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VC Funding and the Effects on the Life-Sciences Real Estate Sector

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Life Science office and lab space has been one of the fastest growing commercial real estate sectors in the United States, part of which was fueled by the COVID-19 pandemic and investors favoring office and lab buildings with sticky tenancies that were averse to the remote-work movement. Life Science companies had been able to raise record levels of funding from Venture Capital firms and as Travis McCready, Executive Director for JLL’s Life Sciences Markets put it, “When companies get VC money, they need lab space in order to deliver as soon as humanly possible”.

While these funding sources are still being provided at levels higher than the 2019 average, they have seen a considerable slowdown since their peak in 2021. With looming recession concerns and the FED raising interest rates, biotech companies have begun laying off thousands of workers and the share prices of many publicly traded biotech companies have started to fall. As the chart below shows, layoffs in the first two months of 2023 have far exceeded those that were experienced during that same period in 2022.

While biotech unemployment levels are still below that of the general U.S. unemployment rate, there is growing concern that these layoffs may continue and some biotech firms may no longer be receiving the same levels of venture capital funding as in recent quarters. Since the recent turmoil in the banking system, CBRE expects that this may cause an even further reduction in venture capital funding for the Life Sciences industry this year.

Since the failure of Silicon Valley Bank, shares of Alexandria Real Estate Equities, a pure-play Life Science REIT, have fallen by nearly 13%. The concern for the Life Science real estate sector stems from the massive amount of life science space that has been built or is currently under construction for tenants whose VC funding may be drying up. Much of the space being built out was driven by the massive surge in funding in 2021 and the concern is that much of that space is now going to be hitting the market. The Wall Street Journal reported that Alexandria Real Estate has closed down a project in the Research Triangle in North Carolina because several tenants in a project the company completed during the pandemic were not ready to move forward with expansion plans as had been previously planned. Alexandria also noted that they reduced construction spending by $250 million by pausing or delaying several projects.

CBRE is projecting that there will be 220 million square feet of life science space by 2025 which is an increase of 22% from the amount of space in the sector at the end of 2022. With fewer startups now seeking space, many major life science markets have seen their vacancy rates increase such as San Diego (up 87% to 5.6%), San Francisco (up 42% to 8.4%), and Boston (up 5x to 3.4%). While these vacancy rates are still tight compared to most commercial real estate benchmarks, there could be concern that these rates will tick higher as VC Funding continues to slow down or even stall.

 

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The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

 

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