Nearly A Third Of U.S. Lab Space Is Available For Lease As Supply Drowns Demand

The overall availability rate for life sciences space nationwide reached 30% in the third quarter, according to a new report from JLL, and it is expected to continue climbing as the industry works its way through a supply glut over the next six to 12 months.

The report predicts rents will continue dropping and that it could be years before local markets work through their supply backlogs.

“There’s no way through the math that’s attractive for life science owners right now,” JLL Executive Managing Director Chad Urie said. 

Rents are down 9%, back to where they were in the first quarter of 2022. An analysis comparing the vacancy rate now to the spikes in vacancy rates during the Global Financial Crisis and dot-com bust found that right now, rates are spiking much higher and faster. It is a down cycle “markedly different than any other this sector has experienced,” according to the report. 

To put the massive gap between supply and demand in perspective, the report says the market would need 32M SF of absorption over the next five years to approach equilibrium, or when supply and demand are roughly equal. At the rate of leasing over the last 18 months, absorbing that much space would take 20 years.

In Boston, the country’s most prominent life sciences market, JLL predicts life sciences leasing activity won’t return to pre-2020 levels for four years.

Even the data that points to positive signs in the biotech industry, such as increased venture capital investment, aren’t nearly as rosy for real estate when analyzed more closely.

“You have two trend lines. The industry sector as a whole is moving in a positive direction. There’s a lot of reasons to be excited about that,” Urie said. “But I think the trend line for the real estate side of the industry is moving in a negative direction and will likely continue to move in a negative direction for at least the next 12 months.”

Increasing venture capital investment has been concentrated on larger firms or those with more advanced approvals and products, meaning smaller startups are staying longer in incubators and being conservative about taking space. 

Fundraising rounds of $100M or more dominate the market, representing 60% of venture funding, with early-stage and smaller rounds running at half the volume they did in 2019. 

“The concentration of funding toward the few mega-rounds is playing a part by tempering real estate demand that has historically been driven by the many,” the report says.

And even the increases seen in overall VC funding can’t mask the fact that it takes a lot more funding to rent space these days. JLL found that leasing 10K SF takes 50% more capital today than it did two years ago. Combined with a larger trend toward smaller leases, both in terms of amount of space and length, it suggests the recovery and absorption of massive amounts of available space may take longer than expected. 

The forecast wave of Big Pharma merger and acquisition activity hasn’t panned out in spurring additional leasing activity. JLL found that in five years of data across the big three markets of San Diego, Boston and the Bay Area, acquisitions led to a reduction in space 25% of the time. And 75% of the time, M&A resulted in retention or expansion, but “most firms retained the same space,” according to the report. 

Big Pharma firms also leased much less space in 2023 than in 2022, and 67% of 30 large Big Pharma real estate moves over the first half of 2024 resulted in a reduction of space. 

There also has been a severe slowdown in transaction volume, according to a new CommercialEdge report on the sector. In 2022, there were $6.2B in life sciences sales across 62 properties. Last year, the volume fell to $1.8B in deals across 20 transactions. This year, there have been three deals.  

There is a divide between established and newer development players in this challenging landscape, Urie said. New players, who tend to be late-cycle entrants, likely bought at peak pricing and have delivered or are still delivering space into a supply glut. They are both exposed and constrained. More established players have been more cautious and halted development. While they may have empty space, they are better prepared to wait out the moment.

“The question is, what kind of washout are we going to look at?” Urie said. “There will be washout. There will be consolidation. But there is an abundance of capital to buy lab buildings opportunistically.” 

The report says different markets and submarkets will recover more quickly and that converting labs to other uses might hasten the return to normalcy. But despite the recent energy and enthusiasm around the Federal Reserve’s interest rate cut, life sciences real estate is set up for some painful quarters.