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Life Sciences Startups Slimming Space Needs During Downturn

Hit by an economic slowdown and a more cautious approach from biotech VCs, life sciences startups have adjusted their playbooks and pulled back from an era of larger leases and rapid expansion, instead shrinking leases, splitting workspace between incubators and leaning on remote staff and contract research.

But despite this shift, landlords have yet to feel the pain from a more fiscally conservative pivot by startups, according to analysts. The context of the moment is important, they say, because companies are still doing business, they’re just being more cautious.

“New firms aren’t being brazen,” Cushman & Wakefield Senior Managing Director of Project & Development Services Jason D'Orlando said. “They’re leaning towards more condensed areas, or partnering with other firms, or working more with contract research or manufacturing firms.”

Challenged by industrywide funding decreases, life sciences startups are rethinking their space needs.

The slowdown in funding over the second half of the year has been pronounced. Carta, a firm that tracks startup investment via its own proprietary fundraising data set, found that early stage biotech funding has taken a dive since hitting a peak last fall. Seed funding in this sector, which hit quarterly peaks of roughly $400M and 53 rounds last year, sank to 26 rounds and roughly $100M in Q3 of 2022. 

Series A funding followed a similar trajectory, with quarterly highs of $2.3B and 88 rounds shrinking to just $500M and 41 rounds in Q3. And PitchBook found that the average biotech funding round dropped from $74.8M to $66M between the second and third quarter of this year. 

There have been some big deals during the second half of 2022, such as RNA-focused startup Orbital Therapeutics’ $103M seed round, but they’re few and far between. 

That all adds up to a shrinking real estate footprint for nascent firms. 

Add more judicious hiring practices, like holding back on hiring a full C-suite or allowing more remote work for non-lab-related tasks, and the reduced need for space is clear, said Yasmeen Ahmed Pattie, founder of East Egg, a firm that offers consulting and strategic planning for firms seeking lab space in New York. With smaller amounts of funding and fewer deals, the slowdown is pushing firms to seek out smaller spaces. 

But it’s more of a return to normal than a precipitous drop in new investments. 

“The slowdown was a correction,” Pattie said. “The last few years were the dot-com boom, and where we are now is where we should be. I hope it’ll grow in a more slow and steady, tortoise sort of way.” 

While budget constraints may be pushing startups to re-evaluate their budgets, they’re generally finding more options on the market, according to Colliers Director of Research Aaron Jodka. Compared to 2021, the market may be challenging. But checked against 2018 and 2019, activity and leasing remain strong.

Between sublease and direct options, new firms aren’t forced to take additional space like they were during the recent irrationally exuberant pandemic era, and defensively grab 20K or 30K SF to safeguard against the shortages of available lab space that plagued basically every major city.

“Context matters,” Jodka said. “2021 was phenomenal and simply not normal. Even though  we’ve seen an increase in sublease space, vacancies are still low compared to history. Vacancy used to be sub-1% in Boston, which is unsustainable for life sciences or any other market.” 

The return to normalcy doesn’t mean that startups and tenants aren’t looking for something different. Changing technology, including mRNA and cell and gene therapy solutions, have pushed smaller firms to focus more on shared space and access to biomanufacturing facilities.

For example, Azzur Group, which offers a clean rooms on-demand service, is seeing increased demand, D’Orlando said.

Landlords have responded to the changing demands of startups in different ways. Some are more open to subleasing and subdividing space. D'Orlando said he’s seen much more subleasing activity nationally, and even in notoriously tight markets like Boston, sublease space has surged. Startups are also spreading themselves across different sites and occupying multiple incubator spaces instead of moving into larger graduation labs. 

Larger landlords have also invested in subdividing space and making more room for smaller leases, D’Orlando said. Firms come to his team asking for workplace strategy consultations, including details on how floors can be redesigned to allow for downsizing tenants and shared amenities, like freight elevators. 

A big focus has been the split between office and lab, and figuring out how to give tenants more space for research and clinical manufacturing while cutting back on desks and cubicles. 

Like much of the rest of the commercial real estate world, life sciences landlords want more amenities that function as a magnet to get workers back, and justify a trip to the office. This means even more focus on popular amenities such as indoor-outdoor space and dining options, and often converting unused or underutilized offices to amenity space. A recent JLL analysis of the San Diego life sciences market noted that landlords are also responding to increased construction costs by sweetening deals with more generous build-outs and tenant allowances. 

“It’s kind of that tech mentality,” D’Orlando said of a new surge of additional amenities and TI spending. “It’s what it takes to keep offices filled, to keep lab buildings filled, and to get employees to come into the office.” 

Whatever cutbacks new biotech companies have made to their leasing, or will make in the near future, won’t have significant long-term impact, Jodka said. As much of the 37.4M SF of lab space under construction nationwide comes online over the next 18 months, according to CBRE research, there will be more available space for startups.

And today’s startups, already looking toward future growth, see the value in being conservative now, D’Orlando said, especially when it may be prudent to wait out recent interest rate increases for a time in the near future when rates flatten or even go down. 

“People understand the value of biotech after the pandemic,” Pattie said. “There’s going to be growth. There was a correction, but it’ll only continue to go up.”