Life sciences workspace

Positioned for Success: Life Sciences Market’s Long-term Outlook is Strong

Over the last two years, the life sciences market has ascended into the top tier of commercial real estate assets. The highly public development of a COVID-19 vaccine spotlighted the already thriving industry, fueling record demand for research and lab space. Even through economic instability, the sector has remained resilient, with novel innovation and scientific discovery motivating robust venture capital investment in emerging life sciences clusters. These pivotal trends will ensure long-term growth in the sector – but even as it shows future promise, fundamentals are beginning to normalize. The JLL 2022 Life Sciences Research Outlook and Cluster report reveals the critical trends shaping the industry, and developers should take note of some key takeaways that could inform development strategy in 2023.

VC investment slows, but remains healthy

Venture capital investment plays an important role in the forward trajectory of life sciences real estate needs. Through October this year, life sciences companies have raised $27.9 billion in private venture capital. Although this figure is about 35% below fundraising achieved by the same period in 2021, it is still high by historical standards and about $2 billion above venture capital investment achieved by this time in 2020. In the current environment, VCs are becoming strategic about how to disperse capital while mitigating risk exposure as the economic climate deteriorates. JLL research found that VCs are favoring startups with some cachet, either a high-profile founder, strong industry relationships or organizations far along in drug development.

Public funding activity has substantially softened. Only 20 U.S. companies have launched an IPO this year, representing $2.7 billion in funds raised at the initial offering. By contrast, 124 companies made a public debut in 2021 with more than $15 billion raised in the initial offering. This is likely to be the lowest year for biotech industrial public offerings (IPOs) in a decade, and as a result, many companies are looking to preserve capital through operational efficiencies, which could include subleasing real estate or reducing spatial needs and slowing expansion.

Supply catches up with demand

A supply-demand imbalance has characterized the life sciences industry for years, but in the last year, construction of new lab space finally caught up to market needs. In 2021, the supply increased by 9.6 million square feet and new construction pipelines grew 73% in the top life sciences clusters. Despite strong pre-leasing activity and 9.1 million square feet of absorption last year, the national supply of direct lease space has swelled from 10 million square feet to 25 million square feet due to the increased new construction activity. Along with that, the sublease supply has moderately increased, giving startups an opportunity to move into lab-ready spaces.

As construction has ramped up, demand has waned. Life sciences companies are scaling back in response to reduced funding, leading to 33% less tenant demand over the last 12 months in the five largest clusters. The falloff cuts 7.2 million square feet of demand out of the market. However, leasing activity is still well above pre-pandemic levels, and demand will likely recover in accordance with VC spending. Venture funding is a good predictor of demand trends. Developers should take note of funding activity to forecast real estate needs in active construction markets.

New life sciences clusters emerge

Boston, San Francisco and San Diego have long been the three leading life sciences hubs, but industry growth and budding new startups have spurred the creation of new clusters – and it is creating opportunity for developers to meet nascent demand in new geographic regions. The Washington, D.C./Baltimore area; Philadelphia; Raleigh-Durham, North Carolina; New Jersey; New York City; Seattle and Salt Lake City round out the top 10 life sciences markets after the three pillars. In addition, new places like Boulder, Colorado; Orange County, California; and Denver are gaining momentum and capturing attention. Life sciences hubs are not easily created, but each of these markets offers talent, universities, funding, government support and real estate availability to support life sciences growth.

Early-stage startups are prioritizing a different set of market characteristics than established companies and are more likely to gravitate to emerging markets. Investors have been diversifying into new markets that offer more attractive returns while maintaining a presence in mature clusters that offer scale, and developers would benefit from a similar strategy when pursuing new construction opportunities.  

The slowdown in venture capital funding and inverted supply-demand dynamics are headwinds for an industry that has experienced voracious growth over the last several years. The life sciences market might be finding stability today, but innovation promises long-term success and opportunity ahead.      

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