Jones Lang LaSalle Incorporated : Life sciences lab sector poised for resurgence

CHICAGO, May 15, 2024 - The life sciences sector in the U.S. is at an important crossroads in its recovery. According to JLL's first U.S. Life Sciences Property Report, softening of demand for lab space is behind us, and market activity will increase in the coming months. Because of this, there are several reasons for optimism. The report explores five key trends for lab space, including growing demand seen across the U.S., how quality in the top markets is driving leasing successes and how the supply-to-demand ratio is trending toward normalizing. Additionally, the report provides a view into the rest of 2024.

"The signs point to us being on the precipice of an exciting resurgence in the sector," said Travis McCready, Head of Life Sciences, Americas Markets, JLL. "Company creation continued throughout 2023 despite significant headwinds. Venture capital firms boast record funding waiting to be deployed, while big pharma is armed with substantial resources for acquisitions. This favorable landscape, combined with the upcoming patent cliff, is expected to drive more activity in the life sciences space."

Where lease terms are shrinking in an occupier favorable market, it's mostly affecting smaller and mid-sized deals. Though there are fewer larger deals being done today, their terms have been more consistent in length. Additionally, lease terms in the first quarter of 2024 remained flat over 2023, from an average length of 5 years to 5.1 years.

Demand for life sciences properties continues to grow across the United States, predominantly in the Bay Area, Boston and San Diego markets. When looking at the top-tier "core" submarkets, asset and neighborhood quality are critical. JLL Research found the best product in the best neighborhoods remains the most sought-after destination for leasing activity. Additionally, hyper-locality, which considers asset quality and location information, is the key driving force in leasing and market performance. Tenant preference also clearly favors higher-quality, Class A space, with older, Class B product showing lower absorption.

Lab demand is up 6.3% across the U.S. in the first quarter of 2024, with most of the demand concentrated in the Boston, San Diego and San Francisco. These three markets saw quarterly demand increase 29%. The Bay Area alone jumped from just under 2 million square feet of demand at the end of 2023 to 2.7 million square feet at the end of the first quarter.

"Demand in Boston, San Diego and the Bay Area is now on par with 2019 levels, which is before the market overheated," said Kevin Wayer, Division President, JLL Life Sciences. "If occupiers are able to take advantage of the conditions now, they should since competition for space is likely to heat up once startup capital flows more freely in 2025 and beyond."

While the supply-to-demand ratio is gradually mediating, some sub-markets have a longer road to normalization ahead. The outlook for the rest of 2024 is such that the ratio will continue to drop in most major markets as new supply contracts as supply continues to stabilize, and demand continues to grow incrementally.

Newly added vacancies are set to fall swiftly after 2024. After the wave of space delivering in 2024 is in the rearview, the new supply outlook looks better for 2025 and beyond. Currently, only 4.7 million square feet of lab space currently underway has the potential to deliver vacant from 2025 into 2027. This respite in new supply will give the market some breathing space, and the ability to dig out of the mound of oversupply.

"A dramatic shift in the macro environment, coupled with a glut of new supply that was mismatched with shrinking demand, led to the downcycle in life sciences real estate," McCready added. "Today, all indicators are pointing to growth in demand and improving macro fundamentals in the space. The last hurdle to clear before the lab markets returns to something approaching equilibrium is now the oversupply of available space in nearly all markets, and the data shows we are on the right path to achieving this."

JLL's vision is to reimagine the world of real estate, creating, finding, locating and operating safe and amazing spaces. JLL's Life Sciences team of 3,000+ experienced professionals are a safe pair of hands to help biotechnology, pharmaceutical, medical devices organizations, investors and developers achieve their ambitions. JLL brings deep understanding of location analytics, project management, research advisory, financial incentives, transaction management, capital markets, real estate strategy and technology, facilities management, regulatory compliance and quality, and more. Our solutions help fuel innovation, enhance efficiency, improve financial performance and attract and retain top talent. Our team is trained and certified to operate within office and critical, regulated environments of lab and manufacturing space. To learn more, visit us.jll.com/lifesciences.

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