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LIFE SCIENCE: ONCE A BRIGHT SPOT FOR THE OFFICE SECTOR, DIMMED IN 2023

Over the past few years, investment interest has surged in the life science office sector, particularly in response to diminishing demand for traditional office spaces in the aftermath of the pandemic. This surge elevated life science rents and catalyzed new developments, but indications of a decelerating market emerged in 2023, as noted recently by JLL. In CBRE’s most recent report, the firm echoed these sentiments, noting that oversupply remains a substantial headwind for 2024, as there is about 38 million square feet of research and lab space under construction nationwide. Coupled with dwindling VC funding in the life sciences, 2024 could be a reset for the sector. As in many CRE sectors, interest rates remain a significant impediment on new investment in life sciences that would spur greater space demand. CBRE’s report specifically noted that oversupply is a near term concern greatest in the traditional life science market leaders including Boston and San Francisco’s Bay Area.

In this week’s blog, CompStak evaluates the rental rate and concessions trends among life science office transactions through 2023 and tracks the location and characteristics of the most valuable life science deals in these two major markets, according to CompStak’s data. Despite the sector’s challenges, Boston and the Bay Area still ranked 1 and 2, respectively as top markets for U.S. life sciences real estate according to JLL. Is 2024 expected to be another lackluster year for the life science office sector?

LIFE SCIENCE OFFICE STARTING RENTS SHOWED SIGNS OF STALLING IN 2023

In 2023, CompStak’s data indicated a plateau in annual growth for life science starting rents in Boston, while the San Francisco Bay Area experienced a year-over-year decline in starting rents for closed transactions. Boston’s life science starting rents experienced greater growth from 2019 than the Bay Area, increasing for each of the past four years, while growth slowed to 1.6% year over year most recently in 2023. Meanwhile, the average starting rent for completed transactions tracked by CompStak declined about 5% year over year in the Bay Area in 2023. Boston’s rise was boosted by top deals in East Cambridge from DEM BioPharma, which leased space in a recently renovated 730-750 Main Street owned by MIT and Flare Therapeutics’s 30,943-square-foot expansion in the Athenaeum Center at 215 1st Street. Meanwhile, the Bay Area’s top priced deals included Nkarta’s 36,544-square-foot extension in 6000 Shoreline Court in the Bay Area Peninsula and Biomea Fusion’s 30-month renewal at 900 Midfield Road in Redwood City
Over the past two years of closed lease transactions, the impact of leasing in new construction or recently renovated buildings, including life science conversions, has been more pronounced in driving starting rent growth in Boston compared to the San Francisco Bay Area. This includes leases like Broad Institute’s lease of 225,000 square feet in 300 Binney Street. The building is being jointly converted to life science office and laboratory space by Boston Properties and Norges Investment Management after Norges purchased a 45% stake in October 2023. Excluding leases in new construction and renovation projects, Boston’s rate of starting rent growth from 2019 dropped to 33.2% to 18.2%.

AVERAGE WORK VALUES INCREASED FOR EACH CONSECUTIVE YEAR FROM 2020-2022 IN BOSTON AND THE SAN FRANCISCO BAY AREA

Traditionally, life science office space requires a significantly higher built out cost than traditional office due to the customized and technical fitouts of medical and research grade interiors. This is a key factor driving higher starting rents on average compared to traditional office space. The average work values in Boston and the San Francisco Bay Area life science office transactions consistently increased each year from 2020 to 2022, especially driven by leasing in new construction which offered turnkey and higher T.I. packages, according to CompStak’s data. The substantial increase in the Boston market, in particular, was significantly influenced by these factors. The average work value declined in both markets from 2022 to 2023, influenced by a smaller share of activity in new or renovated construction. In Boston, the average year built or renovated (considering the maximum of the built year and renovated year, when applicable) was 2000 for 2022 completed deals but decreased to 1996 for transactions signed in 2023. To a lesser extent, this trend was true in the Bay Area as well: the average year built/renovated was 2007 for 2022’s completed deals and 2006 for transactions closing in 2023. Still, the average work value was up 35.3% and 79.8% from 2019 to 2023 in Boston and the San Francisco Bay Area respectively. Excluding work values in newly constructed or renovated buildings, Boston’s average work value increased 14.6% from 2019 to 2023. In the Bay Area, the same exclusion showed a decline in the average work value from 2019 to 2023. However, transactions in new or renovated construction during this period had an average work value of $95.10 per square foot, almost three times higher than in all other buildings.

BAY AREA’S TOP 10 MOST VALUABLE LIFE SCIENCE TRANSACTIONS WERE CONCENTRATED IN MORE RECENTLY CONSTRUCTED BUILDINGS THAN IN BOSTON IN 2023

The buildings that yielded the 10 most valuable life science office deals in 2023 in the Boston market are 7 years older than the comparable average for the Bay Area’s top ten deals of 2023 by value, according to CompStak data. Boston’s average built age for the buildings securing the top ten highest value leases of 2023 was 1988 as compared to 1995 in the Bay Area.

Accounting for renovations in a building’s age, the data presents a different picture. When considering the building age to be newer if a building was renovated, the average age of buildings with top life science deals in the Bay Area market is 16 years older than those in Boston, per CompStak data. For example, 215 1st Street in Boston was originally constructed in 1895 but was renovated in 2019 when the building was converted into space for biotech tenants.

ALEXANDRIA REAL ESTATE EQUITIES, INC. CAPTURED  THE  MOST VALUABLE LIFE SCIENCE DEALS IN BOSTON AND BAY AREA MARKETS COMBINED

Ginkgo BioWorks topped the list of top life science deals in the Boston market. The American biotech company will occupy the entirety of 1 Au Bon Pain Way, a 262,543-square-foot life science office building located in the Seaport submarket. GSK’s lease for 179,542 square feet at 200 Cambridgepark Drive and Orbital Therapeutics’ commitment for 166,000 square feet at 100 Binney Street ranked second and third, respectively, in terms of total lease value. Significantly, all of these leases were executed for spaces above 100,000 square feet in size and in buildings that were more recently built.

The top three most valuable life science deals in the Bay Area market in 2023 were smaller in size and situated within buildings that, on average, were older compared to those in Boston. Vaxcyte’s lease of a 36,593-square-foot space at 825 Industrial Road, which totals 299,508 square feet and was constructed in 2021. Mammoth Biosciences’ 21,856 square feet at 1000 Marina Boulevard took second place and third went to Ideaya Biosciences, which leased a 44,000-square-foot space at 5000 Shoreline Court.

TOP LIFE SCIENCE DEALS WERE CONCENTRATED IN EAST CAMBRIDGE AND IN THE BAY AREA’S DALY CITY/BRISBANE AND SOUTH SAN FRANCISCO SUBMARKETS

In 2023, East Cambridge led all Boston submarkets with 4 out of the top 10 life science deals, according to CompStak data. In addition to Orbital Therapeutics, tenants such as Astellas and Aera Therapeutics leased space in that submarket. Alexandria Real Estate Equities, Inc., a dedicated life sciences-focused Real Estate Investment Trust (REIT), took the lead among landlords in Boston’s top life science deals, accounting for four of the top 10. On the west coast, Daly City/Brisbane and South San Francisco submarkets yielded the most life science deals among the top 10 in the Bay Area. 

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