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Secondary Life Sciences Cities Stay The Course In Economic Headwinds

With the threat of a recession looming on the economic horizon coupled with foreboding predictions of funding drops for life sciences companies, emerging geographic markets across the country are in some cases better-positioned than their more established counterparts to weather the pending storm.

Downturns can be particularly dangerous for emerging markets, especially in life sciences, where there’s particularly high risk and long-term investment in larger developments. In late April, Alexandria Real Estate Equities Chairman Joel Marcus talked about a coming “have and have-not” era of biotech favoring established firms and markets. 

But the lower barriers to entry and growing talent pools in smaller markets may help insulate them from coming turmoil, especially those that have managed to attract major development players.

An aerial rendering of TMC3, a 37-acre life sciences campus in Houston's Texas Medical Center.

JLL Head of Life Sciences, Industries Americas Travis McCready predicted significant performance in markets like Dallas, Philadelphia, Los Angeles and Seattle. Landlords who aren’t life sciences-focused may struggle or pull back, but the established players, like Alexandria, BioMed Realty and Oxford Properties, will continue to build in second-tier cities, he said. 

“There’s been no step-off, generally speaking,” McCready said, alluding to the strength of the market and continued robust demand for lab space.

“The long-term life science landlords understand this isn’t a one-year or three-year market," he said. "This is a seven- or 10-year market. They’re prepared to absorb macroeconomic shocks like this.”

Overall, McCready isn’t ready to panic yet.

“If you remove 2021, the market is on track to perform at higher if not historical levels,” he said. “Leasing momentum, venture capital, all of the key metrics that we use to measure the robustness of the market are on par with 2019 and 2020 levels.”  

Dan Belldegrun, whose $3B Breakthrough Fund plans to invest in established and up-and-coming markets in the U.S. and UK, said this May that he sees potential for these markets to continue to grow and become “burgeoning life science clusters,” driven by talent and academia. 

In Houston, where the economy has long been dominated by energy companies and diversification of industry is welcomed as economic uncertainty persists, long-term regional players like the TMC3 project and the Texas Medical Center have made significant investments. 

While the city’s life sciences market isn’t necessarily “scalding hot,” there hasn’t been any slowdown in activity, CBRE Senior Vice President Scott Carter, who specializes in healthcare life sciences in Houston, told Bisnow. And the moderate pace of development in the industry aligns with the city’s goals.

“We’re not trying to be a Boston or San Francisco right now,” Carter said. “We’re trying to grow at a smart pace right now. It’s bite-sized compared to those other markets. We’re not getting out over our skis with the amount of purpose-built facilities that we’re building right now.”

Overall, Houston’s low lab inventory relative to demand means that projects currently in the works still have potential, even with a temporary drop in demand. 

Carter is looking toward 2023 and 2024, after large projects like Hines’ Levit Green development are complete, for the market to really take shape. 

Turbulence in 2022 isn’t anything he is too worried about long-term. CBRE’s recent life sciences talent report highlighted the city’s highly educated talent pool, and the nation’s best match-up of industry wages and cost of living. 

However, in these smaller markets, it doesn’t take much to derail the progress of the industry at large, according to Colliers Director of Research Aaron Jodka.

In smaller markets, when one big project hits the skids, it can cause a domino effect on other developers, Jodka said. He hasn’t seen any evidence of that yet, and with vacancy rates still low and demand strong, there aren’t as many compelling reasons to stop a project in motion. 

“Long-term plans may be more volatile, but short-term construction, I wouldn’t expect many changes there,” he said.

McCready also sees emerging markets separating into tiers in terms of talent attraction, especially when it comes to computer science and engineering talent.

Markets like Boulder, Colorado, and Salt Lake City will see significant growth due to the wealth of computer tech talent, which he predicts will be a growing part of biotech development. Those markets struggling to produce scientific and technical talent will fall behind.

For their part, startups have begun acting more conservatively with their expansion plans. 

Concerns about funding show up in smaller leases and more sublease space. JLL data shows significant jumps in the first two quarters of 2022 in the amount of sublease space available: 43.6% in Q1 and 29.7% in Q2. 

McCready estimates there’s now roughly 2.1% sublease availability, or a little over 3M SF available, in the markets of Boston, Seattle, San Diego, San Francisco, Washington, D.C.-Baltimore and Research Triangle Park in North Carolina.

Rents haven’t decreased, but the temporary market inflection allowing this sliver of extra space is helping potential tenants at a key moment. 

The availability of more prime lab space on the market at a national level is actually helping smaller, early stage startups right now move into bigger and better Class-A labs earlier in their life cycle.

Those who can get funded in a slightly more challenging market now have more room to grow. In Philadelphia, for instance, there’s significant lease activity happening in smaller spaces and incubators

Overall, funding for startups is making a “return to fundamentals,” he said. The downturn, relatively speaking, has been due to what he calls a recalibration on biotech firms that, in the last few years, received the benefit of overly exuberant markets in the form of overly generous valuations or fundraises. This may provide an extra boost to smaller firms and markets. 

“This is incredibly positive for future growth in the overall industry,” McCready said.