Life Sciences Real Estate Faces an Overbuilding Crisis

The life sciences real estate boom has turned into a bust as oversupply plagues the sector post-pandemic.

Jordan B. & Han-Gwon Lung
September 05, 2024

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Good morning. The life sciences real estate boom has become a bust as oversupply plagues the sector post-pandemic.

Today's issue is sponsored by RSN Property Group.

🎙️ No Cap Episode 7: Co-hosts Alex Gornik and Jack Stone talk with Vikram Raya, CEO of Viking Capital, on how he went from cardiologist to acquiring $800M+ in multifamily assets.

Market Snapshot

S&P 500

GSPC

5,520.07

Pct Chg:
-0.16%

FTSE NAREIT

FNER

823.75

Pct Chg:
+1.01%

10Y Treasury

TNX

3.768%

Pct Chg:
-0.028

SOFR

1-month

5.34%

Pct Chg:
0.0%

*Data as of 9/04/2024 market close.

PROPERTY REPORT

Life Sciences Real Estate Faces an Overbuilding Crisis

Once a pandemic darling, life sciences real estate is now so oversupplied that developers are converting labs into offices—trading one sinking ship for another.

Conversion rush: In cities like Boston, San Diego, and the Bay Area, a surge in life sciences development has led to a glut of vacant properties. Owners, unable to find biotech tenants, are now leasing at a 30% discount for office use. In Boston alone, at least 10 life-sciences buildings are being marketed as office space, with rents dropping from $100 to $70 per square foot.

Source: WSJ

Pandemic-fueled expansion: From Q1 2020, developers added over 59 MSF of life sciences space in the U.S., with another 19.1 MSF still under construction. This compares to just 3.7 MSF added annually in the five years before the pandemic. The rush, driven by skyrocketing demand during COVID-19, is now backfiring as demand has sharply declined, worsened by high interest rates and weakened venture capital funding.

Zoom in: In Boston, life sciences vacancy rates have soared to 27.7%, a steep rise from just 6.2% in 2020. This number is likely to rise with an additional 5 MSF under construction. San Diego's waterfront life sciences project, a $2 billion development, remains mostly tenant-less, and construction on some projects, such as a nine-story Somerville building, has been halted entirely.

➥ THE TAKEAWAY

Big picture: The life sciences real estate boom has turned into a cautionary tale, with property values dropping 15% to 20% from their 2022 highs and oversupply echoing the struggles of the office sector. As developers grapple with excess space and falling demand, the road to recovery looks long—and potentially rocky—if economic headwinds persist.

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*Please see the advertising disclosure at the bottom of this newsletter.

✍️ Editor’s Picks

Confidence boost: Wells Fargo's Chief Economist predicts that even a minor Federal Reserve rate cut could boost commercial real estate sentiment, though lending is expected to slow.
Banking on rate cuts: The Bank of Canada lowered its interest rate for the third time this year, with potential further cuts expected to boost housing affordability.
Gain time for growth: Metonic reduced time on back-office work by 10X and improved investor engagement by 70% with Agora’s comprehensive investment management platform. (sponsored)
Homebuilders thrive: Homebuilder stocks surged 20% in Q3 on the promise of impending interest rate cuts, outperforming the S&P 500 with 21% YTD growth.
Steel deal: President Biden plans to block Nippon Steel's $14.1B acquisition of U.S. Steel, threatening job losses and plant closures.
Office space: Investor Warren Wachsberger of Eldridge Acre Partners sees older U.S. office buildings as the biggest concern for commercial real estate but believes the market has hit bottom.
Condo chaos: Shvo’s Mandarin Oriental Residences in Beverly Hills faces a bulk sale of its remaining units after a $200M default notice, with plans to reallocate investments.

🏘️ MULTIFAMILY

Eastern expansion: Developers plan to build a 360-unit complex on 7th & Pleasant Valley and a 44-unit complex on East Austin's East 4th Street.
Family fortune: The Wirtz family sold a 139-unit Lakeview complex in Chicago to FMA Properties for $22.5M amid United Center's redevelopment plans.
Buying well: Cypress Capital Investments bought a San Francisco apartment building for $9.7M, its third deal this year.
Renovating fortunes: Northlink Capital secured $24M in construction financing for a 53-unit Brooklyn multifamily property near Flatbush Ave train station.

🏭 Industrial

Truckin' trust: Yellow Corp. (YELLQ) may create a real estate investment trust for its truck terminals in the company’s bankruptcy restructuring.
Investment insights: Investcorp (ICMB) acquired a $95.8M, 435 KSF industrial portfolio in Suffolk County from Metropolitan Realty Associates and TPG Angelo Gordon (TPG).
Rising trend: Co-warehousing is becoming increasingly popular for small businesses, with over 5.5 million new business applications filed in 2023 alone.

🏬 RETAIL

Rite Aid rises: Rite Aid (RADCQ) emerged from Chapter 11 with a slimmer focus on 1.3K stores, down from 2.1K pre-bankruptcy, after paying off $2B in debt and getting $2.5B in financing.
Canadian convenience: Canadian convenience store and fuel supplier Parkland is exiting Florida to sell off its non-core assets, as reported by CoStar.

🏢 OFFICE

Crypto crash fallout: Andreessen Horowitz shut down its 2-year-old Miami office due to low employee attendance after the city’s tech ambitions hit traffic in the post-FTX crypto crash.
Property predicament: Hertz Properties, a major U.S. office landlord, faces significant financial troubles, hiring a restructuring officer after disclosing doubts about its survival due to rising vacancies, inflation, and failed property sales.
Real estate revamp: SL Green Realty (SLG) acquired the $224M senior loan on an office property at 522 Fifth Avenue at a significant discount.
Office visitation: Post-pandemic Manhattan office visits hit 72% of 2019 levels, with Midtown buildings leading at 75% average weekday visitations.

🏨 HOSPITALITY

Farm frenzy: The Riverhead town board withdrew its agritourism inns and resorts re-zoning plan after facing backlash from the North Fork community.
Star-studded makeover: Billionaire Barry Sternlicht is leading a group looking to revamp Miami's waterfront Standard hotel with architect Bjarke Ingels; partners include Peter Thiel.

📈 CHART OF THE DAY

Delinquency rates for commercial real estate (CRE) loans at US banks climbed by 16 basis points in Q2, hitting 1.40%, per S&P. CRE property prices stabilized through July, showing moderation in price corrections, though multifamily and office properties lagged.