Bay Area Life Science Market Cools Off

The Bay Area’s life science market has started to slow after a red-hot post pandemic boom, according to a new report by Transwestern.

Rising interest rates and economic uncertainty have caught up to the market and tempered “previously unsustainable levels.” The vacancy rate has jumped 2 percentage points from the fourth quarter to 8.2 percent, numbers not seen since before the pandemic. The average rent has fallen by 22 percent from last quarter to $4.10 per square foot. The slowdown has dampened demand and capital investment in the market, according to the report.

“The primary cause was the downshift in venture capital funding,” George Entis from Transwestern said. “High inflation and the accompanying rise in interest rates led to higher financing costs and greater economic uncertainty. These forces converged particularly hard on all pre-profitability and pre-revenue companies, leading them not only to conserve cash on hand, but also trim expenditures, product innovation and overall expansion in the market.”

While venture capital funding slowed down, the first quarter still saw an infusion of $1.6 billion in funding. Moreover, for the last year, VC investment totals $9.5 billion from the first quarter of 2022 to the same quarter this year. The was comparable to the same levels as 2018 to 2019, according to the report.

“The markets have experienced their shock and are returning to more comprehensible levels, so business momentum will return to the sector but in a more sustainable fashion,” Entis said.

The rising vacancy rates could also be attributed to a development boom in 2022. As of the most recent quarter, there was nearly 5.2 million square feet of life science space under construction in the Bay Area, a nearly 55 percent increase from one year ago, and the second-highest level on record.

The largest leases in the first quarter were Alexza Pharmaceuticals’ 63,000 square lease in Fremont and Lygos’ 49,000 square foot lease in Hayward.

Despite the slowdown in activity, the life science market should expect to become a strong performer as it returns to the norm.

“The market is recalibrating from unbalanced supply and demand fundamentals,” Entis said. “Sound economic decisions and smarter/longer-term financial analysis are likely to be far more prevalent. There is still long-term demand for lab space and that will keep this a sought-after sector.”