Leasing Market Fundamentals

Rent Growth Slows Across Most Markets

^{* Rents adjusted to reflect occupier costs of office to lab conversion}
^{Source: Cushman & Wakefield Research; RHS=Right Hand Side}

Overall asking rent growth has softened from year-end 2023 levels to the second quarter of 2024. Growth remained positive at an average of 4% across the markets represented in this chart. Asking rents are still 24% higher in the second quarter of 2024 when compared to rents from the fourth quarter of 2022.
Despite the deceleration in asking rents, three markets posted strong double-digit rent growth from the fourth quarter of 2023 to the second quarter of 2024: Denver (+19%), Cambridge, UK (+18%), and Los Angeles-Orange County (+17%).
Asking rents declined in the second quarter of 2024 vs. Q4 2023 in five of the 16 markets: San Diego (-4.5%), Seattle (-2.9%), Boston (-2.5%), Chicago (-2.1%) and New Jersey (-1.9%).
The increase in available vacant sublease space in many of these markets has had an impact on asking rents, as most of this space is typically priced lower than direct space.

Key Takeaway: Softer demand and an increase in vacant sublease space has translated to lower asking rents in some markets. However, the strong appetite for highly amenitized, newly constructed class A space is expected push asking rents higher as a significant amount of new space delivers in the sector through 2025.

Upward Pressure on Vacancy Rate Continues

Direct and Sublease Vacancy by Market

^{Source: Cushman & Wakefield Research}

Total vacancy rate increased 350 basis points (bps) from the fourth quarter of 2023 to the second quarter of 2024 to 17.9%. Although the life sciences vacancy rate has increased significantly in the last couple of years, it is still below the current U.S. office vacancy rate of 20.5%.
Several factors are placing upward pressure on vacancy rates, including a recent influx of vacant new construction completions and an increase in vacant sublease space.
The sublease vacancy grew 110 bps on a YOY basis to 3.5%, adding an additional 2.9 million square feet (msf) of space to the markets for a total of 7.7 msf of vacant sublease space.
Total net absorption was negative for both the first and second quarters of 2024 in the U.S. Four of the 12 U.S. markets posted positive absorption for the first half of 2024, including Boston, Chicago, Denver and Los Angeles-Orange County.

Key Takeaway: The total market vacancy rate has increased due to the influx of vacant sublease space and some new construction projects delivering vacant. This trend should start winding down in 2025 as the life sciences construction pipeline contracts and occupiers absorb some of the current vacancy.

Inventory Growth Will Slow in the Near Term

Current Inventory and Under Construction

^{Source: Cushman & Wakefield Research}

Inventory growth is expected to slow in U.S. markets in the next couple of years. Inventory under construction totaled 17% a year ago in the second quarter of 2023, dropping nearly half to the current 8.8% of inventory under construction. It is expected to soften further as the construction pipeline continues to contract.
Among the 16 markets, Boston has the most robust construction pipeline, with just over 6 msf of projects under construction. However, Boston’s pipeline has decreased significantly and is currently less than half the 15 msf under construction from a year ago.
Construction is stronger in emerging European markets. Projects under construction in the UK total 38% of current inventory, with London poised to nearly triple its inventory through the current construction pipeline. Likewise, Leiden, Netherlands, will more than double its current inventory.

Construction Pipeline Continues to Contract

Inventory Under Construction

^{Source: Cushman & Wakefield Research}

Quarterly life sciences construction activity in the U.S. continued to contract through midyear 2024, slowing down for the last four quarters.
Inventory under construction totaled 8.8% as of the second quarter of 2024, nearly half the construction activity from a year ago in the second quarter of 2023.
Softening demand for space, coupled with a substantial number of deliveries expected to deliver vacant in the next 12 months, have dampened construction activity.

Key Takeaway: Construction of new life sciences space has declined in the last 12 months. We do not anticipate significant new construction activity until existing projects, and projects under construction, are leased.

Nearly 19 MSF of New Inventory Will Be Added in the U.S. by 2025

Expected Construction Completions: US Markets 2024-2025

^{Source: Cushman & Wakefield Research}

Construction completions of nearly 19 msf through 2025 will increase the current inventory by 8.8%.
Of these expected construction completions, approximately 42% is currently preleased. The remaining 58% will either deliver vacant or be absorbed by current tenants in the market (TIM).
Boston is expected to add the greatest amount of new space through 2025, with deliveries expected to total nearly 6 msf, representing 96% of its total construction pipeline. This means that the bulk of Boston’s pipeline will deliver by year-end 2025, and construction projects beyond 2025 have slowed.
There has also been a shift in the type of projects in the construction pipeline. Nearly 27% of the projects delivering in 2024 are preleased, meaning most space is being built as speculative (spec). For projects delivering in 2025, over 58% are preleased, indicating that the pipeline is comprised of mostly build-to-suit (BTS) projects rather than spec.

Key Takeaway: The shift from spec construction to BTS will allow vacant inventory to work its way through the leasing cycle.

Venture Capital Funding and Leasing Activity Are Closely Aligned

Four-Quarter Rolling Average

^{Source: PitchBook Data, Inc.; *Data has not been reviewed by PitchBook analysts, Cushman & Wakefield Research; RHS=Right Hand Side}

There is a strong correlation between VC funding for life sciences companies and total leasing activity in the U.S. Significant increases in funding often align with higher leasing activity, suggesting that as VC capital flows into the market, leasing activity tends to rise. Conversely, when VC capital contracts, leasing activity typically follows suit.
During the last few quarters, there has been an inverse relationship between capital raised and space leased. One reason for this is that companies currently raising capital are generally in the late stages of development, with the funds raised primarily allocated to clinical trials.

Key Takeaway: Significant inflows of VC in the sector spurs growth in leasing activity. Funding appears to have hit bottom and may continue accelerating in 2025, which will likely lead to more leasing activity.

U.S. Life Sciences Inventory Growth Follows Job Growth Trajectory

US Life Sciences Job and Inventory Growth

^{Source: Lightcast, Cushman & Wakefield Research}

Life sciences inventory has grown 5.1% annually since 2015 to keep pace with employment growth of 3.3% annually over the same period.
Through 2025, life sciences inventory is expected to grow an average of 5.8% annually, and employment is expected to grow an additional 3.2% annually.
As the construction pipeline contracts in the U.S., inventory growth and employment growth should be more closely aligned in the future.

Key Takeaway: Inventory growth has followed the path of job growth and will adjust proportionately to changes in the labor market.