Despite Rising Vacancy, Life Sciences Real Estate Development Continues

Executive Summary

• Life sciences employment grew by 3.5% year-over-year in February, compared with 2.9% growth in total non-farm payrolls. Employment in the biotech R&D sector grew by 6.2%.
• After increasing in Q4 2022, venture capital funding to the life sciences industry fell to $3.6 billion in Q1 2023—on par with pre-pandemic 2019 quarterly levels. However, while investors are more discriminating, there is no shortage of funding for novel research.
• The lab/R&D vacancy rate increased by 132 basis points (bps) quarter-over-quarter and 170 bps year-over-year to 6.7%. However, continued demand for life science space should limit any future increases in vacancy.
• Asking rental rates continued to rise as more Class A space was delivered to the market. Q1 saw a record-high average rate of $65.62 NNN across the top 13 U.S. life sciences markets, up by 3.2% from the previous quarter.
• More than 40 million sq. ft. of new lab/R&D space was under construction in Q1, with over 25% of it preleased. Almost 18 million sq. ft. is scheduled for delivery this year on top of the 2.1 million sq. ft. that was delivered in Q1.
• The top 13 markets recorded a combined 44,000 sq. ft. of negative net absorption in Q1. Philadelphia led with 460,000 sq. ft. of positive net absorption, while the San Francisco Bay Area had 260,000 sq. ft. of negative net absorption. With negative absorption in the top three markets combined for the second consecutive quarter, total quarterly absorption was the lowest it has been since at least 2016.