For Life Sciences Real Estate Recovery, the Question is When

While challenges persist in the short term, there are signs pointing toward long-term growth for life sciences, according to JLL’s 2024 Life Sciences Real Estate Perspective and Cluster Analysis. The annual report reveals the top life sciences geographies, explores the state of the U.S. lab market and identifies the forces driving lab space demand. Additionally, after introducing rankings for both medical technology (medtech) and biomanufacturing in 2023, JLL Research added two new ranking categories this year that spotlight the top markets for talent and artificial intelligence (AI).

In the past year, the supply-demand imbalance has intensified further in most major lab markets, forcing rents down nearly 9%, which is where they were in the first quarter of 2022. JLL projects this supply supercycle ends within the next six to 12 months, depending on market, and is then followed by a period with limited new supply and repurposing of older lab assets that will boost recovery.

“After an incredible 13-year bull run in the life sciences, we have been experiencing a brief lull with the end in sight for some geographies,” said Travis McCready, Head of Life Sciences, Americas Markets, JLL. “We had a steady supply-demand imbalance tilted in favor of demand through the 2010s. In 2020, as billions of dollars globally were poured into R&D to tackle a single disease, billions of capital also flowed into the life sciences real estate sector from new entrants seeing an opportunity. The result created a supply-demand imbalance now in favor of supply, and we are working through that oversupply to return to market equilibrium. It’s a question of ‘when’ not ‘if,’ and recovery will vary by market.”

To that end, demand for U.S. life sciences real estate has increased for the last three quarters, with 3% growth in Q2 2024. Demand for space in Boston was about even with 2019 levels; the San Francisco Bay Area is about 30% above pre-COVID levels; and San Diego with more than 60% higher demand than in Q1 2019, reflective of funding levels in those markets.

Venture capital funding, which is critical to understanding and predicting demand for lab space, has also shifted over the past year. While the first half of 2024 saw a 34% increase in total venture investment in the U.S. life sciences sector, the quantity of funding and who is getting funded has changed. VC firms are focused on more mature, later-stage clinical assets. “Mega-rounds” of over $100 million represent 60% of venture funding inflows, up 40% last year. This results in challenges for smaller, early-stage biotechs, which are seeing the deal flow they experienced in 2019 cut by half.

There are reasons to be optimistic. Despite layoffs, consolidations, tenants taking longer to make decisions and a difficult funding environment, life sciences employment grew by 2% and new company growth was over 10% in 2023. Additionally, 2023 was a banner year for FDA approvals, and while 2024 will fall back slightly, it’s still expected to be in line with recent years.

Biotechnology patent innovation was 22% higher in 2023 than it was a decade prior, which will result in even more company creation. Evaluate Pharma forecasts worldwide pharma sales are going to be over 80% higher in 2030 than they were in 2023, driven in large part by a doubling of revenue generated by biologics. Furthermore, growth capital is poised to rebound. ​

“The largest 20 or so life sciences venture firms raised $2.4 billion a year in the last decade,” McCready added. “Since January 2023, those venture firms have raised that amount every four months, making it likely they are sitting atop record amounts of dry powder. Once the macro signals turn to green, we expect material growth in deployment, resulting in additional demand for space that will help kickstart recovery.”

New rankings: Talent and AI

JLL Research added two new rankings this year to determine the top markets for talent and AI. Large pharmaceutical companies today are hyper focused on optimizing their real estate holdings, with how to re-assess their space needs after a barrage of acquisitions being top of mind. Despite the short-term dynamic of 67% of big pharma companies reducing space in 1H 2024, JLL’s recent Future of Work survey of global decisionmakers found that pharma leaders predict an increase in headcount, footprint and number of locations by the end of the decade by a 3-to-1 margin.

“Large pharmaceutical companies are looking to use real estate to unlock both supporting business development and supporting innovation over the next five years,” said Kevin Wayer, President, Life Sciences, Work Dynamics Division, JLL. “First among equals in driving real estate needs is access to the right talent, and attracting and retaining the right talent enables organizations to grow.”

JLL Research identified Boston as the top talent cluster, followed by the San Francisco Bay Area (2), Greater DC and Baltimore (3), New Jersey (4) and Los Angeles (5). By incorporating metrics of scale as well as of growth, density and momentum, our ranking system provides a holistic approach that highlights both the current strength and the future potential of these markets.

A growing share of all VC dollars are heading to AI and machine learning (ML) biopharma companies. AI/ML venture funding exceeded the total level of 2023 in the first six months of 2024, now representing 12% of all life sciences venture funding.

“As the cost to develop new therapies has skyrocketed, biopharma companies have been leveraging artificial intelligence and machine learning technology for years,” said Mark Bruso, JLL Director, Boston and National Life Sciences Research. “By applying this technology in the drug discovery phase, companies can better identify the most promising molecules and cut down on the time and cost to get a drug to market.”

The San Francisco Bay Area ranked the top market for AI and accounts for half of all AI/ML biopharma venture funding since January 2023. Boston (2), which received one-fifth of AI/ML biopharma venture funding; Los Angeles (3), San Diego (4) and Chicago (5) round out the top five markets. When assessing markets strengths when it comes to AI, the concentration of talent and funding were big indicators of trailblazers in this emerging space.

The top life sciences clusters

To determine the top overall life sciences clusters, JLL Research analyzed the key fundamentals and drivers that differentiate markets, including growth; density; and momentum across talent, funding and real estate fundamentals.

Once again, Boston (1), the San Francisco Bay Area (2) and San Diego (3) come out as the top three markets for life sciences commercial real estate in the U.S. These three mature clusters have been the apex of life sciences activity for years with an established talent and funding base and the real estate infrastructure to support activity. Greater DC and Baltimore (4), Raleigh-Durham (5), Los Angeles (6), New Jersey (7), Philadelphia (8), New York City (9) and Seattle (10) comprise the remaining 10 top life sciences clusters.

“The relationship between the market dynamics and industry trends provides a unique perspective on the competitiveness and attractiveness of various regions, highlighting both their current strength and future potential,” said Maddie Holmes, Senior Research Analyst, Life Sciences Industry Insight and Advisory, JLL.

For the second consecutive year, JLL Research looked at the growing demand for and availability of skilled talent; innovation measured by clinical trials and venture capital funding; industry performance and concentration to rank the top five markets for medtech and biomanufacturing. 

Los Angeles ranked as the top medtech market, followed by Minneapolis (2), the San Francisco Bay Area (3), Boston (4) and Salt Lake City (5). Boston takes the top spot from Raleigh-Durham for biomanufacturing, with New Jersey (2), Raleigh-Durham (3), Greater DC and Baltimore (4) and the San Francisco Bay Area (5).

-This is a press release from JLL-