21M SF of Life Sciences Space to Hit US Market in 2024

The U.S. life sciences real estate market is set to face a unique set of challenges and opportunities in the upcoming year. Despite a year of uncertainties, the sector has showcased its resilience. However, as we enter 2024, the market is poised for significant changes. A staggering amount of lab and research and development space is expected to enter the market just as the sector experiences a reset in employment levels and demand returns to pre-pandemic norms.

According to CBRE's 2024 U.S. Life Sciences Outlook, after a period of rapid growth from 2020 to 2022, the sector is anticipated to undergo a moderation this year, aligning with the cooldown observed last year. The softer economy and a decline in funding have contributed to this trend. Nonetheless, market fundamentals remain solid and are poised to receive a boost from increased federal funding, a burgeoning pipeline of FDA-approved drugs, and heightened corporate investment in research and development.

CBRE anticipates a record-breaking influx of construction completions in 2024, adding over 21 million square feet of life sciences space across the nation's 13 major markets. This figure represents a remarkable increase of more than 50% compared to the nearly 14 million square feet completed last year and is four times higher than the 5.6 million square feet added in 2022. Although the pipeline is expected to decrease significantly in 2025, allowing for market stabilization, the surge in deliveries this year will likely result in an upswing in vacancy rates and a decline in asking rents.

CBRE's analysis highlights that 79% of the upcoming construction completions are concentrated in the three largest biotech hubs: Boston-Cambridge, the San Francisco Bay Area, and San Diego County. The scale of ongoing development in these markets far outpaces existing inventories, signaling a significant growth opportunity.

Influx of Lab/R&D Space Predicted for 2024

A recent report by CBRE suggests that the projected demand for lab/R&D space in 2024 may fall short of the nearly 38 million square feet currently under construction. While oversupply concerns are most significant in Boston-Cambridge, the San Francisco Bay Area, and San Diego, the situation is expected to be more balanced in the other primary markets.

Boston-Cambridge currently has a life sciences vacancy rate of 6.6 percent, as reported by CBRE. The market is witnessing impressive growth, with 15.9 million square feet under construction, representing a remarkable 28 percent surge in inventory over the past year.

In San Francisco, the vacancy rate stands at 14.2 percent, accompanied by 7.6 million square feet of life sciences space under construction, signifying a 20.5 percent growth in the market. Similarly, San Diego's vacancy rate holds at 11.9 percent, with 4.8 million square feet of life sciences space currently under construction, reflecting a 20 percent increase.

A Shift in Tenant Demand and Job Growth in Lab and R&D Space

Tenant demand for lab and R&D space has experienced a noticeable decline from the peak levels seen in 2021 across the top seven markets. However, this decline should be seen in the context of an overall industry trend. When compared to the pre-pandemic averages from 2016 to 2019, the current demand remains consistent despite a staggering 345 percent increase in available space. In the third quarter of 2023, there was already negative net absorption of 1.5 million square feet of lab and R&D space nationally.

Adding to this shift, the previously booming job growth in the life sciences sector has significantly slowed down. According to CBRE forecasts, the first half of this year might witness a marginal decline of 0.2 percent in U.S. life sciences employment, followed by modest growth in the latter half. To put this in perspective, the nation observed an average monthly increase of 10,000 jobs in the life sciences field throughout 2021.

Furthermore, investment sales within this industry have followed suit and experienced a decline, aligning with the broader trend affecting various asset classes. In the third quarter of 2023, investment sales decreased by 64 percent compared to the first quarter of 2022 when interest rates started to rise. However, CBRE anticipates that interest rate cuts within this year might reignite some transactions that have been postponed recently.

A Changing Landscape in Real Estate Investment

Investment sales in major cities across the United States have experienced significant declines in recent quarters. San Francisco, in particular, has seen a staggering 85 percent decrease in investment sales since reaching its peak in the third quarter of 2021. Boston-Cambridge and San Diego have also been impacted, with sales volumes dropping 70 percent and 66 percent respectively during the same period.

The challenging economic environment and capital constraints have prompted a shift towards mergers, acquisitions, and partnerships as the preferred strategic option for businesses in the coming years. According to Matt Gardner, CBRE’s Americas life sciences leader, this trend is particularly evident in the life sciences sector. Despite the decline in investment, the underlying science remains strong, as reflected in robust levels of drug approvals and early-stage clinical trials. While construction completions are expected to reach their peak in the current year, they are projected to decrease significantly thereafter. This shift will have a positive impact on the life sciences real estate market, creating favorable conditions for growth and expansion.