‘It’s Going To Be A Grind’: Life Sciences Developers Don’t See Oversupply Problem Ending Soon

The life sciences market is still reeling from a bout of severe whiplash after a boom in development and funding in the early days of the pandemic ground to a halt in 2022. 

Now, with rate cuts on the horizon, tenants are expected to start making moves again, sparking cautious hope in the real estate industry that the downturn is turning around.

But working through the market’s massive amount of supply will be a slow and painful slog, real estate executives said at Bisnow’s International Life Sciences and Biotech Conference Wednesday — even with a number of looming drivers expected to bolster the recovery.

“I think it's going to take longer than we thought it was going to take,” Oxford Properties Group U.S. Head of Life Sciences Chris Mundy said onstage at Bethesda North Marriott Hotel & Conference Center. “It will come back into balance, but I think it’s going to be a grind.” 

Over the past few years, developers in the country’s established and emerging life science markets have completed a wave of brand-new buildings that broke ground when the market was hot but are delivering to a dearth of demand. 

The supply and demand dynamics have created an environment where many new buildings in all markets, including some of the country’s most desirable life sciences hubs, are sitting fully vacant more than a year after completion. 

“So much money came into the industry, and then so many stupid investments from all over came into the industry, which propelled the industry in a way that was just unnatural and unhealthy,” Alexandria Real Estate Equities Executive Chairman and founder Joel Marcus said. “So the rocketship of Covid was like this, and then it came down pretty quickly. And so we've been in a pretty tough bear market.” 

Nationwide, the lab and research and development vacancy was at 16.7% as of the end of June, according to CBRE. The Boston-Cambridge market had a 16.3% vacancy rate, while the San Francisco Bay Area was at 24.6% and San Diego was at 17.7%, according to the brokerage.

“We had a lot of really high-quality developers who came in with a really great product to meet the demand that was coming through,” Ventas Life Sciences Managing Director Brian Newman said. “A lot of that product remains vacant, and we just have to work through that. So not a fun environment to be the owner of real estate with those dynamics.”

Looming interest rate cuts — economists project three 25-basis-point reductions before the end of the year, starting at the Fed’s meeting next week — are expected to help pry the markets back open, leading to investment flowing back in and tenants beginning to feel comfortable leasing more space.

But it will take at least a year to feel the positive impacts of that momentum on the system, panelists said.

“I think it's going to be a tough, you know, year, two years left,” Marcus said. 

He said the impact of the rate cuts will be delayed because the change needs to filter through the commercial real estate world. He said inflation, too, will have to be managed. 

Even when funding to life sciences companies picks up, it takes a while for it to translate into new leases. 

“There's a typical lag period between when that funding comes in until you go out and expand or find new space,” CBRE Executive Vice President Tommy Cleaver said. “Those demand engines we expect to start back up towards the end of this year, towards the first quarter of ’25, and then I think you'll see a shift in sentiment and absorption period.”

The fact that there is pent-up demand is expected to help the market. Tenants have been trigger-shy, panelists said, holding out from expanding their footprints until the investment comes in. 

“A lot of these tenants, again, that have been sitting for a while, they're going to have to make a move,” CBRE Senior Vice President Kevin Reap said. “They're either going to go the wrong way, or they're going to end up having to go the right way. And so once that funding and once that data prints or doesn't, there's a decision to be made.” 

In the meantime, though, owners are trying to get creative to bring in new tenants as they await more monumental moves in the market.

Owners are now shifting to court smaller users, with large tenants being few and far between, and they are retrofitting spaces to adjust to the new dynamic. 

“It's a really unique moment in time where these lab buildings are being delivered that are best-in-class buildings that are going to sit for a while before they get tenants,” SGA partner and Director of Architecture John Sullivan said. “So that pushed us to think about space and buildings a little bit differently.” 

When many of these lab buildings were being designed, owners were planning for 30K to 60K SF tenants, he said. But they’re now trying to woo occupiers more in the 5K SF to 15K SF range.

The companies that are still in the market are carefully counting their dollars and wading in one toe at a time. 

“And look, it's frustrating on our end, right?” Alloy Properties Chief Operating Officer Alicia Hinds said, “We have to be patient and let this play out, but I feel like tenants are certainly conserving cash and just being a little bit more careful.” 

Saving money is top of tenants’ minds, and owners who can offer prebuilt spaces like spec suites or sublease spaces have an advantage, saving the incoming tenant time and money. 

Owners say they do have a lot of those types of spaces available from companies that either took too much and needed to reduce their size or folded completely. 

“What we're seeing in our portfolio is the shell space is seeing probably a fraction of the tours that built-out space is seeing today,” Lincoln Property Co. Senior Vice President Scott Faber said. 

Prebuilt space also helps with a perpetual challenge for life science companies: moving into space with lightning speed. It takes a while to build out these facilities, and companies are typically so focused on their research that they tend to not look for space until it's too late. 

It is an occupiers’ market, and tenants know they have the upper hand, landlords say. As such, they’re asking for more and more, and landlords are willing to shell out whatever they can. 

“When they do come out, they’re asking for a lot,” Hinds said. “They're asking for more dollars in [tenant improvement], more abatement when they're looking at deals.”

That means wherever owners can go above and beyond to accommodate tenants' needs will help them get an advantage. 

Flexibility is one such extra push for tenants who are still contract-shy. 

“When you're in a market where everyone's really willing to deliver those big items, then it gets down to how flexible are you with your lease terms,” Hinds said. 

“You're sort of trying to get into the tenant's mind and help them with their business,” she added. “They've got certain milestones that they're looking to achieve, okay let’s craft the lease around that, right? So having the ability to be flexible with leases is also helping us get deals done.” 

Developers of new projects that don’t sign leases soon may face distress as their construction loans come due. CBRE’s Cleaver said there will be some “losers” in the space, and Boston life sciences executives told Bisnow last month they “fully expect” to see properties go back to lenders. 

But for those that are able to make it through the drought, owners with new supply available will reap the rewards when the market opens up again. 

Multiple panelists said that when the spigot turns back on, it will be fast. And the markets that have product built will be in a good position to take in tenants quickly. 

“It's going to take years, but it's going to be, ultimately, something that's going to feel good for those markets long term, that this supply was delivered, that this is available for those companies that have those approvals and those VC dollars that are there,” Faber said.

The life sciences market is dealing with an oversupply issue, but not with the same fundamental issues that the office market is facing around hybrid work hollowing out its demand. 

“There are certain asset classes and certain profiles within asset classes where you might need a bloody mary or a screwdriver or mimosa to make it through before your flight,” Cleaver said. “I think we just need a Gatorade. I think we need to hydrate and stave off for the next six, 12, maybe 18 months.”