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Life Sciences Pipeline Doubles In D.C.-Baltimore Area Despite Headwinds

Though market headwinds seem to be gaining force, the D.C.-Baltimore life sciences market has seen new construction nearly double since the start of 2021.

20400 Observation Drive in Germantown, Maryland

The pipeline for new product has grown to roughly 1M SF, up from 473K SF in the first quarter of 2021, according to a new report from CBRE. During that same period, the report found the region's vacancy rate has been cut by more than half, from 3.6% to 1.4%.

“There are macro-level factors that are raising some flags, and rightfully so, but they should be analyzed alongside local market dynamics,” CBRE Executive Vice President Tommy Cleaver said in a statement accompanying the report.

“We are not overbuilt — our development pipeline is very measured and controlled by disciplined sponsors — our demand is real, and we have a talented labor pool that will sustain growth," Cleaver added. "Despite any negative headline you may read, we still have a need for new lab space.”

Venture capital investment in life sciences spiked to unprecedented levels in 2021, and there are signs the firehose of funding is slowing down. Nationwide VC funding declined 13.3% from the first to the second quarter of this year, to $5.8B. That is below the second quarter of 2021, but still higher than any other Q2 on record, per CBRE.

Small and midsized firms also appear more cautious to sign large new leases, but that hasn't slowed down big pharmaceutical companies, CBRE reported. The lab vacancy rate across the top 12 life sciences markets in the U.S. fell quarter-over-quarter to 5.2%.

Locally, the report found there are 19 tenants in the market, with a combined demand of nearly 850K SF. Germantown, which has a 0% vacancy rate and the smallest inventory in the market, saw the two largest leases of the quarter, with Vaccitech signing a new lease for 20K SF and Deka signing a new lease for nearly 14K SF.

The three projects in the pipeline that aren't conversions are 78.8% pre-leased, while conversions are 36.1% pre-leased.

Of the life sciences projects under construction in the area, nine out of 12 total projects are conversions. In Germantown, Guardian Realty Investors is converting an industrial/technology building at 20400 Observation Drive into lab space and is marketing smaller spec suites and larger build-to-suit suites.

In Rockville, Rock Creek Property Group spent $9M to acquire two floors of an office property and plans to convert them to lab space. The project, which will be marketed under the Precision Labs brand, follows the developer's acquisition of three Germantown buildings for $22M in October 2021 with the intention of converting them to life sciences space.

Cadre also sold three buildings recently converted to life sciences totaling 284K SF in Rockville to MetLife Investment Management, turning a $58M profit in just a few years.