Sector Outlook & Investment Implications

The life sciences sector is well positioned to attract investment due to its long-term growth trajectory.

Key Takeaways

The pandemic dramatically accelerated the U.S. life sciences sector’s growth. However, it was then dampened by high inflation and rising interest rates due to the long timelines and high financial risk of R&D. CBRE views these near-term headwinds as a transitory normalization phase. We are optimistic about the sector’s future growth, supported by several key factors:

• Market Size & Potential: The U.S. life sciences and innovation markets are already the world’s largest. Long-term structural demand drivers, such as an aging global population, climate change and new technologies (e.g. artificial intelligence) are spurring innovation. This is expected to boost tenant demand and investor confidence in real estate.
• Investment & Funding Ecosystem: High interest rates and other trends have impacted capital allocation to the sector, including real estate. However, life sciences companies are generally well-capitalized, with signs pointing to long-term growth resumption.
• Resilience & Support: The life sciences sector has been less susceptible to immediate disruptions, partly due to continued support from the federal government and non-profits.

The life sciences sector has been relatively resistant to economic cycles.

Recessions have had limited impact on life sciences employment growth and funding over the past 30 years.

Unlike most other sectors, U.S. life sciences companies have generally sustained or increased employment during economic recessions. For instance, they added 1% to their payrolls during the 2007 to 2009 recession, while the overall economy lost 5% of payroll jobs. This trend was even more evident in 2020 when total employment fell by 6% from the previous year, while life sciences employment grew by 2%.

Recessions have hampered VC funding slightly more than employment, but it still tends to recover quickly. In 2008, VC funding fell by 16% during the recession’s peak, but quickly recovered in 2009, beginning an unprecedented growth period. From 2008 to 2018, annual VC funding for U.S. life sciences companies more than tripled, rising from just over $15 billion to more than $55 billion. After a brief dip in 2019, the pandemic spurred another significant rise in funding. While VC funding has cooled in recent years, other funding streams, such as M&A and strategic alliances, have largely offset the dip.

Figure 26: Total U.S. Life Sciences Employment vs. Nonfarm Employment, Index (1995=100)

Figure 27: Total Annual U.S. Life Sciences Venture Capital Funding

The $5+ trillion U.S. life sciences industry’s ongoing growth will sustain lab space demand.

The pandemic’s onset rapidly accelerated industry investment, deviating from prior years’ moderate growth.

Despite capital markets volatility, the life sciences industry consistently set new records in 2023. The total market capitalization of public companies with U.S. operations topped $5 trillion. This marks a 12% increase year-over-year and a 34% rise from 2019. Similarly, R&D expenditures among these companies reached a record-high of $177 billion, up 17% from 2022 and 50% from 2019.

The sector’s recent stress is illustrated in Figure 29, by the number of life sciences companies with a recently declining enterprise value, including the large increase in firms with a negative enterprise value. However, the sector’s consistent maturation is also evident. For example, nearly all corporate growth over the past decade has been among companies valued above $100 million. This reflects growth in earlier industry players alongside a consistent influx of new entrants.

The total number of public companies is still down from its peak in 2021, but this partially reflects strong M&A activity. Moreover, the number of firms with negative enterprise values shrank by 24% in 2023 “Total enterprise value” is measured here as market cap plus book value of debt minus cash.

Figure 28: Total Value and R&D Spending of Public Life Sciences Companies

Figure 29: Number of Public Life Science Firms by Total Enterprise Value

Structural trends should fuel sector growth long-term.

Demographic change, new therapeutic applications and technological advancements will be key drivers in the next 10 years.

As the world’s largest healthcare market, the U.S. spends significantly on pharmaceuticals, medical devices and other biotech products (Figure 30). This market should keep growing due to trends such as an aging population, rising life expectancy and chronic disease, and the higher likelihood of future pandemics. These factors increase demand for innovative therapies and treatments.

Alongside the sector’s primary focus on human health, new verticals will also fuel growth. Biotechnology and biomanufacturing are increasingly applied to innovations in areas like climate change, energy, food production and agriculture.

Technological advancements like artificial intelligence will increasingly accelerate the pace of discovery and development, sparking new product and application ideas. The robust U.S. tech industry, coupled with the geographic proximity of leading tech and life sciences markets, encourages quicker idea exchange and technology adoption than in other countries.

As the sector continues to grow and evolve, life sciences employment is expected to increase three to four times faster than total employment over the next decade, according the Bureau of Labor Statistics. However, the demographic trends driving the sector’s growth could also shrink the labor pool, possibly slowing job growth.

Figure 30: Historical and Projected U.S. Health Expenditures, Drug Sales and Senior Population (Index 2010=100)

Strong government support will bolster the life science industry’s growth.

The federal government has a significant interest in assisting the life sciences industry in solving national challenges. A notable example is the National Biotechnology and Biomanufacturing Initiative, signed by President Biden in 2022, with funding and regulatory changes for these industries.

NIH grants and contracts to companies, universities and non-profit researchers helps drive innovation. The Congressional Budget Office (CBO) anticipates a 22% increase in NIH outlays over the next decade, resulting in hundreds of billions of dollars in funding for research, development and commercialization.

The federal government has worked to streamline approvals for novel therapeutics, especially in the pandemic’s wake. Despite yearly fluctuations, FDA approval rates for novel drug treatments have been rising. The FDA has recently expanded several programs that accelerate the availability of drugs treating serious illness, including Priority Review, Breakthrough Therapy, Accelerated Approval and Fast Track.

Figure 31: CBO Forecasted Outlays for NIH Research ($ Billions)

Figure 32: Novel Drug Approvals in the U.S.

The industry is well-capitalized by a spectrum of funding sources.

Direct capital infusions such as NIH grants, VC and IPOs are important industry growth drivers but represent a small portion of total capital invested in life sciences companies.

This diverse funding ecosystem helps stabilize the sector when some sources slow. Despite decreased VC and IPO capital, the total value of 2023 deals from all capital sources exceeded the prior two years’ and more than doubled 2013 levels, according to pharmaceutical industry data.

M&A deals and strategic alliances, such as partnerships and licensing agreements, typically comprise about 60% to 70% of total deal value among pharmaceutical companies. However, during the pandemic era (2020 to 2022), these deals accounted for an average of just 54% of total deal value, while grants and VC funding averaged 13%. In 2024, all deal types are gaining momentum, with year-to-date values by mid-March already surpassing some 2023 totals.

Figure 33: Total Capital Value by Deal Type, U.S. Biopharmaceutical Industry

Rising IPOs and VC investments should portend increased real estate demand.

Some capital sources have historically been more correlated with demand for lab space and life sciences real estate.

Although M&A is the life sciences industry’s largest capital source, these deals typically occur after companies have already established a real estate footprint. In fact, M&A may lead to space consolidation. Partnerships between larger pharmaceutical firms and startups can sometimes stimulate increased lab space usage. For example, Phase II trials tend to be correlated with lab absorption.

However, VC funding and IPO activity tend to be most correlated with real estate demand, as they enable earlier-stage firms to quickly scale their workforce and real estate footprint. Typically, real estate activity occurs about three to six months after VC funding deals close, and about six to 12 months following IPOs (Figure 32).

Capital flows from both key sources fell dramatically from their 2021 peaks due to the decline in biotech company valuations and broader capital market challenges. Typically, an increase in biotech equity values triggers more VC and IPO activity. Since hitting a 52-week low in October 2023, the S&P Biotechnology Index (XBI) has rebounded in 2024, which illustrates the positive sentiment shift in the industry and suggests more capital-raising this year.

Figure 34: Lagged Values of IPO and Venture Capital Deals vs. Net Absorption of Lab Space

Tenants now in the market indicate demand for space should increase in coming quarters.

U.S. life sciences occupiers have indicated that they are seeking more than 12 million sq. ft. of lab space, as of Q4 2023.

This level of tenant demand, typically translating into about 1-2 million sq. ft. of life sciences real estate net absorption per quarter, approximately aligns with the demand implied by current VC and IPO activity levels.

After a brief period of negative net absorption in mid-2023, net absorption climbed in Q4 2023, but was still below expectations given market demand signals (as indicated by requirements). This negative net absorption in 2023 was partly due to many life sciences companies over-leasing space in 2021 to 2022 in anticipation of future growth, before shedding extra space in 2023 as capital markets tightened. Most of this excess space has now been shed and optimism is growing around the financing environment. Unless a large share of tenants withdraw their requirements without leasing space, historic trends suggest a more positive outlook for fundamentals in 2024.

Looking ahead, it is expected that secular shifts will fuel demand for life sciences real estate, as the sector continues a sustainable, long-term growth trajectory.

Figure 35: Life Sciences Tenant Requirements and Net Absorption, Indexed (Q4 2016 = 100)