The pandemic’s emergency status is fading, and so is what was once an exploding need for new space in the nation’s largest biotech regions, led by Boston, San Francisco and San Diego.
The surge in demand for coronavirus vaccines and treatments that brought venture funding in the sector to records in 2020 and 2021 is leveling off, and companies nationwide are laying off workers as research and development priorities shift.
Leasing velocity has slowed in the big life-science regions, and many tenants at the largest hubs are putting back on the market large chunks of space for subleasing.
When it comes to biotech spending on real estate, “we’re seeing a normalizing of real estate planning where these companies are looking to preserve capital,” Travis McCready, head of life sciences industries for the Americas at brokerage JLL, told CoStar News. “They’re not opting for excessive space in a geography or clinical research field that’s otherwise going to be a drain on capital.”
In San Diego, for instance, CoStar data showed there was 1.3 million square feet of biotech space available for subleasing at the end of April, more than triple the 350,000 square feet at the same point of 2022. Boston’s subleasable space has nearly doubled in the past year to 2.9 million square feet, compared with about 1.5 million square feet in early 2022.
Of course, not all firms are shedding space, according to analysts. “Biotech companies are still being founded and funded, and they still need real estate,” McCready said.
But in the areas where usage is shrinking, the reductions can be dramatic. The San Francisco area had about 1.6 million square feet available for sublease, up 65% from 971,000 square feet a year earlier.
“There are a few examples of companies pulling out of pre-leased space in new developments, or putting the space up for sublease rather than moving in,” said Nigel Hughes, senior director of market analytics for CoStar Group in San Francisco.
At the same time, new biotech space leasing in the first four months of 2023 declined considerably year to date compared with year-earlier levels on a national level. New leasing by square footage, not counting renewals, is down more than 65% in San Francisco and San Diego, according to CoStar data. Leasing is holding relatively steady in Boston, though vacancy and availability rates are rising as a wave of new projects are completed.
“The drop in demand can be tied to the waning demand for research, pharmaceuticals and diagnostics tied to COVID-19,” said Joshua Ohl, senior director of market analytics for CoStar Group in San Diego. “There have also been mergers and acquisitions that have played a role in rightsizing footprints or consolidating operations.”
Among the biggest recent examples of the pandemic factor was Waltham, Massachusetts-based Thermo Fisher Scientific’s plans announced last month to shut down three San Diego facilities where a Thermo Fisher subsidiary, Mesa Biotech, made coronavirus testing products. The closings will result in the laying off of 218 workers effective in June, according to layoff notification filings with the state of California.
“As COVID moves from pandemic to endemic, we must make adjustments to meet current market demands,” Thermo Fisher said in a statement April 28. “As we do not foresee customer demand for testing solutions returning to previous levels, we have made the decision to discontinue sales and operations from three of our San Diego-area sites.”
CoStar data shows those sites are at 9440 Carroll Park Drive, 6190 Cornerstone Court and 9600 Kearny Villa Road, totaling about 147,000 square feet that are now expected to be placed up for sublease. Thermo Fisher officials did not immediately respond to a request from CoStar News to comment.
Steve Holland, a senior vice president with brokerage Colliers International who represents life science clients, said many biotech tenants are now putting expansion plans on hold. A decline in venture capital funding is a big factor, especially for early and mid-stage firms that rely most heavily on that source of financing.
“Venture capitalists require their portfolio companies to reduce costs, so we see more sublease space being put on the market as tenants look to lower their cash burn rates,” Holland said. “Vacancy and availability rates are increasing from historic lows as new life science campuses are delivered to market, further softening conditions.”
JLL’s McCready noted biotech remains among the strongest categories for real estate demand, as research continues steadily into treatment areas that were already strong before the pandemic, such as obesity, diabetes, cancer and Alzheimer’s Disease.
Breakthroughs discovered during the pandemic, such as RNA-based vaccines, will likely be applied to those other areas and fuel new development and real estate demand going forward.
But some biotech project developers are pulling back on planned new construction as demand slows and supply-chain delays linger for vital lab-related materials and equipment. And biotech is not immune to a wave of layoffs sweeping numerous industries this year amid volatile economic conditions, especially technology.
The industry news site BioSpace tracked more than 7,000 layoffs announced this year by life science companies nationwide through May 8.
In the past month alone, state layoff notification filings in Massachusetts showed Takeda Pharmaceuticals planned to cut about 186 workers at four locations in three cities in the Boston region, and Sumitomo plans to lay off 223 workers at three pharmaceutical research and development facilities in that region. Those followed announced plans by EMD Serono, a subsidiary of pharmaceutical giant Merck, to cut nearly 140 jobs at a facility in the Boston area.
In San Francisco, state filings last month showed Genentech planned to lay off 271 employees as it closes a production facility. That’s among several similar moves by smaller companies in the Bay Area.
In San Diego, Cue Health, which saw big demand at the height of the pandemic for its COVID testing kits — from the government and large organizations like the NBA and Google — announced in late April it was laying off 326 people or about 30% of its workforce. That followed prior layoffs during the past year totaling more than 500, according to regulatory filings.
Cue is keeping its San Diego facilities officially open for now, according to local media reports. But many of the companies closing facilities or laying off workers nationwide will be returning space to the market via subleasings.
Companies are now also shifting to hybrid work models in cases where work doesn’t require an on-site lab presence, and making other changes in response to a venture capital climate that has slowed in the current volatile economy, where financing in multiple industries is getting harder to obtain.
“In 2021 when companies were handed large checks by VC firms, they were able to easily expand into new space, if they could find it,” said Sandy Romero, a global research manager with brokerage Cushman & Wakefield who tracks biotech among other industries. “In today’s tight capital market, those same companies are having to rethink not just their operational costs, but also their footprints.”
The major biotech hubs are also facing excess space created as many developers, including some with little or no previous presence in life science, bought up properties and planned new developments and conversions to capitalize on hot demand growth of the past five years.
“It’s not just a shock to demand; the Boston metro area has had more than 6 million square feet of life-sciences or lab space-centric real estate under construction since the end of 2021, and today there’s 6.6 million square feet,” said Chris LeBarton, director of market analytics for CoStar Group who tracks regions including Boston.
He said the end result is a glut of available biotech space in the Boston region, with current total availability — with vacancies and subleasable space factored in — of about 15.2 million square feet. That’s nearly double the level as of the second quarter of 2021.
Cushman’s Romero said newer space now hitting the sublease market generally gets absorbed relatively quickly in most regions, as occupiers take advantage of tenant-friendly terms. “Older space is more likely to linger on the market,” she said.
Current trends could continue throughout 2023 as early-round biotech funding slowly thaws. “Many negotiations for new lab space remain on hold while investors wait for more stability in capital markets,” said David Burden, principal and executive vice president in Colliers’ life sciences practice group. “We have clients ready to commit to expansion but who are awaiting venture capital decision-making.”
Colliers executive vice president Rico Cheung, who represents life science clients in the San Francisco Bay Area, said tenants are still scouting for about 4 million square feet of space in that region. While that’s down about 1.3 million square feet from a year ago, it’s still about 1 million square feet higher than levels seen just before the start of the pandemic.
“Most of the sublease space is from companies that raised a significant funding round in 2020-21 and are now looking to sublease a portion of their premises for two to five years, indicating they still have plans to grow into it,” Cheung said. “We haven’t seen many companies looking to unload their space entirely, but I expect that to increase throughout the year.”