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High interest rates have greatly tempered the investment sales market for R&D property types, including life sciences. R&D investment volume has dropped by 64% since Q1 2022, when the Federal Reserve began its interest rate increases.

Retail properties have been better able to navigate this high interest rate environment, with a relatively modest 36% decline in investment volume since Q1 2022, while office buildings (excluding R&D) have faced the biggest drop of 66%.

Figure 27: Sales Volume of Major Commercial Property Types Since Q1 2022

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Source: MSCI, CBRE Research, Q4 2023.

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The San Francisco metro area has seen the biggest decline in R&D property sales (-85%) since their peak in Q3 2021. Sales volume in the two other top three markets (Boston-Cambridge and San Diego) are down by 70% and 66%, respectively.

Sales volume in the 10 other primary markets has fallen by a lesser rate of 58%. The outlook for sales volume in 2024 will greatly depend on the path of interest rates.

Figure 28: Annual Sales of R&D Properties By Market

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Source: MSCI, CBRE Research, Q4 2023.

The average capitalization rate for R&D properties has risen by 50 basis points (bps) since mid-2022 to 5.9% in Q3 2023. By comparison, the average cap rate for conventional office properties (excluding R&D) has jumped by 70 bps to 7.0% over the same time. Cap rates may remain elevated in 2024 if interest rates stay high.

Figure 29: Cap Rates for R&D Properties vs. Conventional Office

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Source: MSCI, CBRE Research, Q4 2023.

The U.S. life sciences market is facing several risks in 2024, including the possibility of continued high interest rates, persistent inflation, geopolitical conflicts and a presidential election. However, a likely end of the Fed’s rate-hiking cycle may result in more investment activity but lower values, ultimately causing another relatively sluggish year for commercial real estate investment sales (Figure 30).

Figure 30: Historical & Forecast U.S. Commercial Real Estate Investment Volume

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Source: MSCI, CBRE Research, Q4 2023.

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