Market Observations
- U.S. life science real estate fundamentals waver as the market continues to adjust. Vacancies and availabilities continued to climb throughout many of the nation’s top life science clusters, reaching cyclical highs in top markets such as Boston, the Bay Area, and San Diego. These three markets also recorded a combined 542,000 SF of negative net absorption during the first half of 2023, while new deliveries have accelerated.
- Job growth remains positive, but year-over-year job growth slowed to 2.1% year-over-year as of June and just 1.3% since year-end 2022. This represents the slowest annual growth rate since the height of the pandemic in 2020. Continued tumult within the sector has resulted in a growing number of strategic layoffs among biotech companies throughout the U.S. and Europe. The rate of employment growth will likely slow further in the coming quarters as a result.
- Venture capital funding for U.S. life science companies inched up during the second quarter of 2023, bringing total capital invested to $11.7 billion year-to-date. Despite representing one of the lowest quarters since peaking in 2020 and 2021, current life science venture capital funding is in line with 2019 quarterly totals. If this pace of funding continues through the remainder of the year, 2023 will far outpace annual historic averages.
- Supply-side fundamentals remain robust, with nearly 31.0 million SF of purpose-built laboratory space currently under construction. The Boston metro area is leading the charge and accounts for 37.3% of this total, followed by the Bay Area at 26.5% of square feet underway. There are also several million SF of active laboratory conversion projects under construction throughout the U.S., driving further inventory expansion in the life science sector. The continued supply wave will ultimately keep upward pressure on laboratory vacancies in the near term.
- Landlords have benefited from strong fundamentals and lease rates for laboratory space have continued to climb throughout midyear 2023. Quarterly rent growth within the largest life science real estate markets of Boston, the Bay Area and San Diego has slowed, increasing by just 0.6% during the second quarter of 2023.
- The lack of investment opportunities continues to weigh on investment sale volumes. Activity picked up slightly during the second quarter of 2023, and year-to-date investment sale volumes for life science-related assets in the top three clusters reached $2.8 billion. Select owners have begun to divest non-core assets, creating some buying opportunities. Despite lower sale volumes and rising cap rates, life science assets have outperformed all other property types since 2008. Private market returns are second only to industrial over the last decade.
