Dive Brief:
- Demand for lab space will increase, and market activity is expected to increase in the coming months, according to JLL’s U.S. Life Sciences Property Report released Wednesday.
- Laboratory demand increased by 6.3% in the U.S. in the first quarter, with most of that increase concentrated in Boston, San Diego and the Bay Area, the report says, noting that those markets experienced a mix of 29% quarterly increase in demand.
- “Demand in Boston, San Diego and the Bay Area is now on par with 2019 levels, which is before the market overheats,” said Kevin Wayer, president of the life sciences division at JLL, in a press release. “If the occupants can take advantage of the conditions now, they should, since competition for space is likely to heat up once seed capital flows more freely in 2025 and beyond.”
Diving knowledge:
In an occupier-friendly market, lease terms are shortening in small and medium-sized operations, which account for the majority of leases being signed today, according to JLL. While the terms of the largest deals are more consistent in length, with an average decrease of just two months from 2022, lease terms for small and medium-sized deals fell by 1.4 years and 2 years, respectively, on average in this time period. Overall, lease terms for the first quarter of 2024 were flat compared to 2023, increasing to an average length of 5.1 years from 5 years in 2023, the firm says. This average is based on JLL Research’s analysis of the largest markets in Washington, DC, Boston, Denver, Philadelphia, New Jersey, Bay Area, Raleigh-Durham, San Diego and Seattle.
“The average lease term of agreements signed in the US has shortened over time. Today it is back in line with the early 2010s, when the average term was about five years. In the second half of the ‘last decade, demand began to outpace supply, giving landlords greater power to negotiate longer lease terms, even when it didn’t necessarily align with the funding and growth trajectory of start-ups “, the report says. “More recently, however, supply has outstripped demand in all markets, putting leverage back in the hands of tenants and allowing start-ups to push for shorter terms.”
However, aggregate demand in the US remains 55% below peak levels seen at the end of 2021, JLL notes. In the three largest markets — Boston, San Diego and the Bay Area — the 6.9 million square feet of demand seen at the end of the first quarter matched levels seen at the end of 2019, “before the markets heat up,” the report says. . “The main difference today is that oversupply in these markets means an expanded opportunity for users to drive the economy and flow into the abundance of high-quality space,” the report notes.
The Bay Area alone went from less than 2 million square feet of demand by the end of 2023 to 2.7 million square feet at the end of the first quarter. The report attributes this increase to small and medium-sized start-ups, which have shown “the breadth of new activity”. San Diego is remarkably active right now, coming off one of its biggest fundraising quarters on record and increased activity from major pharmaceutical companies that have created the most favorable supply and demand dynamics of three major markets, says JLL.
Overall, there is “a wide range of imbalances in the market for lab space in most major markets today,” JLL says. The report notes that the three major markets have followed similar market trajectories over the past two years, as most lab users navigated a tight financing environment, which “severely limited the ability to underwrite bonds lease”. While most markets had never seen supply-to-demand ratios higher than 2:1 before 2022, supply levels rose to six or even 10 times more than demand in most markets in mid-2023, the report says.
For the remainder of 2024, this ratio is expected to continue to decline in most major markets as new supply “contracts considerably and demand continues to grow incrementally,” the report said. However, the supply-to-demand ratio is still nearly four times higher than seen between 2019 and 2021 and the market could likely take three to four years, or more in some submarkets, “to return to a market where owners and tenants have equal leverage in negotiations,” notes JLL.
JLL also expects vacancies to fall, with all indicators pointing to future demand growth and improving macro fundamentals in the life sciences sector. While leverage may take years to even out, new lab supply is expected to decline in 2025 and beyond, giving owners and operators a “breather” that will “give the market some room to breathing and the ability to get out of the oversupply pile.” ”, says the report.
