The life sciences real estate sector, which soared to impressive heights during the boom years of 2021 and 2022, now faces a sobering reality as it heads into 2025. Developers, investors, and landlords are bracing for another year of challenges, marked by a surplus of space, decreasing rents, stalled construction, and heightened pressure on balance sheets. As Chad Urie, Executive Managing Director at JLL, aptly put it, “Ultimately, the math isn’t going to lie.”
For life sciences real estate, the road to recovery seems long and uncertain. What was once a fast-paced development sector has now become an industry in search of equilibrium. The abundant space that once seemed like a rare asset now appears to be a burden for many markets, with vacancy rates continuing to rise. In fact, according to Urie, many markets will need several years before reaching a vacancy rate of around 9%—a threshold for balanced market conditions.
The Deluge of Space
One of the most glaring issues within the life sciences real estate market is the sheer volume of new developments coming online. As of the third quarter of 2024, significant new lab space was delivered to several major markets, including nearly 2 million square feet (SF) in Boston, 880,000 SF in San Francisco, and 117,000 SF in San Diego. Even more speculative lab space remains in development, with Boston slated to add another 4.3 million SF, San Francisco 1.4 million SF, and San Diego 1 million SF in the coming months.
The supply growth is occurring against a backdrop of soft demand, resulting in negative net absorption in these same markets. According to Newmark research, the rapid influx of space has outpaced the market's ability to absorb it. With no immediate sign of a return to aggressive leasing, many developers are left holding properties that lack tenants or prospective tenants, leaving them in a precarious financial position.
The increase in supply coupled with weak demand has created a fundamental imbalance, further complicated by the ongoing economic uncertainty. The question now is not when rents will rise, but when, or even if, the market will stabilize.
The Struggle of Leasing and Preleasing
As large-scale projects near completion, the leasing environment remains tepid. Many of the most high-profile developments, such as IQHQ’s $1.6 billion, 1.7-million-square-foot RaDD project in San Diego, have yet to secure tenants. Developers and landlords are faced with the daunting challenge of finding tenants for massive spaces with limited demand. The trend is not isolated to one project, with other significant developments, such as Longfellow’s Bioterra project in San Diego and Trammell Crow’s 440 Bedford in Lexington, Massachusetts, also struggling to find tenants.
Despite the hefty price tags of these projects, many developers are facing delays in leasing, with little hope on the immediate horizon. The lack of preleasing for many buildings suggests that tenants, including biotech and life sciences companies, are hesitant to commit to new spaces, perhaps due to the financial pressures facing their industries or uncertainty about the market’s recovery.
A Flight to Quality
In the face of this oversupply and stagnant demand, it’s clear that a "flight to quality" is taking place. Premium submarkets, such as South San Francisco, Kendall Square in Cambridge, Massachusetts, and Torrey Pines in San Diego, will likely fare much better than their secondary and tertiary counterparts. According to Urie, properties in these high-demand locations will continue to attract tenants, even as other submarkets lag.
For landlords in less sought-after regions, rental growth will remain a distant prospect, and the possibility of converting new lab space to office or tech-focused use is becoming more likely. With limited interest in speculative lab space, developers may be forced to rethink their strategies, especially in markets where demand is still weak.
This flight to quality, while beneficial to certain areas, also underscores the widening divide between the top-performing markets and those still struggling to recover. As Urie notes, "If you look historically at rental growth in the life sciences industry, it's generally tied to periods of new construction. We're not going to be in a build cycle for four or five years."
The Short-Term Outlook
In the short term, the market is expected to remain tenant-favorable. As landlords grapple with rising vacancies, they will likely offer aggressive rental discounts, tenant improvement allowances, and other incentives to attract and retain tenants. This will put further pressure on the already-strained balance sheets of owners and developers, who will have to balance these concessions with the long-term viability of their projects.
Urie predicts that the competitive nature of the leasing market will intensify over the next nine to twelve months, with increasing pressure on landlords to secure leases and maintain occupancy. However, while vacancies may have peaked, the continued influx of new supply will keep the market under strain, making it difficult for rents to recover in the short term.
Long-Term Prospects
Despite the challenges, there are signs of optimism for the life sciences sector as a whole. While the real estate market may take years to absorb the excess space, the underlying biotech industry is showing some signs of recovery. Venture capital investment is on track to exceed 2024 levels, providing a much-needed boost for biotech companies and potentially driving future demand for lab space. However, this recovery in the life sciences sector does not automatically translate to a quick rebound in real estate demand. For the time being, developers will need to focus on navigating a competitive leasing environment while managing the risk of prolonged vacancies.
Cushman & Wakefield Executive Managing Director Jonathan Metzl highlights the importance of capital access in supporting this recovery. As new capital flows into the sector, it will provide companies with the ability to address challenges with pricing and limited product access, helping to stabilize the market over time. However, global regulatory changes and geopolitical uncertainties may continue to temper the market’s optimism.
Conclusion
The life sciences real estate sector faces a rocky path as it heads into 2025. With an overabundance of space, a slow recovery in tenant demand, and economic uncertainty lingering, it will take several years before the market can return to a balanced state. For now, landlords and developers will need to adjust their strategies, offering concessions and focusing on high-demand locations, while keeping an eye on the broader trends in the biotech and venture capital sectors. As Urie aptly states, “The math isn’t going to lie,” and the reality is that life sciences real estate’s woes will persist into the foreseeable future.
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