Life Science Industry Comes into its Own, Transforms from “Once Volatile” to Resilient Sector

CBRE, San Francisco, Seattle
Courtesy of CBRE

By Meghan Hall

Over the course of the past market cycle, the life science sector has blossomed, changing from what was once viewed as a more volatile market segment into one that has shown considerable strength in the face of the current market downtown. The life sciences industry is expected to continue its climb due to a number of major factors both COVID-19-related and otherwise, with markets such as the San Francisco Bay Area and Seattle paving the way.

“While COVID-19 has shined a spotlight on life sciences, the sector has been growing steadily for almost a decade,” explained CBRE’s Executive Vice President Dino Perazzo. “The result is an industry that used to be perceived as volatile is now very stable with long-term partnerships in place with well-capitalized groups.”

A recent life sciences report released by CBRE notes that the life sciences sector has demonstrated incredible resilience thanks to several megatrends driving industry growth. Among them, an aging global population requires more life sciences solutions, while high levels of venture capital and an increased interest in the industry overall due to COVID-19 have also played a role. While there was a pullback in the market at the beginning of the pandemic, overall demand for laboratory space has grown across the United States over the course of the year. Vacancies remain low in most lab markets and rents are continuing to rise across the board.

“There’s been a fundamental shift in the research environment in recent years, and it is driving significant activity in the primary research markets. Whereas in the past companies tended to operate in a silo, today we have a collaborative, interdependent system,” added Perazzo. “Everyone is working toward a common goal, and the largest players in the game, namely big pharmaceutical companies, are actively investing in biotech partnerships. This approach is fueling industry growth and driving demand for lab space in top U.S. research markets like the Bay Area and Seattle.”

CBRE ranked the San Francisco Bay Area as second among the nation’s top life sciences markets, while Seattle ranked ninth. As of the third quarter of 2020, life sciences employment in the Bay Area totaled just over 120,000, while in Seattle life science employment totaled just over 20,000. Both markets saw significant growth, with the Bay Area seeing its life science employment cluster increase by about eight percent. Seattle saw its employment in life sciences increase by just over four percent.

“Fundamentals are actually very similar across the Bay Area and Seattle; it is the size of the market that is different,” said Perazzo. “What the Bay Area and Seattle have in common is the confluence of technology and science. There are markets that are strong in tech and markets that are strong in science, but the convergence of those two is what really positions San Francisco and Seattle head and shoulders above any other market.”

The San Francisco Bay Area has the lowest vacancy rate of life sciences and R&D space in the nation, at just 1.5 percent. Currently, there are 66 tenants in the market searching for 2.4 million square feet of lab space, an increase of 10 percent and 13.8 percent, respectively, over the past 18 months. Because demand is so high, rent has increased by 11.3 percent over the past year, and further rent growth is expected to grow with the market. To date, there is 4.2 million square feet of lab space under construction, 3 million of which is new construction and 1.2 million square feet is conversions. The Bay area also procured more VC funding over the past year than in any other market, and had captured $2.1 billion in funding by the beginning of the year.

“The life sciences real estate segment is not a price-sensitive market. Even at 1% vacancy, there’s a lot of activity,” stated Perazzo. “A company’s location is of utmost importance to life sciences talent. This highly educated, highly paid talent wants to be near its peers and leading research institutions where an exchange of ideas and innovation can occur. Companies are willing to pay to be in a strategic location that will attract and retain top talent.”

In Seattle, tight vacancy rates have also prevailed, and regional vacancy sat at about 2.2 percent. Tenant requirements for lab space totaled 350,000 square feet as of the second quarter; with this persistent demand, rents are expected to rise higher. During the second quarter, the market received its largest quarterly amount of venture capital funding, with $613.5 million allocated. It is expected that as Seattle matures, it will grow quickly thanks to its already strong fundamentals.

“Our life sciences market is smaller than the Bay Area, but it is growing,” said CBRE First Vice President Marcus Yamamoto. “Ownership to date has been largely consolidated, but we are starting to see new investors enter the market, which will help the sector mature. We have a lot of owner-user space currently, but our investor-owned lab space is poised to potentially double in the next three to five years.”

Looking forward over the next year, there could be growth in established markets across the country. CBRE predicts that untapped sectors of the life sciences market could continue to grow. In the Bay Area, due to lack of inventory, leasing is likely to be slow, as there isn’t enough new product on the market to support demand. The market is expected to revive as construction deliveries pick up pace. In Seattle, new research clusters are also expected to pop up to supplement product outside of core areas such as South Lake Union. Both new construction and conversions will play their part in the maturing market. Conversions could also become an increasingly important strategy for investors as local office markets remain paused and life science demand increases.

As an increasing number of new investors step into the market, looking to capitalize on its strengths, there will be a learning curve for all involved—developers, landlords and growing tenants alike. 

“There’s a tremendous amount of capital exploring life sciences right now, but there’s a steep learning curve,” said Perazzo. “For decades, a relatively small group of space providers has led in this segment. These life sciences specialists have a deep understanding of tenant needs and how the real estate partnership works. New players entering the market need a thorough education on how to work in this sector successfully. There’s a significantly higher investment that goes into developing lab space versus other property types. It is a big bet, and if you don’t understand the tenant nuances, you are going to lose.”

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