The Life Science Impact on Commercial Real Estate

In this article, you'll learn:

• How the life sciences industry is impacting commercial real estate.
• Why demand for lab spaces stays high despite office market struggles.
• The potential investment slowdown and its impact on tenants.
• Key strategies for negotiating better lease terms for life science tenants.

We’re way past saying that the office sector has taken a hit. It’s far worse than that.

Since the prevalence of WFH and remote work is making companies question whether they'll ever come back to the office, it is facing an outright existential crisis. While office landlords struggle, one sector has emerged as a glimmer of hope for the CRE sector: the life sciences industry. With the pandemic highlighting the importance of medical research and development, this industry was poised for success while others were in for trouble.

But will recent investor pushback stall the success? Let’s discuss the rise and potential fall of the life science sector and it's influence on commercial real estate.

Life Science’s Rising Star

One key factor driving the growth of the life sciences industry is the need for specialized lab and research space, which cannot be replicated in a remote work setting. As a result, life sciences companies continued to seek out physical office and lab space, even amidst the broader trend towards remote work.

They are also potentially dream-tenants, well worth the investment to landlords. Since life sciences companies are known for requiring specialized and highly customized spaces for research, development, and manufacturing, they typically sign long-term leases and invest heavily in building out their facilities. This provides stability for landlords and property owners who are guaranteed a consistent source of revenue for an extended period.

In addition, the life sciences industry tends to be less sensitive to economic downturns than other industries. This is because the demand for healthcare and medical products is relatively inelastic, meaning that it does not fluctuate as much with changes in the economy. Even during a recession, people still need medical treatments and medications, which supports the growth and stability of the life sciences sector.

Furthermore, the pandemic has further highlighted the importance of the life sciences industry, which has led to increased investment and expansion in this sector. This has translated into more demand for office and lab spaces, which has helped to offset some of the negative effects of the pandemic on the office market.

Investor interest was obviously peaked, with the $8 billion dollars invested in the field by Venture-capital funding in the fourth quarter of 2021, the numbers had grown threefold in the half decade before, according to data from the Wall Street Journal.

Where the Life Sciences are Prospering

Certain hubs formed, and demand outpaced supply in cities including Boston, San Francisco, and San Diego. Typically, life sciences took root in the cross-sections of academia and exploding tech influence, backed by a strong hospital infrastructure and medical accessibility.

All said and done the top 10 life sciences markets emerged:

1. Boston
2. Chicago
3. Denver
4. Houston
5. Los Angeles
6. New Jersey
7. New York City
8. Philadelphia
9. Raleigh-Durham
10. San Diego

In these top cities, demand for space has remained consistent, bleeding into the first quarter of 2023. 

Nationwide, life sciences projects were able to bring a lot of life to otherwise wounded markets. Even in Manhattan where the office market has withstood hit after hit, the life-sciences branch remained unscathed.

Despite rampant low demand compounded by a mass- emigration away from the city and new, expensive green legislature, the sector wasn’t only surviving, it was thriving…

So even though the NYC commercial market has been plagued by record vacancies, the life science sector was performing better than ever, interesting. This phenomenon doesn't exist in a void. As massive tech and financial organizations are cutting down on their corporate footprints in places like NYC and San Francisco it is leaving more opportunities for other tenants to fill the place. 

The Future of the Life Sciences and CRE

So the life sciences industry was one of the only CRE markets that has been incredibly tight. Like the warehouse market, rent rates remained high, in tandem with climbing demand. But of course, what goes up must come down. Just as the industrial sector has plateaued, life sciences market is set to falter a bit.

The first quarter of 2023 represented some pullback in investor interest. Venture capital funding at the conclusion of 2022 was $36.8 billion. Doesn’t sound too shabby. But, in relation to 2021 figures, it’s’ a whopping 28% drop.

Now this may sound a little worse than it is because in truth, the industry still has not experienced too much suffering. Albeit not immune to an overall economic downturn, the first quarter “numbers are particularly striking given the recent pullback in venture capital to the industry,” according to Propmodo.

So there is still hope on the horizon for life sciences tenants. And it is in the form of maintained rent growth.

“Despite announcements of layoffs, U.S. life sciences employment increased by 3.5% in February from a year earlier, exceeding the overall job-growth rate of 2.9%. Average rental rates increased by 3.2% from the fourth quarter to a record $65.62 per sq. ft. in the first," according to the World Property Journal.

What Life Science Tenants Should Know

If anything, the recent cooldown in the life science commercial sector gives tenants some breathing room to scoop up space that was too hot with demand.

"There is a lot of promising science in the pipeline, and the sector likely will regain momentum once the lending market recovers. Meanwhile, companies of all sizes are likely to find at least a few available spaces in markets where there previously was little or no such availability," according to the World Property Journal.

Because of the dip in interest though, tenants have more leverage to negotiate better terms, amenities, and prices with their commercial landlord. This is especially critical for life science properties where extensive renovations before occupancy are not uncommon. A generous tenant improvement allowance can really come in handy!

From the state of a cold dark shell, it could potentially cost a landlord in the tens of millions of dollars to upgrade to a lab facility in a build to suit for a single tenant. “The tenant improvement budget for high-end office space might be $80 per square foot. The budget for lab space can be $400 per square foot.” Site Selection Magazine. But we've seen that number reach $1,000 per square foot. 

So consider the landlord’s position, any investment has to be worth their while. That’s why negotiation is so critical. This is especially true for life science tenants who will no doubt be dealing with far more elaborate work letters.

Signing a long-term lease now could be a win-win for the both of you. You get the benefit of less pressure on demand and they can stop worrying if and when they’ll find a new tenant. But the only way to truly level the playing field when negotiating with a commercial landlord is by coming armed with your own representative.

Life Sciences and True Tenant Reps™

The office sector has clearly withstood a substantial with many companies reducing their office space or transitioning to hybrid arrangements. On the other hand, the life sciences industry emerged as a rock, with consistent demand for specialized lab and research space driving growth and stability.

However, even the life sciences market is not immune to market fluctuations. In such a volatile market, it is essential that tenants take advantage of the opportunity to negotiate better terms, amenities, and prices with their landlords. But the best way to take control and secure the best possible lease terms is by working with a True Tenant Rep™.

True Tenant Reps™ can help tenants maximize their CRE transactions by evaluating current and future business needs, space requirements, location, facilities, and technology infrastructure. With their help, tenants can establish their priorities, explore their options, and conduct appropriate due diligence to pinpoint room for improvement in their existing space or their entire portfolio. Ultimately, working with a True Tenant Rep ™ is essential for tenants in negotiation and beyond, as they can provide valuable insights, negotiate favorable terms, and ensure that tenants get the most out of their lease renewal.

The life sciences market will keep on moving. Want to learn about other emerging markets and the ones to stay away from? Check out the following articles:

Corporate Tenants: Pay Attention to Growing Demand in Tertiary Markets 

What Type of Offices and Markets Will Survive? 

Commercial Tenants Beware: The 5 Cities with the Most Maturing Office Loans