Lab Supply Surge Leads To Construction Delays, Leasing To Tech Firms
The surge in lab availability, a result of economic uncertainty, funding declines and enlarged construction pipelines, has driven some developers and landlords to seek solutions to excess space that might have been unthinkable during the industry’s explosive early pandemic growth.
“I haven’t seen projects that are underway pause or say, ‘Hey, stop construction. We're going to wait for better days to restart,’” Colliers Research Director Jeffrey Meyers said. “But if you're a project that hasn't gotten that far yet, those are the folks that are really going to be a lot more hesitant to move forward under current market conditions.”
There is roughly 41M SF of lab space under construction across the nation. Projects that aren’t in the ground yet will face more hesitance by developers to break ground, Meyers said, at least until leasing picks up significantly or there is a tenant in hand.
In Boston, where the lab pipeline is larger and more diverse than other cities, with millions of square feet under construction, “a handful of development projects have stalled or been canceled,” according to a Lincoln Property Co. analysis.
That same analysis found that 4M SF of the 20M SF in some stage of development are permitted but not under construction. Developers may need to wait a little longer for excess space to be absorbed and leasing to pick up, especially at rates that aren’t discounted. Subleasing in the region hit 2M SF when it was virtually nonexistent just 18 months ago, according to Hughes Marino.
“These sub-landlords have a melting ice cube on their hands and need to reduce burn rate quickly,” Hughes Marino Senior Vice President Nick Amarante said in a statement. “That means they will accept substantial discounts to their remaining rent obligation if it is going to get the space subleased. This inevitably has led to a spill-over effect where the landlords have to respond, and all are now offering significant free rent concession packages and turnkey tenant improvements and will do whatever it takes to try and compete with the sublease market.”
Nationally, per CBRE data, the lab vacancy rate hit 9% in the second quarter, jumping 2% quarter-over-quarter and exceeding the average 8% rate seen between 2016 and 2020. During Q2, 3.4M SF of new deliveries hit the market, but 45% of the new space was pre-leased.
But smaller markets with fewer options are likely to turn around more quickly, and developers may not feel as much risk plowing ahead on projects.
The long-term health of the market isn’t a question, Meyers said. It’s more a question of when higher vacancy rates come back down to more sustainable levels. In Boston, where lab vacancy rates hit an unsustainable 1% in 2021, they now hover at 10%, per Colliers research.
There have also been suggestions that in addition to new inventory slowing, existing lab inventory may be leased to tenants outside of biotech. Tech tenants seeking out large, top-quality office spaces might find their answer in spec lab projects, Newmark Executive Vice Chairman and President of Western Region Capital Markets Steve Golubchik said at a Bay Area real estate seminar in early September.
With the average size of life sciences leases dropping to just 20K SF, in part due to startups trying to run lean and conserve runway, larger spec lab buildings initially meant for single tenants are being sliced into smaller suites, Golubchik said. Those smaller spaces can accommodate small or even midsized firms seeking new locations. Life sciences leasing in the Bay Area plummeted 58% in Q2.
Lane Partners principal Nick Menchel, another seminar participant, said two of the firm’s in-progress projects, the 520K SF Berkeley Commons project and the 2.8M SF Southline in South San Francisco, have been checked out by tech firms seeking new leasing opportunities.