The life sciences sector was one of the big “winners” in the immediate aftermath of the pandemic, as increased focus in the sector drove venture capital (VC) funding to record highs. Activity in real estate grew as well, with over 31 million square feet (sf) of lab and cGMP space leased from 2021 to 2022.
The sector is, of course, not immune to broader economic pressures. Over the past year and a half, life sciences firms have pulled back, as interest rates have increased and job growth, VC investment and real estate leasing activity have decreased. However, there are early signs of recovery within the life sciences environment. For example, VC funding is up nearly 20% YOY and the number of life sciences tenants searching for space is up over 22% since late spring.
Venture capital funding in the life sciences sector totaled $5.6 billion during the third quarter of 2023, up 18% year-over-year (YOY). During the third quarter, first-round commitments fell 23% YOY, while second and third rounds were 29% and 31% higher YOY respectively, indicating the market’s preference for more established companies. All other rounds were 22% higher YOY.
Average deal size also trended up in the third quarter, averaging $48.9 million—surpassing pandemic-level averages and giving the third quarter of 2023 the largest deal size average ever. This increase in deal size was primarily driven by third-round commitments, which averaged $78.6 million per deal, up 179% quarter-over-quarter (QOQ) and 81% YOY. First-round deals were smaller but also trended upward, at $17.2 million per deal, up 10% QOQ and 60% YOY.
The first half of 2023 was marked by a slowdown in the number of tenants in the market (TIMs), a rolling list of new and existing tenants actively looking to lease space. The amount of space in four hub markets in the Cushman & Wakefield TIMs list slowed 41% YOY in the first half of 2023. However, in the fall there has been an increase in activity, both in the number of active tenants and the total square footage being sought.
Looking at monthly 2023 data, June appears to be the nadir of tenant inquiries, with nearly 7.5 million sf of requirements. June TIMs lagged the average requirements during the first six months of the year by 22%. The average deal size was also smaller in June, averaging 39,000 sf per inquiry, 15% smaller than the six-month deal-size average. Slower June TIMs align with the slower VC activity in the second quarter, which was down 28% YOY. Tenant activity picked up in most of the hub markets beginning in July, averaging close to 9.1 million sf in requirements—14% higher than the monthly averages for April to June. As of October 2023, tenant requirements were 22% higher than June, but they still lag January activity by 24%. The number of tenants seeking space in the market has increased to approximately 220, nearly the number of tenants in the market in January. However, the average deal size has decreased from 54,000 sf in January to 41,000 sf in September.
On a market-by-market basis, total square foot requirements are highest in Raleigh-Durham, where cGMP manufacturing requirements have larger footprints. The average cGMP space requirement in the Raleigh-Durham market averages over 101,000 sf, significantly larger than the national October average of 41,000 sf.
Outlook
A recent uptick in TIMs is partially being driven by a return to normal in the life sciences sector, which is looking beyond pandemic-driven activity. Life sciences is not immune to economic pressures that resulted in many tenants evaluating their needs and slowing their space requirement inquiries. However, inherent growth dynamics mean that users of life sciences space will continue to seek opportunities as growth continues. Recent increases in tenant concessions have made space more attractive to tenants who may have otherwise been sitting on the sidelines. Additionally, an increase in VC funding has also given the sector more reasons to consider space.
Historically high dry powder VC levels mean that companies will be looking at more opportunities to deploy some of this capital. Increased available capital will allow tenants to take advantage of softer real estate fundamentals of the current market.
