RevistaLab's inaugural webinar Life Science Real Estate Market Update, commenced with a spirited debate about pineapple on pizza–a light-hearted component of my introduction to the audience–that was more importantly followed by a discussion that shed light on central themes within the sector: Demand drivers are facing challenges in a higher interest rate environment, while supply-side pressures are weakening fundamentals in select markets. Despite these current headwinds, the panelists remained unified in the long-term outlook for life science real estate as being decidedly positive.
Key takeaways from the panelist discussions include:
Despite persistent macroeconomic headwinds, growth remains positive.
Public market data indicates that bankruptcies among biotech companies have reached 10-year highs and layoff announcements have intensified. Active job openings for biotech-related employment abated following a short rally in early 2023, while job growth is decelerating. However, the need for highly skilled labor persists, with 12.3% of active job listings in the life science sector requiring an advanced degree1. Over the last five years, life science employment has expanded by more than 21.0%, outpacing total U.S. employment growth of just 5.0% during the same period2. Narrowing in on more recent labor market trends, the Scientific Research & Development subsector added approximately 35,000 jobs across the U.S. year-to-date through September 20232.
Venture capital may be turning a corner, and the public markets are slightly looser.
While funding levels are well below recent totals, year-to-date U.S. life science companies have raised more than $20 billion, which is in line with pre-COVID volumes. Quarterly trends are promising, with U.S. life science companies recording two consecutive quarters of growth between Q1 and Q3 2023, in venture capital funding–reaching the highest level since year-end 2022 in Q3 2023. The number of deals continues to decline and the average funding round has reached a 10-year high, highlighting venture capitalists' risk aversion. While biotech IPO activity remains subdued, total capital raised from the 18 companies that went public so far this year has surpassed 2022 volumes. Investors are likely to remain focused on the highest quality companies to avoid downside risks3.
Public funding and the emergence of the ARPA-H program bode well for future growth.
NIH funding continues to grow within the U.S., with markets such as Boston and New York City garnering a larger share of the total, driving research and development, among many of the top institutions and hospitals. The establishment of the Advanced Research Projects Agency for Health (ARPA-H) has injected new optimism and resources into the industry as well. Cambridge in Massachusetts, Dallas, and the Washington DC-area represent the three regional hubs and will act as epicenters of the new agency. Additionally, a network of "spokes" will be developed to help facilitate breakthroughs in science and medicine.
The record life science pipeline is giving way to tapering construction starts.
According to data from RevistaLab, U.S. life science-related real estate development reached a three-year high in the third quarter of 2023, at more than 80 million square feet. The trailing twelve months of completed inventory closed the quarter at 19.6 million square feet, which fueled the total U.S. inventory to climb to 428 million as a result. New supply remains focused in key life science hubs, including Boston and the Bay Area. Elevated construction costs, a more difficult lending environment and the normalization of demand have led developers to pull back on new construction starts. In fact, the trailing twelve months of construction starts declined by 28.4% since the end of 2022 and are now at the lowest level since the second quarter of 2022. As a result, near-term deliveries are expected to ease as well4.
In sum, RevistaLab's webinar Life Science Real Estate Market Update, provided valuable insights into the challenges and opportunities arising from biotech venture capital funding and IPOs, the expected growth in public funding through ARPA-H and the evolving landscape of FDA approvals. Although the life science sector navigates current challenges, staying informed and adaptable will be essential for real estate developers and investors seeking to play a pivotal role in supporting the future of life science innovation.
2 BLS, Moody’s Analytics
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