Demand Increased for US Life Sciences Real Estate in Q4, But Wave of Construction Completions Added to Vacancy Rate

Demand for U.S. life sciences real estate increased in the fourth quarter as companies moved into more lab space than they vacated, illustrating the sector’s resilience amid economic and capital markets headwinds, according to a new report from CBRE.

Net absorption totaled 491,000 sq. ft. across the 13 largest U.S. life sciences markets in the quarter, buoyed by gains in San Diego, Seattle, Houston and Washington, D.C. Net absorption is a proxy for demand in that it measures the amount of space newly occupied in a timeframe against the amount newly vacated.

The fourth-quarter gain in net absorption marked a reversal from the negative result of the previous two quarters, when companies collectively vacated more lab space than they moved into.

“This is a positive sign amid expected challenges for the sector this year,” said Matt Gardner, CBRE’s Americas Life Sciences Leader. “There’s no disputing that the sector has cooled off since its rapid growth of 2020 to 2022. But this increase in demand for lab space underscores that many factors still are fueling steady growth, including increases in life sciences employment, clinical trials, drug approvals and federal funding.”

Recent leasing activity could support additional absorption gains. Companies signed new leases for nearly 500,000 sq. ft. more in the fourth quarter than in the third. That activity will translate to absorption once those companies move into that space.

Among the strongest headwinds for life sciences real estate is a wave of lab construction this year and last. Developers completed construction of 7.7 million sq. ft. in the top 13 life sciences markets in the fourth quarter, pushing the 13-market vacancy rate to 13.1%, up 2.3 percentage points from the third quarter. CBRE forecasts completion of another 20.7 million sq. ft. of labs this year.

Meanwhile, the average lease rate for U.S. labs climbed to $70.07 per sq. ft. per year, up 4.1% from the third-quarter rate. The increase is attributable to the debut of newly constructed labs that command higher rents.

Other metrics are mixed. Venture capital funding for life sciences companies declined in the fourth quarter from the third. But job growth is healthy; U.S. life sciences job growth registered an annual pace of 2% in November, exceeding total US job growth of 1.8%.