Cooling Demand Meets Oversupply – Sept. 9, 2024
At Connect Healthcare Real Estate in Irvine, CA on Sept. 10 and 11, you’ll hear from experts in development, leasing and financing of asset classes that span the realm of patient care. Clearly, that realm is seeing a healthy (pun intended) level of activity in markets of all sizes. A little less settled at present is a related sector: the labs where the drug treatments prescribed by doctors get their start.
The Wall Street Journal began the shortened post-Labor Day week with a story on the current state of the life sciences sector. Although fundamentals remain strong for Class A properties in the established biotech hubs of Boston/Cambridge, San Diego and the Bay Area, even those markets are seeing a glut of new supply, reported the WSJ.
“In the Boston region, for example, owners of at least 10 life-sciences locations are now offering those buildings for office space instead of lab space, according to brokers and other real-estate professionals,” wrote the WSJ’s Peter Grant. “The building owners are willing to lease it for office use even though they can face a 30% haircut on what they had hoped to charge for life-sciences use.”
The Boston Business Journal reported last week that developer Boylston Properties originally planned to build lab space on a development parcel the company acquired a few years ago in the Alewife section of Cambridge, MA. That was before the Cambridge City Council imposed a pause on construction in the neighborhood.
Now, Boylston is trying again to develop on the site—with apartments this time. Principal Andrew Copeletti told the Business Journal that if the moratorium hadn’t come along, “we’d have a built or half-built life science building in a tough market.”
How did the sector get here? Partly it’s due to overbuilding. As the COVID-19 pandemic descended on the U.S. in early 2020, “developers moved at warp speed to develop life-sciences workspaces with climate-controlled laboratories and specialized systems for controlling tiny vibrations that could interfere with experiments, as well as for ventilation, fire safety and power,” reported Grant.
Newcomers to life sciences included owners of office buildings. Four years ago, it must have seemed like a shrewd play. With demand for office taking a severe hit from the pandemic-driven move to remote work, it made sense to accommodate an industry that a) was growing at the time and b) generally entails performing the job onsite. Accordingly, many landlords converted conventional office space to life-sciences usage.
Whether through conversion or ground-up construction, more than 59 million square feet of lab space has been added since the first quarter of 2020, according to JLL figures cited by the WSJ. An additional 19.1 million square feet is in the pipeline nationwide.
By comparison, an average of 3.7 million square feet was added annually in the five years leading up to the pandemic. A little back-of-the-envelope calculation shows that the recent annual delivery rate is nearly four times the pre-pandemic average.
“A lot of people just threw money in stupidly,” Joel Marcus, executive chairman and founder of life sciences REIT Alexandria Real Estate Equities, told the WSJ.
At the same time, demand for life-sciences space has fallen sharply from its pandemic peaks, the WSJ reported. “Many biotech, pharmaceutical and other life-sciences companies have lost their appetites for rapid expansion because of high interest rates, weak venture-capital financing and an uncertain economy.
“ ‘This is the age-old story of real-estate developers over-responding,’ said Travis McCready, head of life sciences, Americas markets for JLL.”