Life Sciences Project Cancelation May Be a Sign of the Times

Does the decision of Alexandria Real Estate Equities to cancel its conversion of a Boston office complex to a life sciences lab spell worsening trouble and more vacancies in that industry sector? Boston has been one of the country’s strongest life sciences markets, so as Boston goes, do other markets follow?

Alexandria Real Estate is now offering to sell the suburban Boston office complex at a 28% discount from its valuation at $170 million rather than proceed with the conversion. The offered price is almost a third of what the company paid three years ago. The reason is said to be a softening market, according to a Green Street Report. The softening began in Boston last year as interest rates rose and venture capital funding started to decline, dropping to $3.6 billion in this year’s first quarter, which mirrored pre-pandemic 2019 quarterly levels.

Fundamentals, though, are also softening in other life sciences markets beyond Boston. The lab/R&D vacancy rate increased by 132 basis points (bps) quarter-over-quarter and 170 bps year-over-year to 6.7% for the first quarter, according to CBRE. 

But this is key: CBRE also says that continued demand for life science space should limit any future increases in vacancy.

The short-term, however, may be a different story. The country’s top 13 markets had a combined 44,000 square feet of negative net absorption in the first quarter, according to CBRE, total quarterly absorption the lowest it has been since 2016. But results vary greatly by city, with the San Francisco Bay Area posting 260,000 square feet of negative net absorption while Philadelphia had 460,000 square feet of positive net absorption.

Meanwhile, more than 40 million square feet of new lab/R&D was under construction in the first quarter, and more than a quarter of it was preleased. About 18 million square feet are scheduled to become available this year, adding to the 2.1 million square feet already available in the first quarter.

One positive note for landlords is that rental rates continued to rise even as more Class A space became available. In the first quarter, there was a record-high average rate of $65.62 triple net lease across the top 13 U.S. life sciences markets, up by 3.2% from the prior quarter.

Also, life sciences employment grew by 3.5% year-over-year this past February, compared with 2.9% growth in total non-farm payrolls. In the biotech R&D sector, employment grew by 6.2%. RSM, a consulting firm, puts the employment more into perspective with an outlook report: “Coming out of a period of staggering growth during the pandemic, life sciences services companies, particularly in the clinical research space, have maintained strong growth despite the economic headwinds of 2022. Looking toward 2023 and 2024, we see a potential easing of these headwinds as the federal funds rate hikes potentially peak in the first half of 2023.”