The Rise and Reset of Life Sciences Office Spaces: Which Cities Are Hotspots?

What You'll Learn in This Article

• Investment Surge: The increasing interest in life sciences offices is due to a decline in traditional office space demand, leading to higher rents and new developments.

• Market Trends: The signs of a market slowdown in 2023 include oversupply concerns and challenges like reduced venture capital funding and rising interest rates.

• Regional Highlights: The continued dominance of Boston and San Francisco as life sciences hubs, driven by strong academic and research institutions, despite facing urban challenges.

• Rent Dynamics: The recent slowing of rent growth in Boston and the Bay Area, influenced by significant leasing deals and new developments.

• Work Value Increase: The rising build-out costs for life sciences offices and the increase in average work values, indicating the sector's appeal and potential for growth.

• Emerging Hubs: The growth of other life sciences hubs in cities like San Diego, Raleigh-Durham, Seattle, Philadelphia, and Houston.

The pandemic-induced upheaval in the office sector has paved the way for the healthcare industry to emerge as a robust and financially rewarding arena in the commercial real estate sector.

Because amidst the profound transformation of CRE in the past few years, medical office buildings (MOBs) and life sciences spaces are gaining prominence as professionals navigate the challenges of office space utilization.

Investment interest in the life sciences office sector has surged, driven by a decline in demand for traditional office spaces post-pandemic.

This heightened attention has led to increased rents and spurred new developments in life sciences real estate as all other office developments have grinded to a halt. However, what goes up must come down. Signs of a market slowdown began to surface in 2023, when approximately 38 million square feet of research and lab space was under construction nationwide.

The sector faces additional challenges, including dwindling venture capital funding and rising interest rates, which could drive down further space demand. Now, oversupply is looming as a near-term concern, particularly in traditional life science hubs like Boston and San Francisco’s Bay Area. As the market recalibrates in 2024, the life sciences office sector may experience a reset, reflecting broader trends in commercial real estate.

So let’s discuss the latest in rent rates and trends for life sciences, with special attention on two cities where the sector has found real but unlikely roots.

And remember, the evolution in the office market from the last few years is symptomatic of a post-apocalyptic office market. For office tenants, there are leasing minefields everywhere. So download your survival guide today.

Boston and San Francisco are Leading the Pack

Life sciences is garnering attention across the country, but the hubs where the industry has clung to a stronghold are Boston and San Francisco. And while the cities’ commercial real estate sectors have been struggling, life science industries can benefit from the established STEM environments those areas.

Boston and San Francisco are continuing to lead life as sciences hubs due to their unique mix of top-tier academic institutions, abundant venture capital, and thriving ecosystems. Boston's Harvard and MIT, along with San Francisco's Stanford and UC Berkeley, fuel research and innovation, while both cities attract significant investment to support startups.

This is despite greater challenges poised to both cities, including San Francisco's Urban Dystopian Syndrome and Boston's drop in city revenue due to a loss in property taxes from occupied offices. 

These regions boast specialized infrastructure and a collaborative environment that bridges academia, industry, and government. 

Is Rent Growth Slowing for Life Sciences?

But, this year Boston started to see its annual growth in life sciences, starting rents level off, while the San Francisco Bay Area encountered a notable year-over-year decline for closed transactions.

From 2019 onward, Boston's life sciences starting rents consistently grew, surpassing the Bay Area's growth rate. However, by 2023, Boston's growth had slowed to just 1.6% year-over-year. In contrast, the Bay Area experienced a 5% decline in starting rents for completed transactions.

Several high-profile deals influenced these trends. In Boston, significant transactions such as DEM BioPharma's lease of a renovated space owned by MIT and Flare Therapeutics's 30,943-square-foot expansion contributed to the market's rise. Meanwhile, in the Bay Area, notable leases included Nkarta’s 36,544-square-foot extension and Biomea Fusion’s 30-month renewal.

Over the past two years, leasing in new or recently renovated buildings, including life science conversions, has significantly driven starting rent growth in Boston. For example, the Broad Institute’s lease of 225,000 square feet played a crucial role. When excluding leases in new constructions and renovations, Boston's starting rent growth rate since 2019 dropped from 33.2% to 18.2%, highlighting the importance of these newer developments in sustaining rent increases.

The Value of Life Science Industries Shows Promise

Despite the deceleration in rent growth for life sciences office spaces, the sector remains promising due to the rising value of work.

Life sciences offices typically require significantly higher build-out costs compared to traditional office spaces, owing to the specialized medical and research-grade interiors. This customization is a key factor driving higher starting rents.

From 2020 to 2022, the average work values for life sciences office transactions in Boston and the San Francisco Bay Area consistently increased each year, particularly boosted by leases in new constructions offering turnkey and higher tenant improvement packages.

Data from CompStak highlights substantial gains in Boston, largely influenced by these factors. Although the average work value declined from 2022 to 2023 due to a smaller share of activity in new or renovated buildings, the overall trend remains positive.

Excluding new or renovated buildings, Boston's average work value still rose by 14.6% from 2019 to 2023. In the Bay Area, excluding these factors revealed a decline in average work value over the same period. However, transactions involving new or renovated constructions during this timeframe had an average work value of $95.10 per square foot, nearly three times higher than in other buildings.

This increase in work values underscores the enduring appeal of the life sciences sector, as the climbing investment in specialized spaces reflects the ongoing demand and potential for growth, even amid fluctuating rent dynamics.

Other Honorable Mention Life Science Hubs

In addition to Boston and San Francisco, several other cities are emerging as growing hubs for the life sciences industry in terms of office leasing in 2024:

1. San Diego

San Diego is recognized for its robust biotech and pharmaceutical industries, supported by institutions like the University of California, San Diego (UCSD). The region offers a strong talent pool and has seen significant investment in lab space and research facilities.

2. Raleigh-Durham

The Raleigh-Durham area, often referred to as the Research Triangle, is home to Duke University, the University of North Carolina at Chapel Hill, and North Carolina State University. This area is experiencing rapid growth in life sciences due to its research institutions and favorable business environment.

3. Seattle

Seattle's life sciences sector is bolstered by the presence of major research institutions like the University of Washington and the Fred Hutchinson Cancer Research Center. The city's tech-savvy workforce and access to venture capital are driving growth in biotech and health tech startups.

4. Philadelphia

Philadelphia is becoming a key player in the life sciences industry, thanks to its strong medical research community, including institutions like the University of Pennsylvania and Children's Hospital of Philadelphia. The city is attracting significant investment in lab and office space for life sciences companies.

5. Houston

Houston's Texas Medical Center, the largest medical complex in the world, is a major driver of growth in the life sciences sector. The city is seeing increased development of lab space and research facilities to support its expanding biotech industry.

Takeaways for Tenants

The demand for medical and life sciences buildings in commercial real estate is more than a trend; it’s a strategic response to the evolving needs of the healthcare sector.

Investors who recognize the resilience, stability, and long-term potential of these properties are well-positioned to benefit from a sector that not only weathers economic storms but also plays a crucial role in the future of healthcare delivery. And with certain pockets of growth, it points to the cities that will be long-term hosts of life science leases. Paying attention to these trends can clue tenants in on the forces shaping the commercial real estate sector and their negotiation leverage.

And negotiating leases in this new era has never required more due-dilligence on the part of tenants. While there are financial minefields everywhere, there has never been a better time for tenants to negotiate a once-in-a-lifetime deal for their corporate leases. Learn how in Surviving the Office Apocalypse.