Demand Slows, Vacancies Up in Bay Area Life Science Market

The pandemic-era surge in the Bay Area life science market has finally come back down to Earth, with net absorption registering negative 501K SF in Q1 2023 as near-record new supply pushed vacancies up 190 basis points to end the first quarter at 8.2%.

“Rising interest rates and economic uncertainty have slowed both demand and capital infusion as the market continues to recalibrate,” Transwestern said, in a Q1 2023 market report.

As vacancy jumped from both softer deal activity and new product on the market, average rent growth declined considerably, falling 22.3% on a quarterly basis and 28.9% on an annual basis to finish the quarter at $4.10 per SF monthly (NNN).

Leasing activity in the Bay Area life science sector was muted as the four-quarter total reached 1.6M SF—a 55.4% pullback from a year ago., the report said.

The expansion in life sciences has spurred new construction and conversions to lab space, pushing development activity to new highs.  As of Q1 2023, there was nearly 5.2M SF of space under construction in the Bay Area, a 54.8% increase from one year ago, and the second highest level on record.

Two-thirds of development is concentrated in the San Francisco Peninsula and includes both new construction and lab conversions, with over 3.3M SF underway in Q1. The East Bay region accounted for nearly 1.2M SF of construction and San Francisco County recorded 527K SF.

“Life sciences employment continues to expand in the Bay Area. In 2022, employment reached 158,500, a growth rate of 4.6%, and it will continue to expand in 2023 at a slightly stronger pace of 4.8%. Over the long term, an aging population, rising healthcare costs and the need for more effective therapies will support stable employment growth.,” Transwestern’s report said.

Venture capital funding to life sciences in the Bay Area reached $1.6B in Q1, a quarterly decline of 42.6% but a return to pre-pandemic levels. Capital flows tapered off from peak levels as interest rates increased, Transwestern’s report said.

For the four quarters ending in Q1, the market registered almost $9.5B in capital invested, a 42.9% decline from one year ago and retreating back to 2020 levels. In 2021, research grants from the National Institutes of Health (NIH) grew for the seventh year in a row, increasing by 3.1% to $30.2B billion, up 43.8% from 2014 levels.