Five Positive Forces Unfolding in 2025

01 Improving Macroeconomic Environment

Continued resilience of the U.S. economy this year will help drive life sciences revenues that support demand for lab/R&D space.

This economic resilience is underpinned by strong consumer spending despite relatively high inflation and interest rates. Part of this has been driven by record household wealth over the past two years due to surging equity markets and home values.

Job growth occurred for the 47th consecutive month in November 2024. Many life sciences employers are adding employees, as total U.S. life sciences employment reached a record high in October 2024.

Various factors could dampen this improved outlook, including any negative impacts to consumer spending. The prospects of an aggressive tariff regime and immigration restrictions under the Trump administration could fuel further inflation and relatively high interest rates.

Figure 1: CBRE Forecasts for U.S. Real GDP Growth

The relationship between short-term interest rates and life sciences demand drivers like venture capital investment over the past few years has been significant. As the federal funds rate fell in 2024, key indicators, such as the S&P SPDR Biotech ETF, venture capital flows and IPOs, edged higher. As a result, life sciences demand in 2025 should benefit from a less-restrictive monetary policy.

However, the 10-year Treasury yield also has a significant effect on life sciences dynamics, especially as a driving factor behind property values and investment activity. The uptick in Treasury yields at the start of 2025 has negatively impacted some of the positive momentum in various life sciences capital markets indicators and is expected to stabilize later this year at its highest level in nearly 15 years. Stabilizing yields should buffer further declines in property values and possibly spark more investment activity in 2025.

Figure 2: CBRE Forecasts for Interest Rates

02 Thawing Capital Markets

capital markets are generally thawing as the macroeconomic environment demonstrates unexpected strength, inflation moderates and short-term interest rates veer lower. The 10-year Treasury yield is expected to stabilize later this year and, along with lower short-term interest rates, should allow for further capital markets improvement through modestly better IPO insurance.

U.S. life sciences venture capital funding has become more plentiful. Although skewed toward larger deals, annual total funding frew by 10% in Q3 2024 and was 10% higher than the pre-pandemix peak in 2019. Preliminary Q4 2024 data suggests a quarterly pullback in funding, but the highest annual total in two years.

Figure 3: U.S. Venture Capital Funding ($, Billions)

Nearly 60% of annual venture capital funding in Q3 2024 was invested in later-stage companies, showing investors preference for maturer opportunities with better near-term prospects. In contrast between 2017-2022, later stage investments comprised only 44% of annual funding when investors were willing to be more aggressive.

Early-stage and seed funding have remained reasonably stable, with seed funding down by only 27% from its peak compared with a 41% decline for all venture capital funding. A more significant pullback has occurred in angel investors and grants for the most speculative companies.

Figure 4: Q3 2024 Annual U.S. Venture Capital Funding by Stage

Georgraphically, there has been no change in venture capital funding concentrating in the "Big 3" markets of Boston-Cambridge, the San Francisco Bay Area and San Diego. Beginning in 2016, venture capital increasingly gravitated to these markets, capturing an average 62% of all venture capital funding through 2024. In contrast between 2005 and 2015, the Big 3 markets attracted 53% of all venture capital funding.

Seed funding is more evenly allocated between the Big 3 markets at 48% and the rest of the U.S.

Figure 5: Share of U.S. Annual Life Sciences Venture Capital Funding by Markets

Public equity investments in life sciences companies (notably private investment in public equity or PIPE) and follow-on offerings have rebounded particularly well since bottoming in 2022. Through October 2024, public equity investment in life sciences companies reached a record $10.8 billion. Follow-on offerings in 2024 through October have rebounded by 43% since their trough in 2022.

Figure 6: Other U.S. Life Sciences Equity Financing

03 Record Life Sciences Employment

Despite the various challenges over the past three years, more people than ever are employed by the life sciences industry. Life sciences employment reached a record 2.1 million workers in October 2024.

Sluggish employment growth in the Pharmaceutical & Medicine Manufacturing subsector has been offset by record-high employment in the Biotechnology R&D subsector.

Job growth in the key life sciences subsector of Biotechnology R&D, whose breakthroughs in cell and gene therapy drove a substantial amount of the jobs boom between 2012 and 2022, began to accelerate in 2024. Between January and October 2024, Biotech R&D companies added 10,700 employees or a 3.7% increase to a record workforce of 303,000.

Figure 7: U.S. Life Sciences Employment Trends

Figure 8: U.S. Biotechnology R&D Employment

Figure 9 illustrates the relationship between markets that had above-average life sciences employment growth between 2022 and 2023 and a lower-than-average share of their employment base in Pharmaceutical & Medicine manufacturing, which has been one of the most sluggish life sciences employment sectors.

Figure 9: 2022-2023 Life Sciences Employment Growth & Share of Employment in Pharmaceutical & Medicine Manufacturing

Markets in the top left quadrant of figure 9 had the highest life sciences employment growth, partly due to their having lower-than-average Pharmaceutical & Medicine manufacturing employment. In contrast, markets in the lower right quadrant are some of the nation's traditional centers for Pharmaceutical & Medicine manufacturing and as such had below-average total life sciences employment growth between 2022 and 2023.

Among major markets, San Diego had the nation's strongest life sciences employment growth between 2022 and 2023 at 12.3%. Among emerging markets, Sacramento led with 8.5% growth in life sciences employment, followed closely by Madison, WI with 7.6%.

The prospect for record U.S. life sciences employment appears favorable this year. Figure 10 shows the correlation between increases in life sciences venture capital funding and new employment in the key life sciences subsectors of Biotech R&D and Pharmaceutical & Medicine Manufacturing. Increases in the industry’s venture capital funding have historically led gains in employment by six to 12 months. Based on this, some 20,000 jobs in these life sciences subsectors could be added this year, resulting in increased demand for lab/R&D space.

Figure 10: Life Sciences Venture Capital Funding Growth & Employment Gains

Using a more sophisticated econometric model to project life sciences employment growth, Figure 11 shows a forecast for roughly 19,000 new jobs in the industry this year, offering perhaps a more realistic but still very positive growth expectation.

Figure 11: Life Sciences Employment Forecast

04 Increased Demand for Lab/R&D Space

The resilient U.S. economy, improving capital markets and growing life sciences employment are supporting momentum in several lab/R&D real estate indicators.

Total life sciences lab/R&D leasing activity in the nation’s 13 largest markets increased to 2.9 million sq. ft. in Q3 2024 from 2.0 million sq. ft. in in Q3 2023. Most of this increase was driven by renewals.

Figure 12: Total LeasIng Activity

The amount of lab/R&D space sought by tenants has stabilized over the past year and may slightly increase in 2025 due to a more favorable capital markets environment and continued economic growth.

In primary markets, the average amount of space sought by tenants over the past year was roughly 22% more than in 2019. However, space sought by tenants in the Big 3 markets was nearly 19% less than in 2019. Any greater improvement in capital markets or significant uptick in demand is likely to benefit the more volatile Big 3 markets than the other primary markets.

Figure 13: Life Sciences Tenant Requirements

Negative lab/R&D net absorption should continue to ease this year based on more favorable capital markets and recent employment gains.

Figure 14: Life Sciences Employment Growth & Lab Net Absorption

05 Persistent Life Sciences Innovation

The life sciences industry remains in a period of unprecedented innovation and discovery.

Through mid-December, 48 novel drugs were approved by the FDA in 2024, the sixth highest annual total since 1985. Over the past seven years, the FDA has approved an annual average of 49 novel drugs, a 38% increase from the average number between 2011 and 2017 and almost double that from 2000 to 2010.

Figure 15: FDA Novel Drug Approval

Cell and gene therapy advancements will be one of the defining achievements of the life sciences industry in years to come. FDA approvals in these areas have been on the rise since 2020, providing a significant source of growth for both the life sciences and healthcare industries in coming years.

Figure 16: Cell & Gene Therapy Approvals

R&D expenditures by public life sciences companies are expected to continue fueling the historic pace of discovery in 2025. These companies have nearly doubled their R&D expenditures over the past 10 years.

Figure 17: U.S. Life Sciences Public Company R&D Expenditures

There remains a large amount of new science being developed, with more than 8,300 products in preclinical and Phase 1 trials. These trials are heavily focused on treatments for cancer, neurological disorders and infectious diseases.

Figure 18: U.S. Life Sciences Products by Development Phase & Disease

While Boston-Cambridge and the San Francisco Bay Area have the most trials by total number, all of the primary U.S. life sciences markets have varying amounts of trials by disease (Figure 19).

Figure 19: Composition of Clinical Trials by Major Disease Category (patterns denote specialties)

Although most clinical trials in Boston-Cambridge and the San Francisco Bay Area are being undertaken in the fight against cancer, the share of their total clinical trials addressing cancer is on par with the average across all markets. However, Boston-Cambridge has an outsized share of clinical trials for cell/gene therapy and antibodies, while San Francisco has a high number addressing neurological disorders.

San Diego and Philadelphia have strong activity in cell/gene therapy, while 58% of clinical trials in Houston address cancer.