Bay Area Lab Rents Come Back To Earth In First-Quarter Fall

Life sciences rents in the Bay Area plummeted by 28% in Q1 2023, but one analyst says it’s more of a correction to a previously hot market and a reflection of macroeconomic headwinds as opposed to a sign of trouble.

Average asking rents on a triple-net lease reached $4.10 per SF, according to Transwestern's Q1 report.

“Demand for lab space was weak for the same reason that demand was weak overall in the commercial real estate market,” Transwestern Bay Area analyst George Entis said. “You have high interest rates, recessionary fears that have locked up capital markets and with credit tightening down and the cost of debt increasing, it’s pushing a lot of companies into cost containment mode.”

Companies tightening their belt include venture capital firms, particularly those focused on technology broadly and those in the life sciences market. The latest report from Transwestern indicates that VC funding has fallen precipitously to levels not seen since 2018. When compared to the first quarter of last year,  investment dropped by more than 50%. 

“The capital markets are just locked up right now,” Entis said. “They are going to press pause until the situation improves.”

There is a chance that things could turn around in the next few months, if the Federal Reserve indeed slows or stops its rate hikes and inflation continues its slow but steady fall. Venture capital firms will be willing to put their money to work once the overall environment shifts, Entis said. In the meantime, he noted there is a substantial commitment from the public sector to life sciences, which could help stabilize rents by offering companies more confidence and capital to grow.

The National Institute of Health continues to increase spending in life sciences, pouring $30.2B into the sector in 2021, a 3% increase over the previous year. It also marked seven consecutive years in which the NIH increased the numer of grants it awarded to companies that are working on gene therapies, personalized medicine, cell therapy and wearable devices.

Many of the companies in those areas, including several startups, are located in the Bay Area. 

“The Bay Area already has an established ecosystem,” Entis said. “It has all the layers and the major research universities.”

Entis also said while the plunge in rents in the first quarter was steep, prices this year are coming off record highs.

“Life science rents went up over 40% from early 2019 to early 2022, so of course that’s unsustainable,” he said. “The markets are recalibrating, but you have to think in the long term, there will be demand for the sector.”

New product coming on the market has also contributed to the decline, pushing vacancies up to 8.2%, a trend that's likely to continue as the roughly 5M SF life sciences development pipeline reaches completion in the next year or two.

“Supply expands, demand stays weak because of the capital markets and you will likely see continued downward pressure on rents,” Entis said. “As soon as the capital markets environment starts to change, I think the life sciences sector is going to follow.”