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'Perfect Storm': Early 2024 Biotech Bounce Isn’t Helping Deflated Life Sciences Real Estate Market

The stubborn mismatch of life sciences lab space — a growing glut of supply and moderation of demand — hasn’t shown signs of any correction thus far in 2024.

Early analysis and data suggest that despite positive market signs and financial activity, including increased Big Pharma merger activity, the runaway success of anti-obesity drugs and a thawing of the initial public offerings market, the biotech real estate slump isn’t ending soon.

Signs of a thaw in the biotech funding market in 2024 haven’t significantly helped lab real estate activity.

“In the major life science markets, like San Diego, Boston and the Bay Area, it’s still the perfect storm when it comes to the real estate side,” said Savills Vice Chairman Shane Poppen, market leader for the firm’s San Diego life sciences practice. “Companies just aren’t taking down space at the same clip they used to. And there’s no scarcity of supply anymore. In fact, it's mind-numbing how much space there is.”

Preliminary data and anecdotal observations before first-quarter data is officially released show a slight uptick in absorption, as well as significant increases in vacancy and sublease space. In San Diego, early Q1 data from Savills shows the vacancy rate stubbornly high at 11.6%, reaching 15.4% if you include sublease space. Asking rents hit $78 per SF, down from $82 per SF the same quarter last year. 

There has been leasing activity for lab space, as well as some significant fundraising. Matt Gardner, leader of CBRE's advisory life sciences practice, estimated $15B in Q1 alone. But the leases are typically smaller and representative of more conservative deal-making, according to Gardner. There’s still a significant lag between landing funding and expanding square footage, and the likely delay of an interest rate cut from the Federal Reserve isn’t accelerating a return to the energy of 2020 and 2021. 

Landlords want to sign leases, but absorption comes slowly with so much sublease space on the market. Two of the bright spots in biotech in recent months, merger and acquisition activity and Big Pharma spending, can lower absorption, since smaller firms can be folded into existing lab space.

The space needs of big firms can fluctuate. In San Diego, Pfizer just signed a new 250K SF lease, but it also vacated 600K SF, creating a net loss for the market.

Leasing rates look exceptionally bad compared to 2021 because of artificial demand during the peak. Firms took extra space whenever it was available, fearing they would lose out in a low-vacancy-rate era. That means more conservative startups, battling for less VC funding and more concerned about their runway, are taking significantly less space today.

Poppen said he is starting to see the first trickles of defaults, like the recent bankruptcy filing from Sorrento Therapeutics, that could become a wave.

Developers planned for new capacity based on the supersized leases of 2021, contributing in part to the supply glut that continues to depress rents. Roughly 21.3M SF of new lab space is set to come online in 2024, according to CBRE.

“There’s just so much space to gobble up,” Poppen said. “Never in our lifetimes have we had this much new construction in life sciences. Everyone thinks we’re hitting bottom, but it seems like instead we just keep bumping along the bottom.”