Lab Space Glut Grows Amid Slowing Life Sciences Leasing

Of the 21.2 million square feet of lab and R&D space currently under construction, 72% remains unleased, following negative net absorption last year and into the first half or 2024. Activity in the sector picked up slightly during the second quarter, but developers have a long road ahead to fill their new buildings, according to CBRE’s latest life sciences construction benchmarks and trends study.

Life science project costs have increased between 20% and 25% above pre-pandemic levels thanks in part to unique requirements including increased security, flexible design options, more plumbing, emergency power generators, increased HVAC and loading docks, among other amenities.

To meet exploding demand during the pandemic, some developers converted underutilized commercial spaces to lab/R&D use. That activity peaked at 35% in early 2022 and returned to a pre-pandemic level of 20% early this year. Conversions likely will continue to decline as construction starts slow and more space is delivered, said CBRE.

Speculative development has slackened some and many developers are pausing projects until they secure tenants, the report said. Developers are also holding off on starting construction until they have a signed lease. As of the second quarter, 22% of life sciences construction projects were fully leased, build-to-suit projects and 10% were speculative.

As new construction starts to decrease, CBRE expects deliveries per quarter to fall back to 2019 levels by 2026. Ten million square feet are set to deliver by the end of this year followed by 7.2 million square feet next year and 3.1 million square feet in 2026. By 2027, less than one million square feet is expected to be delivered although more projects will likely enter the pipeline by 2025 as inventory normalizes, said CBRE.

Oversupply created record-high vacancies in the top three life sciences markets – Boston, San Francisco and San Diego – in the second quarter. San Francisco had nearly two million square feet of negative net absorption over the past year.

The study found a wide range of costs among the seven major life sciences fit-out types. Specialty spaces like vivariums, cleanrooms and gene therapy cost the most to build, according to the report. Warehouse, office and manufacturing space were on the lower end of the cost spectrum. Fit-out costs also vary by geography, with New York and San Francisco having the highest construction costs while Raleigh and Dallas have the lowest.