Demand for lab space in Cambridge’s Kendall Square and other Boston area life sciences hubs has dropped dramatically, leaving the region with vacant space for the first time in a decade.
A report released Tuesday by Chicago-based commercial real estate giant JLL depicted an overbuilt market that is forcing building owners, who only recently commanded top dollar for premium lab space, to reduce rents and scramble for tenants.
The rising vacancies are the result of a slowdown in the biopharma, medical technology, and biomanufacturing sectors after a building boom that started before the arrival of COVID and accelerated in the first two years of the pandemic.
Newly available space isn’t all bad news, JLL said. It offers fresh opportunities for startups seeking to plant themselves in Cambridge, the Seaport district, or other industry clusters in Massachusetts and nationally.
Underlying the slowdown are higher interest rates and a tighter financing market. Venture capital firms, the lifeblood for life sciences startups, have been writing 35 to 40 percent fewer checks in 2023, with a higher share of the money going to later-stage companies, the JLL report said. A once robust investor appetite for initial public offerings also has diminished.
“We were going through a COVID sugar high where people were investing in all sorts of companies that probably in normal times they wouldn’t have,” said Bob Coughlin, a JLL managing director who leads the firm’s Boston life sciences and health care practice. Now the industry is seeing “a correction,” he said, “and that’s not necessarily a bad thing.”
Coughlin, a former state representative and chief executive of the Massachusetts Biotechnology Council, said the retrenchment could set the stage for another growth spurt. He said there are signs the industry has begun recovering, citing more job openings, new biotech IPOs, and larger funding rounds.
But the JLL report suggests the building cycle for lab space may be out of synch with life sciences industry growth, which would depend heavily on a full-scale rebound in venture capital funding. Many biotechs, unable to raise enough money to fund their research, have closed or cut staffing this year, putting more lab space onto the market.
The oversupply of lab space is hitting life sciences markets across the country, but is most intense in the largest industry concentrations: the Boston and San Francisco Bay areas. Of investor-owned lab space under development nationally, the JLL report said, about 63 percent is in the Boston area or the Bay Area in California.
Overall inventory of lab space in the Boston area has climbed more than 30 percent over the past three years — from 30.4 million square feet in the fourth quarter of 2021 to 40.5 million square feet in the second quarter of 2023 — as more construction is completed even as fewer life sciences companies seek space, JLL reported. Nationally, the inventory rose nearly 20 percent to 147 million square feet from 123.6 million square feet in the same period in the eight largest life sciences markets.
“A broad reset in funding levels, valuations and commercial real estate needs has now permeated the sector...” the report said. “Tenants, especially smaller ones, can negotiate economically favorable transactions and shorter lease commitments with extremely limited initial capital outlays.”
Some pharma giants are moving forward with plans to build and occupy new space despite the volatile market conditions, including Eli Lilly in Boston’s Fort Point neighborhood and AstraZeneca in Kendall Square.
Coughlin said the vacancies will give companies more flexibility to locate in the Kendall Square biotech hub where the “bump factor” — executives bumping into one another at lunch — can yield collaboration deals; in Boston’s Seaport district, a short hop from the airport for visiting foreign executives; or, in smaller communities across the state.
Sites in the suburbs or in central Massachusetts are becoming more popular, Coughlin said, because many life sciences companies recognize that their employees “don’t want to sit in traffic” on the way to Boston or Cambridge.
Read the full report below.
Robert Weisman can be reached at email@example.com.