Life Sciences Real Estate Perspective: A Sector Poised for Recovery
Commercial real estate firm JLL has released its 2024 Life Sciences Real Estate Perspective and Cluster Analysis report, which offers a comprehensive overview of the current challenges and opportunities facing the life sciences sector. After several years of unprecedented growth, the life sciences real estate market is now in a period of recalibration. Lab Design News spoke to Andrew Quirk, vertical lead in the United States for life sciences, healthcare, and public institutions at JLL, who offered insights from the report and his thoughts on the trends driving this recovery, and what stakeholders can expect in the coming years.
A market in transition
According to Quirk, the life sciences real estate market has experienced significant shifts over the past few years, largely driven by the COVID-19 pandemic, which brought both a surge in demand for lab space and a quick adoption of AI and machine learning (ML) technologies. However, as we move into 2024, the market is stabilizing, and Quirk emphasizes the importance of long-term sustainable growth.
Quirk explains that unlike the rapid, unsustainable growth seen in previous years, today’s recovery is about stabilization of the market. “That's kind of the broad viewpoint that everyone looks forward to—to make sure that growth is long-term, but also sustainable,” he says. Stability across all stakeholders, from investors and developers to biopharma companies and real estate firms, provides a focus on growth that can withstand economic fluctuations. This in turn marks a new era for life sciences real estate.
The role of venture capital in life sciences real estate
Venture capital (VC) remains a driving force behind the demand for lab space, particularly as the sector begins to recover from the effects of the economic downturn and fluctuating interest rates. VCs are the predominant source of funding in the sector, says Quirk, and are always watching the market. However, Quirk notes that while investments are beginning to increase, VC activity is still highly selective.
“Venture capitalists are not pumping money into the general sector,” Quirk explains. “Instead, investments are dependent on location and the maturity of the companies involved.” Established markets like San Francisco and San Diego are seeing slightly more investment activity, while early-stage biotech companies face a more competitive environment, especially in securing lab space.
2024 top market tiles, as outlined in JLL's 2024 Life Sciences Real Estate Perspective and Cluster Analysis. Image: JLL
This trend highlights a broader pattern within the industry: mature markets with established infrastructure and talent pools, like Boston’s Kendall Square and San Diego’s Torrey Pines, are positioned for faster rebounds compared to emerging clusters. As a result, these markets are attracting more VC attention and continuing to grow despite economic challenges.
The attractiveness of established, mature companies is a safer bet for investors who may have experienced instability for the past few years. “As you come out of lean times that are a little less predictable, investment firms and people in general are looking for safer bets as they come out of it,” says Quirk.
The impact of AI and machine learning on real estate
One of the most significant factors influencing life sciences real estate is the increasing role of artificial intelligence (AI) and machine learning (ML) in biopharma research. AI has already proven its value by accelerating the development of vaccines, including those for COVID-19, and its role is only expected to grow in the coming years.
AI and ML are speeding up data analysis, allowing companies to sift through massive amounts of data to find chemical interactions and identify drug efficacy faster than ever before, Quirk notes. This acceleration in drug discovery is pushing biopharma companies to rethink their real estate needs, with a growing demand for data centers and computational labs rather than traditional wet labs.
As companies increasingly adopt AI-driven processes, they are faced with questions about where this computational work should take place. Is it more efficient to house these AI systems alongside traditional labs, or should they be placed in separate data centers? This shift has major implications for real estate developers, who must now consider how to future-proof buildings to accommodate evolving technologies.
Quirk emphasizes the need for "future-enabled" spaces that can adapt to changing needs. “One of the things that I'm currently trying to push is, ‘Don't try to future-proof everything, but future-enable the built environment,” says Quirk. “We don't have a Magic Eight Ball around this, so no one really knows what the space is going to look like.” This approach ensures that buildings can be repurposed and modified as AI and ML technologies become more central to life sciences research. “The cost of construction now is higher than it's ever been. Cost materials, while stabilizing, are still expensive, and so people are spending a lot of money to build laboratories and offices and everything else that supports it. And if you're investing significant amounts of money, and then next year it becomes obsolete because AI and machine learning has been widely accepted or is more prevalent in your business model, does that negate what you just spent hundreds of millions of dollars on?”
Energy and sustainability considerations
With AI and ML requiring significant computational power, life sciences real estate is facing new challenges related to energy consumption and sustainability. Quirk points out that laboratories and data centers are some of the largest consumers of energy within the built environment, and this trend is only expected to grow as AI-driven research accelerates.
“Some of our very specific questions are around how this is going to impact the use of energy. Laboratories in general, [as well as] healthcare, are some of the largest users of energy, and that can be anything from cooling to electric power, to water for cooling. As your computing needs go up, the use of these natural resources go up. So there's correlation to the speed of discovery and the higher use of these services—data storage goes up,” Quirk notes. This rise in energy consumption, he explains, is driving companies to rethink their sustainability strategies and explore ways to minimize their environmental impact.
As a result, sustainability is becoming a key focus for life sciences real estate developers. Buildings must be designed to not only support the high energy demands of AI-driven research but also to incorporate eco-friendly practices. This includes energy-efficient HVAC systems, optimized water usage, and the integration of renewable energy sources wherever possible.
The role of talent and innovation in regional markets
The availability of talent is another critical factor shaping the life sciences real estate market. Regions with a rich pool of experienced scientists, particularly those skilled in AI and ML, are becoming magnets for investment. Quirk highlights San Francisco as one of the most sought-after markets in this regard, with a growing concentration of AI and ML talent driving both investment and real estate development.
“One of the hottest markets is San Francisco—that’s the one that we're looking at closely,” says Quirk. “When you look at that market, it's a very rich environment for technology-based individuals—either in experience or education.”
“As companies are starting to incorporate AI and machine learning more and more into the business model, that becomes very attractive,” he adds. “In those areas, the need for talent is going to be widely accepted. That's going to continue to grow until the end of this decade, and certainly beyond that. But there's going to be a big run up in the need for these people, and a fight for these people, and we're already starting to see that. And the investment is following that space as well.”
As AI becomes more integral to drug discovery and biopharma innovation, companies are increasingly seeking locations where they can access both top-tier talent and cutting-edge infrastructure. This talent-driven demand is further solidifying the position of established markets like San Francisco, Boston, and San Diego as leaders in life sciences real estate.
In addition to attracting talent, these regions are also benefiting from the influx of venture capital and the emergence of new companies. Despite the challenges facing early-stage biotech firms, there is still a significant amount of investment flowing into emerging businesses in these key markets.
Repurposing and optimizing lab assets
With rising construction costs and a limited supply of new lab space, life sciences companies are increasingly focused on optimizing their existing real estate assets. Quirk notes that many companies are now evaluating their current spaces to ensure maximum efficiency before committing to new developments.
“In the past, it was in the big run up of new space—everyone was looking for the shiny, beautiful object that was the latest and greatest. And I think now people, especially those that own their real estate, are making sure that every square foot is being employed and that is it being employed efficiently.” This includes everything from evaluating how fully a lab is utilized to exploring the potential for repurposing underutilized spaces. In some cases, companies are even considering converting existing buildings into computational labs to support AI-driven research, highlighting the shift away from traditional wet lab space.
This trend is particularly important in markets where new lab space is scarce and expensive. By optimizing their existing assets, life sciences companies can reduce costs and improve efficiency while still meeting their research needs.
Looking ahead: signals of recovery
As we move into 2024, the life sciences real estate market is poised for recovery, but the timeline remains uncertain. Quirk points to several key signals that will indicate when the market is truly on the upswing. These include stable VC investment, continued growth in AI and ML adoption, and the return of employees to physical workspaces.
One of the most critical factors is access to capital. Recent moves by the Federal Reserve to lower interest rates have already begun to stimulate investment, and further rate cuts could provide an additional boost. Quirk also notes the importance of FDA approvals in driving demand for lab space, as the speed and success of drug approvals will directly impact biopharma growth.
Ultimately, the life sciences real estate market is in a state of evolution, with AI and sustainability playing increasingly prominent roles. As companies navigate these changes, JLL’s 2024 Life Sciences Real Estate Perspective offers a roadmap for understanding the trends that will shape the industry in the years to come.
