Report: Five Lab Sector Trends Point to Opportunity

Life sciences real estate has struggled in recent years due to falling demand, increased deliveries of space and a decline in funding. However, JLL recently indicated that things might be changing. The company’s “U.S. Life Sciences Property Report” outlined five trends demonstrating that the “life sciences lab sector is poised for resurgence.”

#1 – Lease Terms Shrink

In the early 2010s, the average lease term was five years. During the decade’s second half, when demand outpaced supply, landlords negotiated longer lease terms. During the early 2020s, the reverse was true, with tenants holding the cards and pushing for shorter lease terms.

JLL said that, compared to two years ago, the average term for middle-market deals (which most of today’s deals are) decreased by two years. Smaller deals decreased by a year and a half. This means that the current situation is “aligning to the market conditions of 10 years ago,” the report said. Though larger deals are getting to the closing table, “their terms are more consistent in length,” JLL said.

#2 – Quality Assets in Certain Regions Drive Leasing Activity

The regions in question—Boston, the Bay Area and San Diego—are standouts in a down market. According to the report, availability rates in these metros’ submarkets “have significantly outperformed all other localities in those same metros in recent years.”

Furthermore, high-quality assets are outperforming. “The best product in the best neighborhoods remains the most sought-after destination for leasing activity,” JLL noted.

#3 – Demand Grows, But Regionally

Given lab demand, “it appears as though the cycle of demand softening has all but ended,” the report explained. But, the increase in demand is predominantly concentrated in three markets – especially in the Bay Area, Boston and San Diego.

For these markets, the demand for 6.9 million square feet today is similar to the year-end 2019 levels before market overheating occurred. However, “aggregate demand across the U.S. is still 55% lower than the highs seen at the end of 2021,” JLL noted.

#4 – Supply/Demand Ratio Far from Equilibrium

The supply/demand ratio is starting to moderate, but “there is a wide array of disequilibrium in the market for lab space in most major markets today,” the report commented. Lab users who were short of funding were unable to sign leases. This has led to “a clear oversupply in Boston and the Bay Area,” JLL said. Yet Los Angeles and Raleigh-Durham “have managed to maintain supply-demand ratios more in line with historical levels,” the report said.

JLL forecasts that the ratio should continue to drop in most major markets in 2024. This will be due to a substantial contraction of supply and incremental demand growth.

#5 – New-Supply Vacancies Forecast to Fall

Speaking of contracting supply, the addition of new space is winding down from its early 2020s frenzy. JLL pointed out that “just over 13 million square feet of vacant space was added to the U.S. lab market in 2022 and 2023,” explaining the increase in vacancy rates.

It’s estimated that an additional 15 million square feet will be delivered in 2024. “After the wave of space delivering in 2024 is in the rearview, the new supply outlook looks quite a lot better for 2025 and beyond,” the report said.