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Life Sciences Real Estate 2023: Resolutions And Recalibration For A Cautious Year Ahead

Looking forward to the trends that will define the new year, and predictions for 2023, a group of leading life sciences industry analysts predicted a much more cautious approach to investment, a reflection of larger macroeconomic challenges, yet continued long-term investment in an asset class that continues to grow in importance. 

“We’ve entered a really slow, kind of cautious period,” JLL Head of Americas Work Dynamics and Industry Research Amber Schiada said. “We’ve also seen valuations come back down to earth, too.”

The contours of 2023 were set, in large part, by the recent past. In the nine-year bull run from 2014 to 2021, which Alexandria Real Estate Equities Chairman Joel Marcus called “unprecedented," the biotech industry saw roughly 500 IPOs and $300B in venture capital raised. Marcus said it’s clear the market is healthy, but investors are more careful about deploying capital today, which will have a significant impact on the next 12 months of funding, competition and real estate development. 

“It’s good and bad news,” Marcus said. “It’s good news for the companies that succeed, with positive data and bad news for the companies that won't be able to raise money, and need to look at shutting down or combining or something like that.”

Here are some of the trends and predictions nine industry analysts and experts believe will shape the market to come. 

Alexandria Real Estate Equities Chairman Joel Marcus

A Buyer’s Market For Space

With the funding market becoming more cautious and development pipelines poised to deliver new product, especially in major markets, this year may become more of a buyer's, or renter's, market. Unispace Head of Life Sciences Dean Poillucci sees inventory outstripping demand during this period, leading to cheaper rent for those startups that thrive in this environment. There have already been signs of increasing sublease space. 

That isn’t to say developers aren’t facing challenges; while cost overruns have moderated from pandemic highs, this will still be a difficult time to pay for labor, materials and machinery. Colliers Director of Research Aaron Jodka expects some projects will be put on hold due to financing challenges.

“The developer community will have to get even smarter about how you're planning out these developments, because the shortages are real and the increasing costs are real,” said Suzet McKinney, Sterling Bay principal and director of life sciences. 

Automation And AI Impact Lab Design 

Recent tech news cycles have focused on a new crop of AI chatbots and the technology’s impact across a wide range of industries. Life sciences won’t be left out of that shift, JLL’s Schiada said. She foresees AI, robotics and automation, especially in facilities management, testing and lab operations, streamlining how startups work and eventually decreasing the amount of space they need, especially in early stages. More developments will start rethinking the allocation of lab and office space in new projects, focusing more heavily in research and development as remote work and tech continue to change how researchers work. 

Matt Gardner, leader of CBRE's Advisory Life Sciences practice, said there’s talk of using automation and AI to create continuous manufacturing facilities, allowing biomanufacturing to radically increase output and bolster the growth of new cures.

The Evolution Of Emerging Markets

Marcus at ARE noted that both Maryland and the Research Triangle in North Carolina have been focuses at his company. The Research Triangle in particular has attracted development because “you can actually build and create scale down there,” especially with its “tremendous” talent pool. But he also noted the promise of Texas, which has an “embryonic” life sciences market and a lot of long-term promise. Schiada agrees on Houston in particular, as it has all the elements coming together, in terms of new and soon-to-complete lab developments, and the “proof point is coming.” Poillucci also predicts the buzz around Chicago and the momentum in Philadelphia will help buoy those markets as well. Sterling Bay’s McKinney also highlighted Minneapolis as a potential growing market, aided by medical device talent that could help seed a larger biotech sector. 

Another trend to watch, although not in an emerging market, is conversions in downtown San Francisco. Northmarq Senior Vice President and Managing Director BJ Feller predicts the tech downturn, and layoffs at big firms, will open up a lot more opportunity for redevelopment and conversions in prime Bay Area locations. 

“The Bay Area would love to see, say, 5% of the employment base switch from tech to life sciences,” he said. 

Suzet McKinney, Sterling Bay's director of life sciences

Uptick In Acquisitions

"If I was going to look at 2023, and say one word to describe the year, it would be 'partnering,'" CBRE’s Gardner said.

The massive Amgen acquisition at the end of 2022 might be a sign of things to come in 2023. Gardner believes the ability for larger players and pharma to acquire startups seeing their run rates dwindle will be a huge buoy for biotech. When VC markets are more skittish, mergers and acquisitions will help fill the vacuum and fund expansions and research that will keep tenants in buildings. 

ARE’s Marcus believes the big players in Big Pharma, who have $300B or so of cash in play on their balance sheets, will launch a wave of bolt-on acquisitions, or mergers with smaller firms in similar industries that present great strategic value, in this case, existing drug pipelines. Others have suggested that with funding being somewhat harder to come by, any startup that can prove itself will be courted by established companies. 

The All-Electric Lab Building Becomes A Bigger Deal

The expansion of emissions regulations across big cities will make a bigger impact in lab design going forward, predicted Project Management Advisors Executive Vice President Bernie Baker. He noted that South San Francisco is updating its building codes, and with the expectation that more municipalities will enact Local Law 97-style emissions codes, energy-heavy lab buildings will have to increasingly conform to more stringent carbon emissions targets. 

“It’s doable right now,” Baker said. “The question is when will it be required?”

Capital Flows Remain Steady

The slowdown in venture dollars in 2022, a reaction to the macroeconomic downturn, rising rates and uncertainty around construction cost, have led many to predict more retrenchment and recalibration. But there are signs of a healthy, if more measured, investment environment, especially in future quarters. JLL’s Schiada has fielded many calls from foreign capital looking to invest in the market, and believes the relatively small investor pool is getting more “sophisticated.” She sees a recalibration of investment dollars from segments like office to life sciences and labs. 

“Life science is still the No. 1 alternative asset class across the globe,” Jodka said. “And that's certainly still the case here in the U.S. and the Americas. So it is very much an asset class in focus. A number of groups are looking at life science as a way to fill up some of their office bucket, or replace some of their office investment allocations.”

Biomanufacturing Facilities Get Smaller And More Personalized

One of the more salient shifts in biotech has been the emergence of new technologies, particularly cell and gene therapy and mRNA technology. As startups continue to develop proprietary, personalized medicine and biologics, which require earlier and more robust access to biomanufacturing facilities, there will be increased demand to protect their intellectual property.

Unispace’s Poillucci believes there will be growing demand for small biomanufacturing sites, around 60K to 80K SF, for smaller firms to control and protect their work. He’s already seen a number of speculative facilities designed for “good manufacturing practices” compliance in the Boston area going up to meet this kind of demand. 

This boom will come at the same time early examples of cell and gene therapy and mRNA technology begin to come to market, which will lead to increased demand for manufacturing capacity. 

Bob Dougherty of Luminous Capital Management foresees a “dramatic expansion” of biomanufacturing capacity going forward, including contract manufacturing, kicking off in the next year. Expect new deals in the big three markets of San Francisco, San Diego and Boston, as well as emerging areas like Orange County, California.