For Lab Real Estate, Shift To Smaller Leases Means Longer Supply Glut

A surge in venture capital funding in the first quarter of 2024 has created optimism within the life sciences real estate industry with the hope that more funding will lead to increased leasing activity during a historic supply glut.

But data suggests that while leasing has seen an upswing, lease sizes remain relatively small, suggesting that it will take a substantial amount of time for activity to truly chip away at the expanding vacancy rate. Nationally, the lab vacancy rate remains at 16.7%, per CBRE, with an estimated 21M SF of space still under construction. JLL estimates 15M SF could deliver vacant by the end of the year.

“It’s funny alchemy to see venture capital partners get back into the pool, and to see the amount of space being taken and lease sizes retrenching in the other direction,” JLL Head of Life Sciences Markets Travis McCready said.

The majority of activity has been for leases of 30K SF or less, he said. 

“It’s not a relationship one would expect.” 

While life sciences venture capital funding surged 30% in the first six months of the year, according to Savills research, it’s important to understand just where that money went. Right now, much of this funding remains focused on late-stage startups that have hit clinical milestones or larger megarounds. 

That funding isn’t necessarily trickling down to smaller firms relative to recent boom years, which means those firms continue to struggle. Conservative financial strategy remains the most important driver of smaller startup leases, and that mindset is driving leasing decisions, even if activity may be increasing, CBRE Advisory Life Sciences Practice Lead Matt Gardner said. 

Even considering that there tends to be a six-month to one-year gap between a funding event and new lease — which means the recent funding upswing will hit real estate markets towards the end of the year — there’s still less appetite for excess space.

“A company that, three or four years ago, may have said yes to 100K SF and not worried about the excess and decided to sublease, might now simply not place that bet,” Gardner said. “They're taking 20K to 30K SF for themselves and not overdoing it.” 

The supply imbalance has also led to shorter-term leases, McCready said, hovering around five years on average, down from just over seven years in 2021, per JLL. And startups, burned by the last few years, remain focused on cutting costs and making do with smaller spaces. Savills found smaller leases have been the primary driver of lab real estate demand nationwide in 2024.

These trends have also driven a marked increase in support for outsourcing things like research, contract development and manufacturing organizations, which are also poised to grow in the near term. 

“You can actually comfortably continue the scientific enterprise without immediately having to add more space,” said McCready. 

But there are some bright spots, particularly in the incubator market, which has seen significant recent growth, according to CBRE’s Gardner. Whereas the market tended to be publicly funded in the past, there’s been a recent wave of new private incubation spaces catering to smaller firms and the desire to stay in smaller spaces. 

Several new projects, including Portal, a lab operator focused on Chicago and Atlanta, B+Labs by Brandywine in Philadelphia, and organizations like Cambridge Innovation Center, are coming to the market. At the same time, developers look for ways to alter existing developments or spaces to include additional incubation space for startups, Gardner said.