Life Sciences' Real Estate Predicament: Too Much New Space, Not Enough Of The Right Kind

How real estate is able to weather the downturn currently affecting the life sciences sector over the coming year will play a role in the industry’s development across the U.S., experts said onstage last week at Bisnow’s New York Life Sciences and Biotech Conference.

Life sciences is still in a fledgling stage in many U.S. markets, resulting in a lack of midsized spaces for startups to grow into. But many landlords who built aggressively to respond to a surge in demand in 2021 and 2022 have large vacancies to fill and many of the same financing challenges as the companies they hopes to secure as tenants. The result is falling rents while the sector grapples with the discrepancy between the types of spaces available and the types of spaces that tenants really need. 

“There's a little bit of an arms race,” Travis McCready, JLL’s head of life sciences and industries for the Americas, said at the event held at Elevate Research’s West End Labs. “We're seeing a very hypercompetitive market for tenancies today, including a little softening on rent.”

There is an increasing amount of new life sciences space coming online across the U.S., with supply expected to expand by 20% in the next two years, according to CBRE’s 2023 life sciences outlook. The industry’s growth is spreading beyond its longtime homes and into emerging markets including Atlanta, Dallas/Fort Worth and Nashville.

In New York City, Taconic subsidiary Elevate Research Properties completed its West End Labs development this month, delivering 400K SF to the Upper West Side. More is on its way in NYC from Elevate: 500K SF in Kips Bay, plus 322K SF at its Hudson Research Center and its 200K SF Iron Horse Labs development.

Other cities with nascent life sciences industries are also adding inventory. Trammell Crow and Beacon Capital are developing the 302K SF Hyde Park Labs in Chicago, adding to the city’s almost 2M SF of inventory. Trammell Crow is also active in Atlanta, teaming up with Georgia Advanced Technology Ventures on an under-construction, 365K SF lab and office tower.

Longfellow’s the Hub, a mixed-use development that includes retail and residential space, is expected to deliver 265K SF of lab space to Durham, North Carolina, by Q1 2025. In Houston, the 515K SF medical research and lab portion of Texas A&M and Medistar Corp.’s Innovation Plaza is expected to deliver in 2024, The Real Deal reported.

But tenant demand is beginning to slacken compared to the pandemic years, following almost a year of venture capital’s retreat from funding startups amid interest rate hikes. At the end of the first quarter, there was 40.3M SF of lab space under construction in the biggest U.S. life sciences hubs, just 26.1% of which was pre-leased.

In the second quarter, Boston, the Bay Area and San Diego recorded a combined 1.5M SF of negative net absorption according to CBRE, a result of demand for space shrinking and leasing slowing.

“The calculus for building on spec has changed radically in the past 24 months. It is a significantly more challenging proposition to sit down with your capital partners,” McCready said. “Many geographies in the United States have reached equilibrium, or are approaching being overbuilt.”

Emerging markets may also be in for some discomfort as more buildings come online. CBRE’s 2023 Outlook report for the sector placed Houston’s inventory at 1.6M SF with a further 854K SF under construction, but demand at just 70K SF. But Houston’s 11.7% vacancy rate was far tighter than Chicago’s, which came in at 29.6% with a further 456K SF under construction.

Opportunity still exists for developers due to a gap between what’s available versus what a lot of tenants really need, said Susan Rosenthal, New York City Economic Development Corp.’s senior vice president for life sciences and healthcare.

“[Tenants] don't want to go from four benches at an incubator to 25K SF — they need to go first to maybe 5 or 10K SF,” Rosenthal said. “That's a really hard proposition for developers, because they're still early stage for their risky tenants. At the same time, if you want that pipeline to the later tenants, we have to work together on that.”

Because life sciences tenants need to move fast when it comes to finding new space, developers wind up needing to anticipate demand before it emerges, Taconic Investment Partners Senior Vice President for Life Sciences Matthew Malone said. 

“Companies are coming out of incubators space and needing laboratory space in a very quick time frame. They're getting a Series A, they're saying, ‘I've got to move on, I need to grow, where can I go?’” he said onstage. “We’re enabling those companies to stay and grow, speed to market right into our buildings.”

The solution, Syska Hennessy principal John Bilotta said, is building life sciences spaces to be as flexible as possible. 

“Creating larger vertical chases driving down through the building is taking away leasable space, which I know is not anything [developers] want to hear,” he said. “But to create the most flexible space for the spec lab's building, we have to create that flexible environment.”

That flexibility may be especially important in cities like New York, where labs might have to be built more vertically to justify the cost of construction.

Lendlease is one company changing construction strategies to allow for more flexible uses in its life sciences developments. Prefabrication and modular construction are one way forward for vertical developments, said Lendlease General Manager for Life Sciences Construction Anthony Giuliano, as doing so allows the developer to run its utilities via extra panels in the ceiling space instead of sacrificing floor space to bulky shafts.

“It used to always be in the hallways, with lab closets with all this dedicated space for all these valves,” Giuliano said. “[We will] put in some extra panels in the ceiling so you have flexibility, so office space could actually turn to lab space in the future.”

Developers thinking longer-term also need to consider flexibility, HDR Associate Education and Science Principal Sally Lee said. Even if building something for a specific tenant, developers thinking beyond the duration of a lease need to think about how a building could be adapted once a lease expires.

“This economy's sort of pushing developers to have anchor tenant in hand before they go for a building, sometimes the speculative nature of things is quite volatile,” she said. “Can this floor be converted to multitenant in a way that's still compliant with code, egress and have quarter structures that makes sense? There's flexibility-proofing that needs to happen.”

A flexible split in the ratio of office to lab space in a development is also important, Malone said. Elevate is currently addressing that question by building plug-and-play space that can be changed based on whether a tenant needs a 50-50, 60-40 or 70-30 split between labs and offices, he said.

Still, flexibility can present its own complications. Brooklyn Navy Yard, with its planned 50K SF biotech hub, is in a good position to provide labs of differing sizes and capacities including wet labs, dry labs and material life sciences, Brooklyn Navy Yard Development Corp. Vice President for Development Abdo Allam said.

But the BNYDC is a not-for-profit and has wider floor plates than most other life sciences buildings or potential projects in space-constricted NYC, and developers elsewhere in the city, or in other cities with limited space — like Boston or the Bay Area — face tougher decisions.

“You want the most optionality,” said Allen Matkins partner Martin Togni. “But at some point, you have to go down more one road than the other.”