San Francisco Bay Area Life Sciences Real Estate Market Shifted in Q3 from ‘White-Hot’ to ‘Red Hot’

The U.S. life sciences real estate market showed signs of normalizing in this year’s third quarter after setting records in 2021, according to a new report from CBRE. Still, the market’s latest measures handily exceed those from before the pandemic.

Demand for lab space in the San Francisco Bay Area increased to 5.3 million sq. ft. in the third quarter, the highest of the top 12 life sciences markets across the U.S. Labs under construction in the Bay Area was the second highest share, totaling more than 9 million sq. ft., of which 20% is pre-leased. The average lab vacancy rate in the Bay Area increased in the third quarter to 7.4% from 5.8% in the second quarter this year.

“The Bay Area life science real estate market is well-insulated and generally avoided risk factors during the pandemic. The region isn’t immune to market headwinds, but the Bay Area has a strong research infrastructure and established life science developers remained focused on the long-term trajectory to refrain from overbuilding in the last two years. The new research space that is being constructed now is almost entirely controlled by the handful of established life science developers who can draw on deep and growing tenant portfolios,” said Dino Perazzo, Vice Chairman with CBRE’s Life Sciences Practice in the Bay Area.

U.S. life sciences employment increased by 5.4% in the third quarter from a year earlier. Venture capital funding in the Bay Area declined slightly in the third quarter ($1.1 billion) from the second ($1.8 billion), though funding volume remains on course for the third-highest annual total on record after 2021 and 2020.

“Venture capitalists have increased discretion on who and what they are funding in light of market headwinds. VCs are “right sizing” their valuations to properly reflect expected returns, but demand for lab and R&D space still surpasses pre-pandemic levels and remains near record highs. In turn, IPO markets have tightened which has opened doors for large biotech and Big Pharma companies to create scientific programs or acquire companies outright,” said James Bennett, Vice Chairman with CBRE’s Life Sciences Practice in the Bay Area.

Average lease rates across the 12 markets increased by 6.8% to $60.28 in the third quarter from the second. The Bay Area ended the quarter with the fourth highest average asking rent ($71.62) of the top 12 markets.

Top Life Sciences Markets: Select Q3 Stats

*In square footage of existing lab space.