In Nation's Tightest Life Sciences Market, There Is Little Appetite To Build More Space

The life sciences real estate train, which just a few years ago was reaching top speeds, is now pressing down firmly on the brakes.  

The D.C.-Baltimore region is one of the largest life sciences clusters in the U.S., and like its peers, it’s dealing with a slowdown. Biotech companies that were previously growing rapidly were hit last year by rising interest rates, slowing venture capital funding and the collapse of industry backer Silicon Valley Bank, leading to a dramatic pullback in their real estate demand. 

But the D.C. region has an advantage over other top markets during this slowdown, experts say: Developers pursued far less speculative construction during the pandemic-era demand boom. This helped the region maintain the lowest vacancy rate of all U.S. life sciences hubs, according to CBRE, but it has left developers with shovel-ready sites waiting for large tenants that have become few and far between.

“We’re a very healthy market in comparison to other regions, because we did not overbuild,” JLL Executive Managing Director Pete Briskman told Bisnow. “Other top clusters are overbuilt and don't have enough demand to fill their space. We're not overbuilt.” 

The D.C.-Baltimore region’s life sciences sector, mostly concentrated in Montgomery County, Maryland, had a 4.4% vacancy rate across its 13M SF of inventory at the end of the year, according to CBRE’s market report. That’s much lower than the country’s other life sciences hubs, which include an 18% vacancy rate in San Francisco, 13% in New Jersey, 13% in San Diego and 10.8% in Boston-Cambridge.

But still, developers with plans in Maryland are taking a pause before beginning new construction as they wait for demand to catch up. 

“Demand for additional space beyond what’s been delivered has definitely cooled,” Matan Cos. Leasing Director James Matan said.

His company had 2M SF of lab space planned along the I-270 corridor in 2020. The first half of that has been developed and is leasing up, but the other 1M SF is on hold, Matan said. The same is true with the company’s entire life sciences portfolio. 

“As far as adding new space to the life sciences at the moment, we’re remaining at a shovel-ready position, not necessarily coming out of the ground speculatively,” he said.

The lack of spec development in Maryland was previously a cause for concern, as industry leaders in 2021 called for more projects to start to accommodate tenants that require fast move-in schedules. But now the region’s more conservative development landscape has left it in a good place, and developers are holding onto that strategy, waiting for tenants to sign leases before breaking ground. 

That means some plans, like Matan’s additional 1M SF, are lying in wait.

“Groups aren't developing on a speculative basis as often until they have an anchor tenant, for some of those larger campuses,” Savills Associate Director of Life Sciences Taylor Caparosa said.

Trammell Crow Managing Director Eric Fischer said the development firm has built life sciences on spec in other markets like Boston, but that has never been its strategy in the D.C. region. 

The Dallas-based developer was previously looking at a strategy “more oriented towards speculative” development at The Labs at Jefferson Technology Park, planned for 500K SF, in Frederick but decided that it wouldn't be "prudent." 

“You can’t build spec in today’s market; the sector is moving so rapidly,” Fischer said.

Trammell Crow is also waiting on a tenant for its other massive life sciences development on the boards in the area, The Labs at Belward in Shady Grove.

The challenge is finding leasing. Trammell Crow is actively marketing the property with CBRE, and Fischer said he is confident that it will see activity, even if it “might take a while.” 

“That’s going to be an amazing, amazing campus ... maybe they thought it would be built in five years, and maybe it’ll be 15 years now,” said Brad Stewart, senior vice president of business development at the Montgomery County Economic Development Corp. 

With the slowdown in life sciences VC funding — $1.6B in the D.C. region last year compared to $2.5B in 2021, according to Savills —  there are fewer tenants in the market, and those on the market are looking for less space. That has driven tenants to move-in-ready spaces, or spec suites, where they can grab less space for shorter periods of time, experts said. 

Briskman said there are about 40 local spec suites set to deliver in the first quarter of the year – both conversions and new build-outs. 

Rock Creek Property Group co-founder Gary Schlager said that even though leasing activity is down overall, the developer’s smaller spec spaces are leasing faster than the larger blocks. 

The developer’s Precision Labs projects in Shady Grove and Germantown are mostly life sciences spec suites, converted from traditional office and flex space. The Germantown location also delivered with a 32K SF opportunity for a tenant, with 8K SF having been leased, but Schlager said the rest has been slower.

“We did create some larger spaces that we did not build out on a speculative basis, and those have the least amount of activity,” Schlager said. “There are some tenants in the market, it’s just not what it was three years ago.” 

Maryland Department of Commerce Senior Director Ulyana Desiderio said there is always an appetite for space for “teenage” or “young adult” companies that are coming out of their incubator stage but not ready to locate in a large facility. 

And if those companies cluster together, they also have the advantage of sharing expensive equipment. 

“There is an incredible need for these companies to be around other companies like them,” she said.

Meanwhile, large tenants are looking at optimizing the space they have, Fischer said, which means more sublease space is coming on the market.

That being said, there are still some large tenants circling the market, according to Jayson Knott and Matt Doyle, who work for the Maryland Department of Commerce on attracting large occupiers.  

They focus on occupiers in the hundreds of thousands of square feet and said they have two or three of those in the pipeline right now. 

“The industry knows we’re out in the market helping these companies, making the Maryland case, both on workforce, on cost, on real estate,” Knott said.

In December, AstraZeneca inked a 198K SF lease for warehouse space in Gaithersburg at Matan’s 700 Progress Way. The company already has a 1.3M SF headquarters in Gaithersburg with 4,300 employees. 

“We understand [the] market has slowed down, but I think deals like the 200K SF done with AstraZeneca in the heart of Montgomery County’s life science corridor is a positive sign that things aren’t dead,” Matan said. “And hopefully it creates some momentum going into 2024 that the life science market will start its engines again.” 

Trammell Crow is hoping one of the big tenants the state is chasing could help get its developments underway. 

“There are a handful of very large requirements that are out there that are greater than 300K SF coming through the state of Maryland,” Fischer said. “For us, it is an indication that Maryland is front and center related to large expansion.”