Report: Life Science Market Shows Signs of Normalization Following Period of Growth

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Courtesy of Louis Reed

By Kate Snyder

After setting records in 2021, the life sciences real estate market across the country showed signs of normalizing in the third quarter of the year, according to a new report from CBRE. Demand for lab space in the Bay Area was the highest of the top 12 life sciences markets across the U.S., and in San Diego, both vacancy rates and construction activity have remained steady.

According to CBRE’s U.S. Life Sciences Q3 2022 report, the top 12 markets include the Bay Area, San Diego, Seattle, Boston/Cambridge, Chicago, Denver/Boulder, Los Angeles, New Jersey, New York City, Philadelphia, Raleigh-Durham and Washington, DC. The average lease rates across the 12 markets increased in the third quarter by 6.8 percent compared to the previous quarter, and developers completed 2.1 million square feet of space throughout the 12 markets, outpacing new absorption of 363,047 square feet. Overall, the U.S. life sciences employment increased by 5.4 percent in the third quarter compared to the same time last year.

“We’re seeing a normalization of the market after multiple quarters of breakneck growth,” said Matt Gardner, CBRE Americas Life Sciences leader. “It’s important to keep in mind that the pandemic set a new floor for the life sciences industry. Funding remains at high levels, and job growth continues. Life sciences real estate is a valuable asset.”

In the Bay Area, demand for lab space increased to 5.3 million square feet in the third quarter, according to the report. Labs under construction in that region were the second highest share, totaling more than nine million square feet, of which 20 percent is pre-leased. The average lab vacancy rate in the Bay Area also increased from 5.8 percent in the second quarter to 7.4 percent in the third quarter.

 “The Bay Area life science real estate market is well-insulated and generally avoided risk factors during the pandemic,” said Dino Perazzo, vice chairman with CBRE’s Life Sciences Practice in the Bay Area. “The region isn’t immune to market headwinds, but the Bay Area has a strong research infrastructure and established life science developers remained focused on the long-term trajectory to refrain from overbuilding in the last two years. The new research space that is being constructed now is almost entirely controlled by the handful of established life science developers who can draw on deep and growing tenant portfolios.”

Venture capital funding in the Bay Area declined slightly from $1.8 billion in the second quarter to $1.1 billion in the third quarter, though funding volume remains on course for the third highest annual total on record after 2021 and 2020, according to the report.

“Venture capitalists have increased discretion on who and what they are funding in light of market headwinds,” said James Bennett, vice chairman with CBRE’s Life Sciences Practice in the Bay Area. “VCs are ‘right sizing’ their valuations to properly reflect expected returns, but demand for lab and R&D space still surpasses pre-pandemic levels and remains near record highs. In turn, IPO markets have tightened which has opened doors for large biotech and Big Pharma companies to create scientific programs or acquire companies outright.”

In San Diego, the vacancy rate for life science space remained steady at 3.4 percent in the third quarter. The total demand for laboratory space was 900,000 square feet, which according to the report, was still within the quarterly average before the pandemic. The Sorrento Mesa submarket led in leasing activity with 192,292 square feet of lab space leased, resulting in positive net absorption of 79,034 square feet. Construction activity also maintained a steady pace, with an additional 3.97 million square feet under construction in San Diego County. 

“The third quarter saw over 353,000 square feet of leasing activity, with year-to-date approaching 2.1 million. 36 percent of the two million square feet of planned life science construction is already pre-leased,” said Ted Jacobs, CBRE’s vice chairman in San Diego. “The fourth quarter is likely to be slower for leasing demand due to the overall economy and capital markets”

In Seattle, top lease transactions in the third quarter were Sonoma Biotherapeutics leasing 83,462 square feet and Altpep Corporation leasing 31,270 square feet, both in downtown Seattle, according to the report. Total life science inventory in the Seattle metropolitan area was 9.3 million square feet, with the bulk of it in Seattle at 5.8 million square feet and Bothell at 2.8 million square feet. The vacancy rate for the metro area was recorded at eight percent. The total demand for lab space was 400,000 square feet. Approximately 1.4 million square feet was under construction with about 27 percent pre-leased.