Life Sciences

Life science markets to “normalize” in 2023

The life science sector’s rapid expansion in recent years is expected to moderate in 2023 due to the economic slowdown. Nevertheless, the market should remain relatively resilient. Pandemic-fueled demand and capital infusion will give way to more normal market conditions, with better opportunities for occupiers. New construction will increase supply in the most sought-after lab/R&D markets of Boston-Cambridge, the San Francisco Bay Area and San Diego. Other markets with less new construction will experience more stable supply and demand trends as the long-term expansion of life sciences endures.

History of resilience

The life sciences industry has a history of resilience during economic downturns. For example, during the sharp but brief COVID recession in 2020, total U.S. employment fell by 13.4% from the previous year but U.S. life sciences employment grew by 0.7%. . As a recession takes hold next year, life sciences employment likely will exhibit less resiliency than 2020 but still have a milder decline than most other sectors.

Figure 25: U.S. Life Sciences Employment Growth

Note: Life sciences employment includes scientific research and development services, pharmaceutical and medicine manufacturing, medical and diagnostic laboratories.
Sources: U.S. Bureau of Labor Statistics, Oxford Economics, Q3 2022.

Several megatrends support the relative stability of life sciences employment, including rising demand from an aging population, higher health-care costs and the need for more effective and cost-efficient therapies. In addition, rapid advances in high technology and artificial intelligence are driving transformative medical advancements.

There is also the distinctive, stabilizing trend in how the life sciences industry responds to each phase of the business cycle. When the business cycle is favorable and capital more plentiful, smaller companies with innovative research are better able to remain independent. But when cycles turn less favorable, smaller companies generally become more agreeable to partnerships and mergers and acquisitions with larger-cap life sciences companies that want to capitalize on their innovative research. During the current cycle, the largest pharmaceutical and biotechnology companies have amassed historic cash balances and are activating this capital through partnerships with or acquisitions of these attractive smaller companies. Such activity should continue in 2023, stabilizing various smaller companies that show promise.

Figure 26: Life Sciences Corporate Cash Reserves and M&A Transactions

Sources: S&P CapitalIQ, CB Insights, Q3 2022.

Government funding to increase

Despite these stabilizing forces, the ongoing reduction in venture capital funding and dearth of equity financing is causing many life sciences companies to slow their expansion. Annual venture capital investment in U.S. life sciences companies has dropped 27% since peaking in Q4 2021. Additionally, only 14 life sciences IPOs occurred in 2022 through early November, down 81% from the year before. The prospect for a turnaround in these trends is highly uncertain but will likely moderate as 2023 progresses to more sustainable levels than the past two years.

At the same time, government policymakers are focused on life sciences investment more than ever. Proposed funding from the National Institutes of Health is up significantly for fiscal year 2023 in addition to the $2 billion in investments to expand the U.S. biotech and biomanufacturing sectors by the Biden administration.

Figure 27: Life Sciences Funding Sources

Note: 2022 VC funding only through Q3; NIH funding forecast for 2023.
Sources: NIH, CB Insights, Q3 2022.

Wait-and-see approach

The economic slowdown and pullback in private capital that has already lessened demand for life sciences commercial real estate should persist in 2023. Many occupiers and investors are on the sidelines until there is greater clarity on the trajectory of interest rates and the economy. In the meantime, there is a historic amount of new life sciences laboratory/R&D building construction underway, mostly in the premier clusters of Boston-Cambridge, the San Francisco Bay Area and San Diego.

The next tier of leading markets, including Washington, D.C.-Baltimore, Philadelphia, Raleigh-Durham and New Jersey, should see more stable market conditions due to less new construction. Smaller, emerging markets should also see favorable demand for multi-tenanted lab/R&D space.