Lab demand shrinks in life sciences real estate market, putting keys in hands of smaller biotechs

Boston, the San Francisco Bay Area and San Diego are once again the top markets for life sciences commercial real estate in the U.S., with plenty of opportunities for growth as biotech readies for a comeback, according to a new report.

Commercial real estate and investment management company JLL previewed the opportunities to come after a tough market reset that saw layoffs, company closures and restructurings aplenty. One easy thing to pause in all that retraction? Physical growth such as lab or office expansions—and the data show just that. 

At the end of 2021, demand among the top eight U.S. markets added up to 25 million square feet. That has now shrunk to just over 10 million square feet by mid-2023.

But, as the larger industry underwent a correction, smaller biotechs have been scrambling for lab space throughout this year, becoming the largest seekers of new space, according to the report. While later-stage companies can pause development plans and hold off on physical expansions to operate within their existing footprints, earlier-stage companies need to get moving into lab space.

JLL said that 82% of deals in the first half of the year came in under 30,000 square feet, compared to the previous average of 65%. These tenants have a good opportunity to negotiate economically favorable transactions and shorter lease commitments right now, too, the report noted.

But now, JLL, like other industry watchers, says that green shoots are emerging in the industry.

“The relationship between funding rounds and startup expansion are symbiotic, driving growth throughout the biotech sector, and, while the public markets have slightly cooled off, private capital remains hopeful with record dry powder from top VCs focused on life sciences,” said JLL’s Travis McCready, head of life sciences, Americas markets.

The top 20 VC firms have raised $22 billion since 2021 that’s ready to deploy, and JLL predicts the rest of the year will see a flurry of “mega M&A deals.”

“Established pharmaceutical companies and biotechs have the chance to strategically select long-term markets for R&D growth,” said Kevin Wayer, president of life sciences in JLL's work dynamics division. “It’s the perfect opportunity for larger companies to analyze their real estate portfolios and facilities and make informed location choices, as well as for growing companies and startups seeking to scale. It marks a new era of strategic decision-making in the life sciences industry.”

Other top markets include the Washington, D.C., and Baltimore region; Raleigh-Durham, North Carolina; New Jersey; New York City; Boulder, Colorado, and the Northwest Corridor; Philadelphia; and Seattle, according to JLL’s report.

The top 10 provide access to venture capital, but new markets like Los Angeles, Chicago and Houston are emerging thanks to investments from universities, institutions, governments and industry players, according to Maddie Holmes, a senior research analyst for JLL’s life sciences industry insight and advisory division.

After a huge rush of projects to add lab space, many are soon to come online, meaning a supply wave of square footage is coming, JLL said. Boston and the San Francisco Bay Area have the largest concentration of space soon to be available—in fact, there’s 37 million square feet of investor-owned lab space under development, and 63% of it is in one of these two areas.

As for medtech, Orange County, California, reigns supreme as the top market because of renowned academic and research institutions in the area, local government support, nearby industry associations and a strong VC presence. The other top regions for the sector are Minneapolis-Saint Paul, the San Francisco Bay Area, Greater Boston and Salt Lake City.

Meanwhile, Raleigh-Durham is the top home for biomanufacturing, followed by Philadelphia, New Jersey, Greater Boston and the San Francisco Bay Area.

But one thing is for certain: Scientific advances have not been stymied by the industry’s downturn, McCready said, name-checking advances in cell therapy and neurodegenerative diseases as highlights.

“There are literally dozens upon dozens of advances made in the past 12 months alone, each that will have a significant downstream effect on the vitality of our business,” McCready said.