Shrinking Lab Leases Lead To Real Estate Reappraisal In Life Sciences

The real estate and funding slowdown proliferating markets across the country has reached life sciences, decelerating the leasing market. In today’s supply-heavy environment, even the deals that are getting done have noticeably downsized, with small leases rippling throughout the lab real estate market. 

The trend is leading to a tenant-friendly market and a re-evaluation of strategy by life sciences landlords.

“[Alexandria Real Estate Equities] wanted to see your cap table before you saw the building before. That’s not the case anymore,” Savills Executive Vice President and North America Life Science Practice Lead Austin Barrett said. “You have a tenant who wants to lease 5K SF, 10K SF, you’re going to get a meeting. You’re going to have options.”

The biotech leasing ecosystem is fueled by early stage firms that want smaller leases for shorter terms, Barrett said. Tenants are trying to stretch their dollars in an uncertain period, which means reduced resources for real estate and growth hindered by fears of downsizing and extending beyond their runway.

The difference between 2021 and today is stark. During the peak of the pandemic boom, larger tenants dominated, with top leases routinely exceeding 100K SF. Barrett estimated that 30% to 40% of new tenants then took up 75K SF or more. Now, leases of that size represent less than 5% of the market. Half of recent Boston lease deals have been for less than 12K SF, he said. 

Boston is on track for the fewest deals signed in a decade, and 80% of those have been early stage companies needing less than 30K SF, JLL found. In San Francisco, 76.2% of leases through the third quarter were 30K SF or less, with just about 70% of active tenants seeking space of similar size. 

Boston, which once had demand for more than 8M SF, registers a quarter of that, Colliers Research Director Jeffrey Myers said. Part of that is because firms like Eli Lilly have already taken huge buildings, meaning the smaller firms and spaces are what remain active. He predicted that more than half the markets nationally will see rising lab vacancies this year. Vacancy is 6.6% nationwide.

Larger landlords like Alexandria have bought into the so-called megacampus model and can often accommodate smaller tenants. In the long term, the model may not work as well as it did in the past. New startups with 10K SF might make a jump to 35K SF instead of 50K SF next time they hit a milestone. But it is still a formula for incubating talent, science and larger leaseholders. 

“Landlords with sizable, big blocks of vacancy and new construction that will break ground a little later in the cycle are probably having to rethink their strategy the most,” Myers said. “They’ve been thinking, ‘We’re going to be able to land one or two big tenants to fill up our buildings.’ But those tenants aren’t in the market like they were before.”

Prepping smaller spaces for tenants who need flexible, short-term leases of 5K SF to 15K SF — the business model of firms like SmartLabs and BioLabs — will help specialty operators continue to scale, Barrett said.

He said those firms will look to grow and open in other markets. SmartLabs plans to open a new facility in East Cambridge, Massachusetts, in 2024. But there is also a challenging year coming up for that model, Barrett said, due to the amount of sublease space he expects to hit the market.

“As firms feel pressure from the board to shed space and there are limited expectations on a recovery, that’s going to drive more readily available space,” Barrett said. “So that’s ultimately when the SmartLabs and the BioLabs get hurt.”

The demand for smaller space is putting extreme pressure on markets with a shortage of smaller lab space. In New York City, Yasmeen Ahmed Pattie, founder of East Egg, a firm that offers consulting and strategic planning for firms seeking lab space, said startups that used to get $50M rounds are seeing $5M, meaning they can hire a handful of workers instead of a dozen. It is challenging to accommodate any NYC-based firms looking for 5K SF leases in a market where most buildings start at 10K SF. 

“A couple years ago, startups would look at 10K SF and think, ‘No problem. Big rounds are coming,’” she said. “Now it’s harder to get funded, so the void of not having smaller spaces is that much more pronounced.”

Credit, financing and venture capital are still relatively harder to come by, but Barrett said those who have credit can benefit from this market. Smaller firms will have more than a dozen options for smaller spaces and won’t have to wait until they become available, a common occurrence in 2021 and 2022 that meant defensive leasing and startups put on hold without labs. That lead time should strengthen their ability to research without as much of a rush and could prove beneficial. 

With sublease space predicted to surge in key markets, such as the 2.6M SF in Boston, there are even fewer reasons for small firms seeking more restrained real estate deals to look at new buildings.

In Boston, sublease activity accounted for 23% of the 2.1M SF of lease activity this year, according to CBRE. In the five years prior, it accounted for 5% of all leasing activity. At sublease spaces, “​you're able to plug and play,” Myers said, which makes it much more cost-efficient for startups seeking to innovate amid cost pressures.