Emerging from a Recent Pullback, Life Sciences Has a Pulse

There are early signs of recovery within the life sciences environment following a recent investment slowdown as venture capital is re-emerging, tenants are coming off the sidelines and average deal sizes are hitting all-time highs, according to a recent report from Cushman & Wakefield.

Its research manager, Sandy Romero, said venture capital funding is up nearly 20% YOY and the number of life sciences tenants searching for space is up over 22% since late spring.

During the third quarter, first-round commitments fell 23% YOY, while second and third rounds were 29% and 31% higher YOY respectively, indicating the market’s preference for more established companies, Cushman & Wakefield reported.

Average deal size is again on the rise in Q3, averaging $48.9 million, which is the largest deal size average ever.

A recent uptick in tenants in the market (TIMs) is partially being driven by a return to normal in the life sciences sector, Romero said, adding that some tenants are being wooed by concessions.

All of this is very encouraging especially for more established companies, says Bob Dougherty, Principal at Luminous Capital Management. 

“Witnessing second- and third-round VC commitments being up, while first-round commitments fell YoY, indicates a market preference towards more established companies. We believe this trend will benefit the biomanufacturing arena even more than the lab sector, as investors will prefer commercializing more proven therapies over betting on new discoveries.

“Biomanufacturing is an extraordinarily capital-intensive business, so new commitments have been on hold for the better part of two years. We believe this translates to significant pent-up demand that will break loose in a significant way as capital begins to flow more freely.”

There are also hopeful signs for early-stage companies as well, according to Maddie Holmes, Senior Research Analyst, Life Sciences Industry Insight and Advisory, JLL.

She said more than $25 billion was raised by the top 20 VC firms focused on life sciences since 2021, capital which typically takes half a decade or more to deploy.

“The upshot is that there is ample dry powder ready to be invested as economic conditions stabilize. Demand for commercial lab space is likely to pick up because of any increase in funding,” she told GlobeSt.com.

“Into 2024 we expect to see continued M&A activity. Large pharmaceutical companies are targeting innovative start-ups, acquiring valuable intellectual property from early-stage companies facing a difficult fundraising environment.

“The forthcoming patent cliff, with $51.2 billion in revenues expiring on average each of the next six years, will also spur large biopharma companies to seek ways to expand their pipelines through M&A activity.”

However, there is some conjecture that the life sciences investments in 2024 will be far more strategic than years past, with companies needing to show financial milestones and a path to clinical trials, Nick Cassaro, Vice President of Life Science Development at BGO, tells GlobeSt.com.

“While this stabilizes growth within the marketplace and brings some predictability in 2025, we anticipate that the M&A activity will continue in 2024 with Big Pharma acquiring smaller companies to continue to grow their pipeline as some drug patents are set to expire.”

But while demand is slowly starting to pick up again in some markets, there is still a glut of available lab space due to the frenzy of construction of the past few years, Sabrina Solomiany, Senior Managing Director, Head of Medical & Life Science, Berkadia, tells GlobeSt.com. “Between the projects delivered in 2023 plus those scheduled for 2024, it will take some time before net absorption turns positive,” she said. “Ultimately though, trends are moving in the right direction and the expectation is life sciences real estate will continue to outperform in a major way.”

Ken Richter, Executive Vice President and National Life Science Sector Leader at Project Management Advisors, tells GlobeSt.com that there has been an “extraordinary amount” of speculative R&D space that has started construction in the major and even secondary life science markets.

“Coupled with increasing sublease opportunities, the R&D vacancy will increase to rates not seen in at least a decade over the short-term,” he said. “However, we remain very bullish on the life science sector and see the recent green shoots in Venture Capital and Tenants in the Market (TIM) upticks.

“In addition to demographics, the complexity of today’s drug delivery modalities (cell/gene therapy, RNA therapies, etc.) will drive more research and cGMP space than the traditional small molecule delivery.”

At the same time, niches within the category are gaining traction and creating new demand. Adam Burrington, national director of project development, Ryan Companies, tells GlobeSt.com that MedTech is separating itself from life sciences and emerging as its own sector.

“With advancements in technology and treatments, MedTech is well on its way to substantial growth in 2024,” he said.

“Aside from MedTech, the concept of damp labs will become more commonplace, providing end users with even more optimization and flexibility than wet and dry labs. We’ve also witnessed more institutions partner with developers to help fuel growth in tertiary and secondary markets.”

Tucker White, U.S. Life Science Lead, Market Intelligence, Boston & Philadelphia Manager, Market Intelligence, Avison Young, though, believes that until the public markets open back up and uncertainty surrounding the cost of capital is mitigated further, life science developers and landlords alike can expect the demand doldrums to continue.

“Most leasing activity in the second half of 2023 has been influenced by licensing agreements and M&A activity within the sector where larger pharma and biotech companies are now playing a more predominant role as a source of capital for emerging companies.”

Perhaps for these reasons, the creation of a true Class B category of assets for life sciences is emerging, according to Corey Hennings, Vice President, Life Sciences Regional Lead, Cumming Group. 

“Not every client in today’s challenging financial environment can move into a Class A building, but there is room and need for startups to have buildings with solid bones, space, and room to progress their science,” Hennings said.

“Investors should take this time to look at aged assets, explore conversion where they make sense, and focus on the upcoming life science markets as a true opportunity to be ahead of the wave of the next life science upswing.”