The High Bar Is Coming Down for Life Sciences Growth

Originally published by GlobeSt

The past two years set the bar quite high for growth in the life sciences sector, according to Matt Gardner, CBRE’s Americas Life Sciences Leader.

“It’s natural for a red-hot market to cool a bit after such a strong run,” he said in prepared remarks.

A new CBRE report said metrics gauging the sector varied in the fourth quarter as the industry normalized after robust growth.

“Life sciences employment growth slowed from earlier rates but still progressed at a 4% year-over-year pace. Venture capital funding rebounded in the fourth quarter after three consecutive quarterly declines” it said, and “the market has normalized.”

CBRE puts Boston, Chicago, Denver, Houston, and Los Angeles as the top-performing life sciences markets in Q4, based on their combined market size, vacancy, square footage under development, and current tenant demand.

Life Science Relies on ‘Different’ Financing Sources

Kevin Kinigstein, partner, Cox Castle, tells GlobeSt.com that he anticipates 2023 to be slower, especially at the outset.

“External factors such as uncertain interest rates, the debt market generally, and inflation are already proving to have an undesirable impact on all commercial real estate, even in the hottest of asset classes,” according to Kinigstein.

That said, the life science sector is influenced by certain differentiating factors that are likely to make the industry experience less of a slow-down than many other asset classes, he tells GlobeSt.com.

“One primary differentiator is that the life science industry relies in large part on different financing sources than conventional commercial real estate,” Kinigstein said.

“Between increased government funds which are coming in 2023, and the continued industry reliance on venture capital, it is likely that life science will outperform other asset classes,” he said.

Additionally, the tie between life sciences and other external driving factors will also continue to differentiate this space.

“The often-cited aging population will continue to drive demand, but there are other outside factors such as the expected continued explosion of artificial intelligence in 2023, and the fact that executives have another year under their belt when it comes to navigating supply chain issues – both of which may prove to be more impactful for life sciences than for other conventional real estate classes.

“While it is fair to expect the market for life science transactions in 2023 to be significantly less hot than we saw in 2021-2022, we believe life science will be among the leading asset classes in terms of demand and growth, and that the slow-down may be less than expected.”

Pandemic-Caused Therapies Drove Growth

Jon Needham, vice president, investment management at BentallGreenOak (an investor in area life sciences real estate), tells GlobeSt.com, “The supply boom that took place in recent quarters certainly alters the calculus when making investments, but in general, a more balanced supply/demand dynamic is important for the health of the sector moving forward.

“While the US Life Science market was down in 2022 compared to the historic high of 2021, removing 2021 outlier data and comparing 2022 with previous years tells a story of health, sustainability, and growth.

“The pandemic fast forwarded approvals and implementation of novel therapies which will prove to be the foundation for growth over the next cycle. As the sector matures and adapts to the integration of new technologies, a continued emphasis will be placed on high quality, robust, and flexible real estate to assist in the advancement of the life science ecosystem.”

Leasing Activity Dropped 62%

Leasing activity across Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham are normalizing, according to JLL data.

On an aggregated basis, it dropped 62% from an industry high in Q4 2021 to Q4 2022, and, currently, leasing activity is on par with pre-COVID averages.

Tenant demand activity has slowed, as companies take a more conservative approach regarding space needs. Demand today is just about half it was at its peak in Q4 2021 across markets Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham.

Maddie Holmes, senior research analyst, Industry Insight & Advisory, JLL, tells GlobeSt.com that direct asking rents, which had been gradually increasing quarter-over-quarter since the onset of the pandemic, took a discount across those markets.

Kevin Wayer, President – Government, Education, Infrastructure and Life Sciences Industries, JLL, tells GlobeSt.com, “We are witnessing M&A and joint manufacturing activity continues to pick up, but an intense cost-reduction focus continues.”

Expect Slowdown Through Mid-Year

Craig Tomlinson, senior vice president at Northmarq, tells GlobeSt.com that after three high-profile sales (exceeding $250 million) of life science properties in 3Q 2022, RCM data reported none in the last quarter.

“These are very high basis properties, typically +$1,000 per foot,” Tomlinson said. “That, plus the lack of sale comps, explained lenders’ reluctance to fund such transactions.

“The slowdown is expected to continue through mid-year, with the exceptional sale-leaseback possible. Those are typically higher yield as compared to third-party transactions.”

After the Big Run, Normalization is ‘Healthy’

Nick Iselin, executive general manager of development for Lendlease, tells GlobeSt.com that few people presumed that the enormous trajectory in life sciences would continue unabated and ultimately, “this normalization is not only expected but healthy. We are happy to see that activity is still going strong in the top markets, such as Boston where we are co-developing FORUM, a 350,000-square-foot, best-in-class life science project.”

Boston is Still a Leader

Kristen O’Gorman, an associate principal at SCB’s Boston office leading its life science practice, tells GlobeSt.com that the Boston area continues to be a life sciences leader full of resounding innovation, with startups raising over $1.5 billion last year.

“Although tenants may have more options in today’s market, the evolutionary nature of young companies remains true,” she said.

“From a design and real estate perspective, this means a balance of prioritizing high-performing buildings that also offer maximum flexibility that can appeal both to startups and more established companies.

“Now that the marketplace has become more competitive after sustained growth, we see the life science market normalizing, with growing consideration of amenity programming as a way to differentiate.

“A few quarters ago, a potential tenant might have been less focused on this aspect, but now they have an opportunity to be more selective – we see tailoring this amenity programming as a key to adding value and a market edge.”