to be seen what that will drive in terms of future demand, but the fact that they’re being headquartered here is just kind of the continued growth of the whole ecosystem.”

Rents saw a 1.6% decrease last quarter, but Richards said it wasn't as bad as expected and he doesn’t expect to see a dramatic decrease anytime soon.

“I think rents have actually held better than I would have expected,” Richards said. “But what very definitely will increase is tenant improvement allowances or delivering spaces that a company needs.”

Brokers and researchers said they hope the market can get back to the more balanced times before the pandemic. Teague said she thinks more founders of life sciences companies are starting to move toward a conservative growth strategy to avoid oversaturating the market.

“Hopefully, over time, it means that landlords are going to get clients that have a bit more creditworthiness and have been vetted a bit more versus when there was just a sugar high in 2020 and 2021,” Teague said. “The market was in a great position in 2018 and 2019, so if we can get back there, that would be a great day.”