According to data from real estate services firm JLL, also released today, San Diego’s life sciences has seen a steady increase in VC funding in recent quarters, accelerating in the first half of 2023. In Q2 2023, VC funding hit $632 million and has exceeded $1 billion in Q3.
Still, that’s far from the investment peak of $1.94 billion in Q1 2021. Following that boom in the early phases of the pandemic, the San Diego life sciences sector saw its VC funding dip to a nadir of $345 million by Q4 2022.
Biotech hubs could see stabilization by 2024
According to JLL’s 2023 Life Sciences Industry and Real Estate Perspective report released earlier this month, signs of optimism also extend to other biotech hubs like greater Boston and the Bay Area. These areas, along with the San Diego region, have witnessed a wave of lab space supply. JLL also points to signs of resilience in hubs in New Jersey, Philadelphia and Raleigh-Durham. In addition, a growing number of other U.S. cities are vying for recognition as biotech hubs. The report notes that the pipeline for lab space has peaked, with project completions expected to surpass new project starts in the coming years.
JLL acknowledges anticipated short-run downward pressure on rents and occupancy, and projects market stabilization by the end of 2024. In its report, it points to the following factors to support that thesis.
- Burgeoning demand for lab space: With investors rebounding, there’s a strong trajectory of growth for lab space demand, JLL argues. The firm’s report shows that in the second quarter of 2023, demand across the top eight markets in the U.S. was 10.1 million square feet, a 60% drop from YE 2021 highs. JLL also suggests that demand has likely hit its lowest point and is poised for growth in the coming quarters, given recovering job demand in the life sciences sector.
- A pending VC wave could drive biotech growth: Prominent life sciences VC firms have accumulated record-breaking funds in recent years, setting the stage for an investment wave.
- Strategic expansion of lab space: Hubs like Boston, the Bay Area, and San Diego are at the forefront of a significant lab space influx, underscoring their role in biotech’s future. The peaking pipeline for lab space means that the amount of lab space currently under construction or planned for construction has reached its highest point. JLL projects that project completions, which will soon become available for use, will surpass new project starts in the coming years. The data could signify a maturing market. As the amount of new lab space construction slows down, and more projects are wrapped up, the market could inch close to a state of equilibrium where supply more closely matches up with demand.
- Resilience in rents and occupancy: While short-term pressures on rents and occupancy are clear, JLL projects robust stabilization by the close of 2024.
- Sustained Big Pharma collaborations: As described at the outset, pharmaceutical companies like Roche and Pfizer continue to partner with smaller biotech firms. Also in September, Regeneron inked a partnership with AbCellera to discover and develop new antibody-based therapies for a range of diseases. In addition, Ginkgo Bioworks also unveiled a pact with Google Cloud. Such collaborations highlight the continued confidence of established pharmaceutical and tech giants in their partnerships with smaller biotech players.
‘Thorns’ remaining in the biotech landscape
While a recovery may be potentially underway, hurdles remain. The sector’s vulnerability to external financial pressures, interest rate fluctuations, and dwindling public funding opportunities have cast shadows over its immediate prospects. Prominent challenges include the following:
- Financial Pressures on Biotech Companies: JLL indicates a subdued interest in investing in the biotech sector despite recent positive developments in other areas. This has led to concerns that many biotech companies may need additional financing or acquisitions to remain operational through mid-2024. Further emphasizing this challenge, JLL provides data on the “Remaining cash runway for publicly traded biotechs,” suggesting that several companies have limited financial runways ranging from 0 to 3 months to 9 to 12 months.
- Interest Rate Sensitivity: The biotech sector is notably sensitive to changes in interest rates. The Federal Reserve has raised interest rates several times in 2023, with the most recent bump in August. The rate hikes have had a chilling effect on the biotech industry — especially cash-strapped companies as elevated rates complicate fund-raising, but also public companies.
- Limited public funding. Public funding opportunities for biotech have largely dried up in recent years. As JLL notes, data reveals that over the decade leading up to 2022, an average of 70 life sciences companies went public each year. But in the past 12 months, there were only 28 companies making their public debut. That’s less than half the historical average. Of these 28 companies, only six managed to raise over $100 million at their offering. Median capital raised at IPOs has rarely dipped as low as it is now over the past 16 years. Secondary offerings, another source of public capital, also were down in the first half of 2023.
Long on optimism for biotech growth
While the biotech sector faces ongoing funding concerns and occupancy issues for real estate firms, the long-term outlook remains promising, JLL notes. The firm firmly believes that the biotech ‘supercycle’—a phase characterized by sustained economic growth — will recover and continue to drive the sector’s expansion, just as it has been for much of the past decade. In the interim, well-heeled biopharma firms will scout and enter new markets for expansion and persistent demand for lab space could give way to a recovery in occupancy rates as VC funding recovers.
Filed Under: Biologics, Cell & gene therapy, Regulatory affairs