By Jack Stubbs
For the last several quarters – and indeed years – the life sciences sector has been a growing real estate industry across the U.S., particularly in key markets like Los Angeles/Orange County, San Francisco, Seattle and San Diego. And according to a recently-released report by JLL, “2023 Life Sciences Industry and Real Estate Perspective,” this trend shows little signs of slowing.
Some of the key takeaways from the report were the following: demand for lab space has slowed, but is poised to bounce back as top VC firms grow more confident in the coming months; a wave of supply is hitting markets across the country, with a particularly high concentration in Boston and the Bay Area; job demand in the life sciences sector has returned to record highs, indicating a potential increase in demand for lab space in the coming quarters; and, lastly, that opportunities exist for both tenants and landlords in an evolving environment.
From a national perspective, one of the primary factors driving the life sciences industry and demand for commercial lab space is the robust amount of VC funding available for startups – following the COVID-19 pandemic, there was around $10 to $13 billion invested per quarter across the U.S., compared to the more typical $5 to $6 billion, according to the report. The past four quarters saw nearly $26 billion in VC investments across the U.S., which is more than any year pre-COVID-19.
Another trend characterizing the broader life sciences market is a change in the demand for lab and manufacturing space, with current opportunities particularly abundant for tenants rather than owners, explained Chad Urie, JLL executive managing director in San Diego.
“If you look at it from a tenant perspective, now is a fantastic opportunity to really mirror your real estate with your business strategy. The market has been so tight for the past several years that tenants haven’t had that luxury,” Urie said. “Owners have dictated the terms and length of the lease and tenants had few options. With the market loosening, these companies are now in a position to drive real estate solutions that fit their real estate needs.”
At the end of 2021, demand across the top eight markets in the U.S. – among which included the Bay Area, San Diego, Seattle and Los Angeles – stood at over 25 million square feet. By mid-2023, that figure had fallen to just over 10 million square feet. In most markets, small users in particular are those looking for space rather than mid-to-late-stage companies. Sub-30,000 square foot tenants accounted for 82 percent of deals signed in the first half of 2023, up from the previous average of 65 percent, states the report.
Despite the general decrease in demand from late 2021 to mid-2023, there is a significant supply wave hitting markets across the country (the national pipeline figure is three times that of 2019) particularly in the Bay Area and Boston markets. Of the 37 million square feet of investor-owned lab space under development in the U.S., 63 percent is in Greater Boston or the Bay Area. Meanwhile, markets like Los Angeles, Raleigh-Durham and D.C./Maryland have pipelines as a percentage of current stock of approximately 10 percent or less, states the report.
One of the factors that might account for the significant disparity of life sciences space under development is a lack of available infrastructure, particularly in markets like Los Angeles and Orange County compared to those of the Bay Area and Boston.
According to Patrick Church, JLL managing director in Los Angeles, this is particularly being felt in areas like Pasadena.
“In markets like Pasadena…the infrastructure for life sciences space doesn’t exist…some companies have moved into traditional office buildings and have run into significant issues with power and HVAC, because these buildings weren’t built to accommodate lab space,” he said. “Having the right infrastructure is vital for us in our market. Unlike in San Francisco or San Diego, Los Angeles doesn’t have buildings that were built from the ground up to be suited for life sciences. It’s a challenge, but we’ll get there.”
Orange County is faced with similar challenges when it comes to providing the necessary infrastructure and inventory, according to Jason Lantgen, JLL managing director in Orange County, and is not blessed with the relatively larger amount of supply in markets like San Diego.
“From the Orange County perspective, it’s interesting to hear about the San Diego and Bay Area markets. The problem we’re finding is that we’re bumping into other industries with the requirements on infrastructure. The real estate requirements in Orange County are significantly less,” Lantgen said. “For companies coming out of incubators or looking for wet lab space, a historical challenge in Orange County has been a lack of wet lab space, which contrasts with the excess of supply in San Diego.”
In terms of the continued robustness of the life sciences across the country, proximity to talent – and the integration of said talent into the industry – will remain a key factor moving forward.
“The life sciences is not just a core market opportunity any longer; it’s all about talent, and there is an increasing focus from employers and real estate companies. These universities are shifting quickly to gear their programs to where things are heading,” noted Urie.
In the historically tech-centric Bay Area, the life sciences are moving on par with more established technology companies in terms of the fight for talent, according to Grant Yeatman, JLL Managing Director (Bay Area).
“A bottleneck for our industry, or any industry, is employment. The composition of some of the scientists and data engineers working for AI here in the Bay Area is a big deal here. The life sciences are now competing with the Googles and Metas of the world in terms of the fight for talent,” he said.
Nationally, job postings grew from a monthly average of 16,000 before COVID-19 to nearly 27,000 in November 2022, states the report. Meanwhile, the appetite for new jobs grew substantially in spring 2023, to the point where May and June 2023 were both in the top six months for most monthly job openings on record.
From a practical standpoint, proximity to labor pools, particularly in markets like Orange County, will remain crucial to sustain the intellectual capital sustaining the life sciences.
“There is proximity and access to labor and the universities in Orange County; companies are always going to be looking close to home to capture the talent pool,” Lantgen said. “From a 50-year historical perspective for the Orange County market, the industries that have continued to become established and move forward here, gives me hope,” he added.