The life sciences real estate sector in Massachusetts is hurting from record vacancy rates, and a new report shows the funding that has historically driven demand for lab buildings still hasn't returned.

Venture capital funding for Massachusetts-based life sciences companies totaled $2.75B through the first half of this year, down 17% from the same period last year and the fourth consecutive year of declines, according to a new report from industry association MassBio.

This time last year, the organization was "optimistic" that the biotech industry had reached the bottom of its downturn and would begin to recover. That turned out to be wishful thinking.

"There were some indications that interest rates would fall, a few more exits would begin to happen, funding would loosen up, and M&A activity would return to a healthy level," MassBio CEO Kendalle Burlin O'Connell wrote in the report's introduction. "That did not happen."

The industry now faces new headwinds from the federal government.

National Institutes of Health funding to Massachusetts was already down in 2024 by about $48M, or 1.4%, from the year before. But as the Trump administration has slashed federal research funding, MassBio's report says the state is on pace to receive $464M less this year.

The drop in funding has resulted in a decline in jobs. Massachusetts' research and development employment fell by 1.7% last year, and biomanufacturing jobs declined by 1.5%.

"While federal funding cuts are threatening the foundations of medical discovery and the economic benefits that come with it, Massachusetts is committed to moving forward," Gov. Maura Healey said in a release. "With strong partnership between my administration, the Legislature, and industry leaders like MassBio, we are going to continue to support our life sciences industry and grow our competitive edge.”

While development of life sciences space has slowed during the downturn, another 1.1M SF of inventory came online in Massachusetts last year, bringing the total inventory to 63.2M SF, according to MassBio's report. It says the state's life sciences vacancy rate has risen continually over the last four years from 1.3% in mid-2021 to 27.8%.

Boston proper has an even higher vacancy rate at 38.3%.

While MassBio's report notes this vacancy has presented a short-term challenge for property owners, it says it creates a "long-term benefit for the ecosystem."

"For so long, we were almost at 100 percent capacity, so companies didn’t even have an option of where to go and how to get there," Burlin O'Connell told The Boston Globe. “Now we have vacancy, we have space available, and that creates optionality for these companies.”

Some developers that were advancing or planning conversions of vacant office buildings to lab space have since reverted, as life sciences tenants have become harder to land than office users — a complete reversal from 2021. Developers said at a Bisnow event in June that many "subpar" lab buildings that were hastily converted from office during the sector's boom have struggled to lease, while tenants have been drawn to new, purpose-built lab space.

Developers also said they have seen a pickup in touring activity from life sciences tenants this year. And while MassBio's report shows funding is down from previous years, it still found Massachusetts remains a top global hub for the sector.

The state's biotech companies received 22.5% of all U.S. VC investment during the first half of this year, second to California. And it was the No. 3 state for NIH funding behind California and New York — though the highest on a per-capita basis.

"I have full faith that when the dust settles, it is the Commonwealth of Massachusetts that will lead the way back," Burlin O'Connell wrote. "We’ve done it before. We’re trying like hell to do it again."