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Sluggish capital markets, high interest rates, slowing economic growth and record-high supply of new lab/R&D space will be challenging for life sciences markets in 2024.

As demand for space returns to pre-pandemic averages, construction deliveries should peak in 2024, which will increase the overall vacancy rate and lower the average rent. The construction pipeline should drop dramatically in 2025, allowing property markets to stabilize amid more leasing activity.

Net absorption of lab/R&D space turned negative in 2023, particularly in the top three life sciences markets of Boston-Cambridge, the San Francisco Bay Area and San Diego. These markets had a much faster inflow of venture capital funding between 2019 and 2021 (+170%) than the 10 other primary markets (+82%), possibly leading to more risk-taking, misallocation of capital and overzealous expansion plans. Significantly higher amounts of new construction also occurred in these markets.

Figure 18: Lab/R&D Space Net Absorption

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Source: CBRE Research, Q4 2023.

Tenant requirements for lab/R&D space in seven key markets—though down considerably from the peak in 2021—are roughly consistent with the pre-pandemic average between 2016 and 2019. However, the supply of new space has skyrocketed by 345% from the pre-pandemic average (Figure 19). These supply-and-demand dynamics are expected to prevail in 2024.

Figure 19: Q3 2023 Lab/R&D Supply & Demand vs. 2016-2019 Average

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Note: Combined total for Boston-Cambridge, the San Francisco Bay Area, San Diego, Washington, D.C.-Baltimore, Raleigh-Durham, Seattle and New Jersey.
Source: CBRE Research, Q4 2023.

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Tenant requirements for lab/R&D space have fallen more sharply in the top three life sciences markets (-58%) than in the other 10 primary markets (-45%) since the peak in late 2021. The share of tenants’ lab/R&D space requirements in the top three markets hit its lowest level in the past five years in 2023 (Figure 20). Increased requirements for the 10 other primary markets underscores how mature and robust they have become as life sciences centers.

Figure 20: Share of Tenant Requirements for Lab/R&D Space

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Note: Top three markets are Boston-Cambridge, the San Francisco Bay Area and San Diego. Ten other primary markets are Washington, D.C.-Baltimore, Raleigh-Durham, Philadelphia, Seattle, New Jersey, New York City, Chicago, Los Angeles, Denver-Boulder and Houston.
Source: CBRE Research, Q4 2023.

Construction completions of new and converted lab/R&D space in 2024 are expected to exceed the record 13.3 million sq. ft. of completions in 2023 (Figure 21) by more than 5 million sq. ft. In 2025, completions should fall dramatically to less than 5 million sq. ft., the lowest total since 2019.

Figure 21: U.S. Lab/R&D Construction Activity

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Note: Includes speculative and excludes build-to-suit projects and a small number of properties without an estimated delivery date.
Source: CBRE Research, Q4 2023.

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More than 40% (13.4 million sq. ft.) of lab/R&D space scheduled for delivery over the next two years is in the top market of Boston-Cambridge (Figure 22), followed by 7 million sq. ft. in the San Francisco Bay Area and 3.7 million sq. ft. in San Diego for a combined share of 76%.

Figure 22: Lab/R&D Construction (MSF) by Primary Market, Q3 2023

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Source: CBRE Research, Q4 2023.

The large amount of new space currently under construction has caused vacancy rates to increase sharply in the top three life sciences markets (Figure 23). The overall vacancy rate for these top three markets increased to 10.1% in Q3 2023 from 3.3% in Q1 2022 and should head higher in 2024.

Figure 23: Vacancy Rates in Top Three Lab/R&D Markets

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Source: CBRE Research, Q4 2023.

More moderate increases in vacancy have occurred in certain other primary markets. A composite vacancy rate for Washington, D.C.-Baltimore, Raleigh-Durham, Philadelphia and New Jersey increased to 10.6% in Q3 2023 from a low of 7.2% in Q4 2022 (Figure 24).

Although primary markets have a smaller pipeline of new supply, their vacancy rates likely will increase in 2024 due to high interest rates, an economic slowdown and sluggish capital markets.

Figure 24: Vacancy Rates in Select Other Primary Lab/R&D Markets

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Source: CBRE Research, Q4 2023.

Average asking rent for lab/R&D space in the top three life sciences markets declined by 0.1% for the year ending Q3 2023., compared with a 13.2% increase for the 10 other primary markets, due to more moderate supply growth and vacancy increases. As supply grows and vacancy increases in 2024, average asking rents across all markets should decrease moderately.

Figure 25: Average Asking Rents for Lab/R&D Space

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Source: CBRE Research, Q4 2023. Primary markets include Washington, D.C.-Baltimore, Raleigh-Durham, Philadelphia, Seattle, New Jersey, New York City, Chicago, Los Angeles, Denver-Boulder, and Houston.

Despite a surge of new supply in 2024, there are signs that demand should improve with recent increases in venture capital funding.

Total leasing volume of lab/R&D space in Boston-Cambridge and the San Francisco Bay Area, for example, shows the typical two quarter lag between an increase in venture capital funding and an increase in demand (Figure 26).

The recent slight uptick in venture capital funding may result in a near-term modest rebound in leasing activity, helping these markets navigate a challenging 2024. On the other hand, lower funding in Q4 2023 may temporarily dampen that momentum.

Figure 26: Lab/R&D Leasing Volume & Venture Capital Funding in Boston-Cambridge & San Francisco Bay Area

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Note: Two-quarter lag in direction of total leasing activity with that of total venture capital funding.
Source: CBRE Research, CBInsights. Q4 2023.

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