2023 Was The Year Boston’s Biotech Boom Fell Back To Earth

Coming out of a white-hot streak during the early years of the pandemic, Boston's life sciences market looks like a bucket of ice water has been dropped on it.

After billions of dollars in venture capital funding fueled a flood of new biotech leasing and development in the sector, a slowdown was inevitable, but several industry experts told Bisnow they didn't expect one of this magnitude for the nation's most significant lab cluster.

The slowdown has caused pain this year for companies from biotech startups to spec developers, but experts say the Boston market still has strong fundamentals and they are optimistic it will recover as funding begins to return. 

Signs of the changing market emerged last year, but the damage accelerated at the beginning of 2023 as interest rates rose, funding dried up and two of the largest bank collapses in history hurt financing efforts. This led the sector to quickly cut growth plans and look to give back space, and with over 10M SF in the Boston-area development pipeline, the vacancy will take years to fill up.

"We've never seen a slowdown of this magnitude in life science," JLL Executive Managing Director Bob Richards said. "The challenge is the ability of existing companies to raise additional capital and produce companies to raise initial capital. That has been what has caused the slowdown, primarily."

Across the market, total vacancy reached 21.2% this quarter, according to new data JLL shared with Bisnow, a massive jump from 9.9% at the beginning of the year. 

"We've literally gone from a hot summer day to a cold winter evening," Richards said.

This sudden shock came from the pain that hit the biotech sector. As of October, at least 17 Boston-area biotech companies had shut down this year, almost triple that of 2022, the Boston Business Journal reported. In February, Rubius Therapeutics dissolved and terminated its 85K SF lease at Alexandria Real Estate Equities' 399 Binney St. in Kendall Square.

"We did see writing on the wall and the pullback in private equity funds, and I think that's what really brought life science activity to a slowdown," Jumbo Capital partner Jordan Berns said, adding that rising interest rates "made everyone just kind of pause in terms of adding more funds."

In August, startup Intergalactic Therapeutics laid off all of its employees and announced plans to sell the company, the Boston Business Journal reported at the time. Intergalactic Director Joseph Graskemper wrote in an August LinkedIn post that macroeconomic conditions led to the company's shutdown.

"The current economic environment has led to challenging times for companies to raise capital," he wrote. "As a result, many companies are reducing staff or halting operations completely. Unfortunately, Intergalactic Therapeutics was not immune to these challenges and all employees have been laid off, myself included."

With the lack of funding entering the space, many companies laid off workers to preserve capital. More than 180 biotech companies have laid off employees this year, up from 119 last year, FierceBiotech reported. Of those companies that laid off employees, at least 56 are based in Massachusetts, the Boston Globe reported.

"Demand is really anemic on the smaller startup side," CBRE Senior Vice President Cerise Marcela told Bisnow. "I think that's what's fueling that kind of vacancy that we're seeing now in the core markets for life sciences."

To meet the booming demand in the height of 2021 and 2022, developers began to build millions of square feet of lab space on spec. Now, as biotech companies are pausing growth plans and putting space back on the market, vacancy has begun to rise drastically.

At the end of the year, Greater Boston had 45M SF of inventory and 10.6M SF under construction. Boston saw most of this development with 4.6M SF in the pipeline at the end of the year. The biggest problem facing the market going into the new year is the potential oversupply. 

Of the 1.4M SF of lab space that was delivered in Greater Boston in the third quarter, 57.4% was pre-leased, according to CBRE data. The market has also seen a surge of tenants looking to give back space. Its sublease availability had never surpassed 600K SF before 2022, but in Q3 it rose to 2.4M SF. 

"There's sort of the elephant in the room of the potential oversupply that's coming with new development trying to finish their construction as we come into '24 and '25," CBRE Director of Research Suzanne Duca said. 

Big developments like Greystar's 465K SF project near Assembly Row, Ivanhoé Cambridge and Lenlease's 350K SF FORUM development, and Harvard University and Tishman Speyer's 900K SF Enterprise Research Campus are still under construction and will bring millions of square feet to the already-supply-heavy market. 

"If developers want to permit projects, that’s great, but I think we have to cool it here for a while," The Davis Cos. CEO Jonathan Davis said at Bisnow's State of the Market event in October. "We have 15M SF of space that is past the point of no return, and it would be a good idea to digest that.”

The most susceptible areas to an oversupply problem could be the suburbs, Duca said, because companies looking to lease space now finally have options to move into core markets like Kendall Square that in the past had nearly 0% vacancy.

"I think anything that's been in the core traditional markets is going to, over time, fare well," Duca said. "There’s some concerns in some of the periphery markets that have kind of exploded in the last couple of years about how long or even when those will get occupied."

What will happen to buildings in submarkets that aren't seeing the same activity is unknown, but Duca said that overall tenant demand will likely increase as more funding pours into the market.

"I think the general belief is that once the world of funding kind of opens back up again, I do think there is a fair amount of pent-up demand that's sitting out there," Duca said. "I think it's going to take a little bit of time to unlock that before anyone is willing to make a hard decision on which way to swing."

Earlier this year, the collapse of Silicon Valley Bank, a lender that had long catered to healthcare and tech startups, almost caused disaster for the biotech sector that had relied on the lender to fund science ventures and growth.

In the days after the collapse, companies were scattered to access funds and put out fires across the system. One of the biggest deposits in the bank was for $74M from Massachusetts-based Ginkgo BioWorks, Bisnow previously reported.

"The SVB collapse was scary in a moment in time," MassBio Head of External Affairs Ben Bradford said. "We know that access to capital is really important for our pre-revenue companies who make up a majority of the Massachusetts ecosystem."

Smaller and regional banks have begun to fill in the gap that SVB left, including Jeff Leerink, CEO of Leerink Partners, who has reemerged in the Boston biotech scene after his bank had been acquired by SVB in 2019, the Boston Globe reported.

Venture capital funding has shown signs of improving, with September's $1.3B total for Greater Boston representing the best month since the spring of 2022, according to JLL. Bradford said the funding market is down compared to the highs of 2021, but in a historical context, it is strong. 

"If we were in 2018 and I was saying that we had raised $7.5B in venture funding in 2023, everyone would be ecstatic, right?" Bradford said. "But if we're sitting in 2021, a year that we raised $13B in venture funding, and I said we were going to have $7.5B, it would be disappointing."

As the biotech sector works to recover from the sharpest downturn the market has seen, some landlords have been shifting strategies to turn some spaces previously planned as biotech into other uses. 

"Real estate owners are not exceeding expectations where they thought they were based on '21 to '22," Jumbo Capital's Berns said. "I don't think we're suffering, because we have the ability to pivot while still looking for the life science but also consider R&D, tough tech and clean tech tenants."

In March, clean tech company Via Separations leased half of Berkeley Investments' 64 Pleasant St., which the company converted to attract lab tenants, the Boston Business Journal reported.

At its 45-acre Pathway Devens, King Street Properties has landed two major leases with clean tech tenants: Electric Hydrogen, which signed a 187K SF lease at 33 Jackson Road, and EV battery company Ascend Elements, which signed a 101K SF lease at 39 Jackson Road.

Boston's position as the largest life sciences market has helped it continue to attract major players, such as Danish drug company Novo Nordisk, which signed a 166K SF lease with Alexandria Real Estate Equities in Waltham last week. 

In September, the Advanced Research Projects Agency for Health chose Cambridge to act as its investor catalyst hub, to be run by Hadley-based nonprofit VentureWell.

CBRE's Marcela said she has seen a "cautiously optimistic outlook" from life sciences developers, and some of them are holding on to space so they can capture biotech demand when it returns. 

JLL's Richards said that all eyes will be on J.P. Morgan's Healthcare Conference in January, where biotech leaders come together to talk about the future of the industry, to get a better picture of how the market will fare in 2024, but he said he is optimistic that Boston will come out on top.

"We do need some major investments in the space again. There's certainly a lot of dry powder on the sidelines, a lot of money waiting to be deployed," Richards said. "I think we're all getting a little bit more bullish on the second half of '24."