Recently, JLL released a report titled, “2023 Life Sciences Industry and Real Estate Perspective: Assessing the future landscape for biopharma, medtech and biomanufacturing” that explores the real estate landscape of technology sectors.
According to data captured in the LevinPro HC database, JLL has advised on 24 transactions in 2023. Of those, there were 19 medical office buildings, two inpatient behavioral health hospitals, one ambulatory surgery center and one acute care facility. In total, the 50 facilities consist of more than 4.2 million square feet.
The report was broken down into multiple sections that looked at various elements of the market. Below, we’ve summarized each section.
Robust demand for lab space will return when venture capital ramps back up
During the early stages of the COVID-19 pandemic, the biotechnology sector experienced a surge in venture funding. Investments reached $10-13 billion each quarter, which is double the amount typically seen in the United States. The biotechnology sector saw nearly $26 billion in venture capital investments, over the past four quarters indicating a reset to the industry’s long-term growth trajectory. The flood of capital allowed startups to secure funding easily, which led to an increased demand for lab space.
Investment levels resembled those seen in 2018 and 2019. In Q2:23, demand for commercial lab space decreased by 60% compared to 2021.
Looking forward, the future of private capital investments in life sciences is unclear, but there are positive indicators that point to a healthy market. The top 20 life science venture capital firms raised more than $22 billion, collectively, since 2021, which is four times the amount usually raised in a two-year period. Even though venture capital firms have been issuing fewer investments in 2023 (35-45% less), they still have the resources to close the deals. The rest of 2023, and into 2024, is anticipated to have more large-scale deals for businesses with advanced scientific developments in clinical trials.
When will public markets open again to biotech companies?
Leading up to 2022, an average of 70 life science companies went public each year. Yet, in the 12 months, only 28 companies have gone public, which is less than half of the typical pace. Of those companies, only six raised more than $100 million at their offerings, pointing to a serious slowdown in large-scale debuts.
The median capital raised in IPOs is at its second-lowest point in the last 16 years. Secondary offerings have also decreased to levels last seen in 2013-2015, indicating that public sources of capital are subdued. This “situation” has led many mid-stage biotechnology companies to seek funding from alternative sources and scale back their operations.
As of mid-2023, both major biotechnology indices, S&P Biotech EFT (XBI) and NASDAQ Biotech Index (NBI), have not performed well in the boarder market, indicating a lack of enthusiasm for investing in the biotech sector, despite positive trends in other technology sectors. To address this concern, many companies are likely to explore options such as secondary offerings to improve finances.
Demand for space has changed considerably
The biotechnology sector is highly sensitive to interest rate movements, especially when the Fed announced a rate hike in late 2021. This has made high-growth tech sectors less appealing for investors due to the reduced attractiveness of riskier, long-term revenue streams and profits.
At the end of 2021, demand across the top eight U.S. markets exceeded 25 million square feet, but by mid-2023, it had dropped to just more than 10 million square feet. The composition of demand changed, too, with most small users seeking space. Tenants with less than 30,000 square feet represented 82% of deals signed in the first half of 2023, up from the previous average of 65%.
Demand in the biotechnology market, hopefully, hit its low point in mid-2023. An anticipated increase in funding may lead to a resurgence in demand, but there may be some resistance as groups have become used to move-in-ready options. Until the end of 2024, many markets are expected to see elevated levels of supply, meaning growing demand and tenants will have greater negotiating power.
Have we reached “peak supply”?
Currently, the United States is seeing a surge in demand, with 37 million square feet of investor-owned lab space in development, but it is not evenly distributed. Of the lab space available, 63% is in Boston and the Bay Area. Areas such as Los Angeles, Raleigh-Durham and Washington, D.C. have a lower percentage of projects, which places constraints on their supply.
The national lab space pipeline has tripled since 2019, but it is likely that the peak of this pipeline has already passed. There has been a 2 million-square-foot decrease in labs under development since the end of 2022. Due to rising interest rates over the last year, borrowing costs for lab construction has increase to more than 10% for select deals, meaning that project completions will, most likely, outnumber new projects.
With these projects having a roughly 24-month construction period, project delivers are expected to slow down starting in late 2024 and continue in 2026.
Life sciences job openings—a harbinger of better days ahead?
There was concern over whether employment growth would slow down after the peak of 2020-2022. There were significantly more job postings in 2022, but then it dropped drastically. Early 2023 was met with layoffs. The up-and-down nature of the job market was concerning.
But by the end of Q2:23, job demand in the biotechnology and pharmaceutical sectors returned to the highs of 2022. This will likely increase demand for lab space across the country. Also, with half of all job openings concentrated in the top 10 markets, it highlights the geographic diversity of the biopharma sector in the United States.
Historical biotech recessions—any precedent for today?
Over the last year, the biotechnology sector has experienced a downturn when it comes to real estate. Funding has decreased and rents/occupancy have as well. In mature markets like Boston, San Francisco and San Diego, the last major downturn took roughly 2.5 years from peak vacancy until rents reached their lowest point.
While occupancy rates are expected to face downward pressure well into 2024, it may be overly pessimistic to predict that rents will continue to fall for another 2.5 years, as the industry is well-positioned to rebound, particularly with the significant available capital.
The report goes on to highlight certain geographic markets with the most potential thrive in this current environment. For the full report, click here.
