Will Crash or Slowdown Follow Boston’s Lab Boom?

It’s looking like the answer to the question of what to do with a piece of real estate is no longer just “convert it to life science space,” at least for a few years.

Is Greater Boston’s lab building boom headed for a crash? Or just a slowdown after a period of breakneck expansion?

Time will tell, but signs are mounting that the bloom is off the rose when it comes to the development of new life science buildings and corporate campuses.

First, there’s a startling report by a respected commercial real estate firm that predicts trouble ahead for developers with plans for tens of millions of square feet of new lab and research space in the Boston area.

As much as 65 percent of the 40 million square feet in new life science projects either proposed or permitted in the Boston area “could be curtailed,” Newmark’s research unit reports.

That’s a staggering 26 million square feet worth of lab space whose future is now in doubt as developers face increasing difficulties securing financing as interest rates rise and construction costs soar.

“Maybe they don’t come out of the ground in the next five or 10 years,” said Liz Berthelette, research director in Newmark’s Boston office. “Maybe some end of getting shelved.”

A prime example of that can be found in Sullivan Square, where RISE Together and Trax Development have dropped a 246,000 square foot life science building from the first phase of their 2.6 million square foot project planned for 100 Cambridge St.

Creditworthiness Concerns Up

A second warning shot can be found in the latest edition of the Federal Reserve Bank of Boston’s Beige Book, which summarizes anecdotal reports about economic conditions around the country.

The report, issued in mid-July, notes a slowdown on conversions of buildings to lab and life science space in New England “amid concerns about tenants’ creditworthiness and a looming glut of space.”

“The outlook turned decidedly more pessimistic, as contacts expected further declines in investment sales and construction moving forward,” the Fed reported.

That reference to the creditworthiness of life science companies leads us to a third area of ​​concern.

It’s more than just rising rates and construction costs that have cast a pall of uncertainty over a growing number of lab projects.

Rather, stock market turbulence and a cooling down of red-hot investor interest have put a damper on the growth plans of a number of life science companies.

While venture capital money going to new companies in the field remains high, it has declined from last year’s boom-time levels.

Under pressure to conserve cash, some life science companies have started to make job cuts.

Biogen, for example, has jettisoned 300 jobs in the Bay State since late 2021. The cuts, which amount to roughly 12 percent of its local workforce, will save the $500 million, Biospace reports.

Boston biotech Imara slashed 83 percent of its staff, leaving just six employees, while Leo Pharma shut down is closing “its regenerative medicine innovation hub and science and tech centers in Asia and Boston,” according to Fierce Biotechwhich is now regularly keeping a tab on the latest industry layoffs.

Sublease Space Hits 1M SF

Layoffs and life science and biotech companies deciding they don’t need as much space after all have led to a worrisome uptick in another area: sublease space.

The amount of sublease space in Greater Boston jumped to 450,000 square feet in the first quarter, for a 50 percent increase over the first three months of 2021, when it stood at 300,000 square feet.

But the pace of empty space hitting the market exploded in the second quarter, roughly doubling to a little under 1 million square feet by the end of June, according to Newmark.

Scott Van Voorhis

So, after a period of frenetic expansion, the red flags are seemingly popping up all over the place, warning of trouble now and likely more ahead with the life science development boom.

All that said, it seems unlikely that the bottom is going to fall out of the Boston lab market, which over the past few years, has become the preeminent hub for the life sciences sector in the United States, if not the world.

But neither is it realistic to expect the current expansion, in which everyone and their brother was rushing to convert old office buildings and everything else under the sun into high-priced lab space, can continue at its current space.

The next year or two may very well see a shakeout period, as well-crafted, positioned and financed life science projects move forward, even as others with shakier underpinnings are put aside or converted into offices or apartments.

Stay tuned.

Scott Van Voorhis is Banker & Tradesman’s columnist; Opinions expressed are his own. He may be reached at [email protected].

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