Life Science Grapples with Oversupply and Weakened Demand 

Key Takeaways: 

• Since 2020, a record 33.5 million square feet of life science space have been delivered, but with 26.4 million square feet still underway, current demand is not keeping up with supply 
• Life science hubs saw significant year-over-year vacancy increases, with the Bay Area’s rate up 550 basis points, Boston’s 540 basis points, San Francisco’s 440 basis points and San Diego’s 310 basis points 
• The national vacancy rate stood at 19.4%, up 200 basis points year-over-year 
• Under-construction office space totaled 69.8 million square feet nationwide, representing 1% of existing stock 
• Office sales volume amounted to $20.9 billion through August, remaining flat compared to year-ago figures, with assets trading at an average of $173 per square foot 
• Los Angeles led the nation in sale prices, with properties sold at an average of $437 per square foot, an 89% year-over-year increase 
• The Twin Cities saw its sales volume double from July, reaching $527 million through August 
• Washington, D.C., saw its pipeline shrink to half of year-ago volumes, with 2.1 million square feet underway in August  

Trends & Industry News

Life Science Sector Struggles with Supply Glut

Coming out of the pandemic, lab space was in high demand. Breakthroughs in mRNA and CRISPR technologies, alongside record-low interest rates, led to billions of dollars in funding from both private and public sources pouring into the life sciences sector. Developers rushed to respond, bringing millions of square feet to market in recent years through new developments and conversions of existing buildings. This year, it has become clear that developers over-responded to demand for lab space, leading to a supply glut in the sector, according to our U.S. office market report. 

Since the start of 2020, 33.5 million square feet of lab space have been delivered, and an additional 26.4 million square feet are currently under construction. Most of this new supply is concentrated in top life science hubs. Boston has delivered 10.1 million square feet this decade (9.8% of stock), San Francisco 6.2 million (11.1%), and San Diego 3.3 million (12.5%). The supply will continue to roll into these markets in the coming quarters, our office real estate outlook indicates, with Boston having 8.2 million square feet under construction, San Francisco 4.6 million and San Diego 2.5 million.  

At the same time as the wave of new lab space was coming to market, funding for the sector started to dry up, along with demand for these spaces in most markets. In San Diego, IQHQ’s $1.6 billion mixed-use Research and Development District (RaDD) downtown is slated to open with no biotech tenants. Recent reports suggest that frustrated office owners have begun listing empty life science buildings for general office use, offering space at much lower rates than they could receive from life science occupiers. Although we’re not yet seeing a negative absorption of life science space overall, the current demand simply doesn’t keep pace with the growing levels of supply. 

Oversupply isn’t a unique problem within the office sector, but there is currently too much space in life sciences due to recent deliveries. Unlike traditional office space, the long-term fundamentals for life sciences remain solid. Still, it will take longer than originally anticipated for the space to be absorbed, as these projects are delivering into markets with more availabilities.

Peter Kolaczynski, Director, CommercialEdge

Investor appetite for lab space has completely cratered after the sector’s peak following the pandemic. In 2022, there was $6.2 billion in life science sales across 62 properties, with an average sale price of $890 per square foot. In 2023, life science sales volume fell to $1.8 billion across 20 transactions, with properties trading at $631 per foot. In 2024, our database has logged just three sales of life science properties.  

While the excess of space may take a while to work its way out, we expect life sciences to remain one of the strongest sub-use types in the office sector over the long run. Most life science work remains immune to remote and hybrid work, requiring carefully controlled physical spaces, and venture capital funding in the sector should pick up again as interest rates begin to come down, according to our office real estate outlook. 

Listing Rates and Vacancy

Office Vacancy Rates Spike in Life Science Hubs

The national average full-service equivalent listing rate was $31.67 per square foot in August, the latest U.S. office market report notes, unchanged from the previous month.  

The national vacancy rate was 19.4%, increasing 200 basis points year-over-year. Vacancies have risen in almost every market last year, but some of the biggest jumps occurred in the top life science hubs. In the Bay Area, vacancy rates have surged by 550 basis points since August 2023. Boston’s rates have gone up by 540 basis points over that time, San Francisco’s by 440 basis points and San Diego’s by 310 basis points.  

Top Listings by Metro Area: August 2024 

The life science glut space can explain the rise in overall vacancies. However, many of these markets also have a high concentration of tech jobs, a sector facing its own challenges over the past two years. The tech sector has been beset by layoffs, weak hiring and a shift toward remote work setups at many companies since late 2022. 

Supply

Deluge in Some Sun Belt Markets 

Nationally, 69.8 million square feet of office space were under construction in August, representing 1.0% of stock, according to our U.S. office market report. 

A total of 34.3 million square feet of office space has been completed through August, putting 2024 on track to have the lowest office deliveries since 2013. Due to weakened demand and expensive capital, this year marks only the beginning of a slowdown in office deliveries. In 2023, office starts fell to 30 million square feet and have almost completely dried up in 2024, with only 8.7 million square feet of office space breaking ground this year. 

National New Supply Forecast (Sq. Ft.)

Amid the shift to remote and hybrid work, some Sun Belt markets’ office inventories have significantly increased in size in recent years. Austin has delivered 10.2% of its stock since the start of 2021, Charlotte 9.8%, Raleigh-Durham 9.2% and Nashville 8.7%. The decreasing demand for office space has exposed these markets to oversupply, and in Austin (4.6% of stock under construction) and Nashville (3.6%), there is still a significant amount of new supply on the way. 

Transactions

Downward Trend in Sale Prices 

Across the U.S., a total of $20.9 billion in office sales have been recorded through the end of August, with properties trading at an average of $173 per square foot, our most recent U.S. office market report reveals. 

Manhattan continued to lead the nation in sales volume, with nearly $2.5 billion in transactions through August. Washington, D.C., closely followed with $1.8 billion, and the Bay Area was next with $1.3 billion year-through-date. Other markets to approach the $1 billion mark were Phoenix ($923 million) and Boston ($917 million). 

2024 Year-to-Date Sales (Millions) 

Average sale prices saw a decline in most markets compared to one year ago, with one of the biggest drops recorded in Denver. The average sale price of an office building in the market has fallen from $243 per square foot last year to $112 per square foot in 2024, an over 50% decrease. Of the 23 recorded sales with a published transaction amount, 10 sold for a discounted price. Two buildings on Crescent Parkway in the Denver Tech Center even sold for less than their previous sale price in the 1990s. 

Western Markets

San Francisco No Longer Leads in Office Vacancy  

San Francisco continued to be the most expensive office market in the West and the second nationally, with asking rents at $66.93 per square foot, only $1.63 below Manhattan’s $68.56 per square foot. For the first time in months, the Golden City was no longer the leader in office vacancy among top U.S. markets, posting a 27.6% vacancy rate as of August and falling behind Austin’s 27.8% vacancy. 

In the West, life science hubs saw the biggest increases in U.S. office vacancy rates — the Bay Area saw a 550-basis-point surge year-over-year to a 24.8% vacancy rate, San Francisco’s rate went up by 440 basis points, while San Diego’s rose 310 basis points to 19.1%.  

The Bay Area remained the most sought-after office market in the West and the third nationally, with investors closing $1.3 billion in transactions at an average price of $283 per square foot through August. Average sale prices in the region remained stable, with Portland ($172 per square foot) and Denver ($112 per square foot) being the only Western markets with sale prices below the national average. 

West Regional Highlights 

Meanwhile, Los Angeles logged the highest average sale price nationwide at $437 per square foot, surpassing the leader of the past months, Manhattan ($386 per square foot as of August). Total sales volume in Los Angeles also increased by over $200 million from last month. The surge was mainly driven by Fashion Nova's $118 million acquisition of a 175,000-square-foot office building in Beverly Hills. The e-commerce giant plans to relocate its headquarters from Vernon, California, to this four-story building by the end of the year. 

Regarding office supply, San Diego had the biggest pipeline regionally on a percentage-of-stock basis, with over 3 million square feet under development as of August, representing 3.1% of its existing stock. Amid a general slowdown in life science construction activity, San Diego’s pipeline shrank considerably from one year ago when 5.2 million square feet were underway.  

Out of 16 office projects in San Diego, 13 are life-science facilities, accounting for 2.5 million square feet. Among the largest is Bioterra Lab, a 316,000-square-foot facility nearing completion at 5889 Oberlin Drive. The project, expected to be finalized by year-end, features expansive and efficient 70,000-square-foot floorplates. 

Midwestern Markets 

Sales Volume in the Twin Cities Nearly Doubles  

The major office markets in the Midwest have yet to show significant improvements, with key fundamentals mainly unchanged. Asking rents across all markets in the region remained below the national average. Chicago led with an average rate of $27.56 per square foot, while the Twin Cities ($26.44 per square foot) and Detroit ($21.92 per square foot) posted the lowest rates among top U.S. markets.  

In terms of vacancy, the Twin Cities stood out by ranking among the top five for office occupancy rates nationwide, with a vacancy rate of 16.4% as of August. 

Construction activity in the Midwest continued to stall. Once a national leader in office development, Chicago had the smallest pipeline nationwide on a percentage-of-stock basis, with current projects totaling only 0.3% of stock. This equals 811,394 square feet, a significant decline from a year ago when 2.4 million square feet were under construction. 

Midwest Regional Highlights 

Office properties in the Midwest continued to sell at discounted prices, with Minneapolis-St. Paul being the only market in the region where sale prices exceeded the national average, at $189 per square foot. In contrast, Chicago ($97 per square foot) and Detroit ($94 per square foot) rounded out the top three lowest sale prices nationwide, along with Philadelphia’s $84 per square foot. A notable discounted deal was the purchase of a historic 68,000-square-foot retail and office building on Chicago’s Magnificent Mile for $47 million, or $691 per square foot. This represents a 66% discount from its 2016 sale price of $140 million, TheRealDeal reported. 

While sales activity in most leading Midwestern office markets remained muted, the Twin Cities saw its sales volume nearly double compared to July figures, reaching $527 million through August. A significant transaction contributing to this was Hunt Electric’s $44 million purchase of the 300,000-square-foot Spectrum Commerce Center in Eagan. Contrary to the general trend, the property sold for more than its $35.5 million purchase price less than two years ago.  

Southern Markets

Washington, D.C., Pipeline Falls to Half of Year-Ago Volume 

Washington, D.C., continued to lead the South in office sales volume, logging over $1.8 billion in transactions through August, second only to Manhattan’s $2.5 billion nationwide. However, the capital is no stranger to discounted sales. In one recent transaction, Douglas Development acquired the Portrait Building at 701 Eighth St. NW for $34.3 million after the previous owner handed it over to its lender earlier this year, $64 million below its $98.5 million sale price in 2013.  

Once a hotbed for office development, Washington, D.C., currently has 2.2 million square feet of office space under construction, accounting for just 0.6% of its total stock — half the 4.3 million square feet underway a year ago. On the other hand, other Southern markets led the nation in office development on a percentage-of-stock basis. Austin topped the list, with office projects representing 4.6% of its existing stock. Miami ranked third nationally with 3.9%, followed closely by Nashville at 3.6%. 

Office Space Under Construction (Million Sq. Ft.) 

Sale prices in the South experience a slight downward trend. Austin, the regional leader in sale prices over the past year, saw a month-over-month decrease from $432 per square foot to $376 per square foot. Miami also posted a slight decline, from $368 per square foot a month ago to $348 per square foot in August. Despite this, both markets remain among the top five most expensive in the U.S. for office investments. 

South Regional Highlights 

Austin led the South and the U.S. in office vacancy with a 27.8% rate, overthrowing the leader in office vacancy, San Francisco, for the first time in months. Houston was closely behind San Francisco, with 25.9% available office space. Other Southern markets with vacancy rates above the national average were Dallas-Fort Worth (22.9%) and Atlanta (21.3%). 

Regarding asking rents, markets like Austin ($45.84 per square foot), Washington, D.C. ($41.60) and Atlanta ($33.80) all posted asking rates above the national average. Meanwhile, major markets like Dallas-Fort Worth ($31.04 per square foot) and Houston ($30.01) reported lower asking rents, just below the national average. 

Northeastern Markets

Manhattan Sees Decline in Sale Prices 

While sales activity in Manhattan continued an upward trend, nearing $2.5 billion in sales in August after hitting the $2 billion mark in July, many properties traded at discounted prices. This contributed to a month-over-month decline in average sale prices from $439 per square foot to $386 per square foot. This places Manhattan second nationally in office sale prices, surpassed by Los Angeles’ $437 per square foot.

A notable example of a reduced-priced deal in Manhattan was the acquisition of a nearly 1-million-square-foot Midtown office building for a 97% discount. The property received only one bid and was auctioned off for just $8.5 million, a stark drop from its previous $332 million sale price in 2006. 

Northeast Regional Highlights 

Construction activity in life science hub Boston remained strong, with 11.2 million square feet of office space under development, equal to 4.4% of its existing stock. Out of this, 8.2 million square feet are life science facilities. However, the demand for life science space hasn’t kept pace with the volume of deliveries, contributing to a surge in vacant space. Boston’s vacancy rate has reached 15.9% as of August, a 540-basis-point rise year-over-year.  

New Jersey was the only Northeastern market with a vacancy rate above the national average, with 19.9% available office space as of August, reflecting a 280-basis-point increase year-over-year. 

Regarding rental rates, all Northeastern markets posted asking rents above the national average. Manhattan remained the national leader with average rates at $68.56 per square foot despite experiencing a 1.5% year-over-year decline. Asking rents in New Jersey stood at $34.03 per square foot, while Philadelphia saw slightly lower rates at $32.78 per square foot. 

Office-Using Employment  

Slowdown Continues 

Office-using sectors of the economy added 12,000 jobs in August, according to the Bureau of Labor Statistics. The Financial Activities sector added 11,000 jobs, while Professional and Business Services added 8,000 and the Information sector lost 7,000. 

Office Using Employment 

Over the last year, office-using sectors have grown by just 0.4%, adding 141,000 jobs. While a cooling labor market can explain some of the slowdown in job growth, the national labor market as a whole grew by 1.5% year-over-year in August. Office-using sectors have underperformed the overall labor market since the tail end of 2022.  

Metro data for July, which trails the national release, shows that 80 of the 120 markets covered by our database lost office jobs over the last year and an additional 16 markets grew by less than 1%. With the prevalence of remote and hybrid work, new job formation is the only way to increase office demand, but these sectors of the labor market are currently stagnant. 

Download the report

Download the PDF report to view more, including the map for office-using employment growth.

You can also see our previous office reports. 

Methodology 

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.  

Get access to over 13M commercial property records with regularly verified commercial data, including local market insights, true ownership and construction projects with CommercialEdge Research. 

CommercialEdge collects listing rate and occupancy data using proprietary methods.  

Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National listing rate is an average of all markets. Prior to July 2024, this report used the top 50 markets for a national average.

Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of office space in that market. Owner-occupied buildings are not included in vacancy calculations.  

A and A+/Trophy buildings have been combined for reporting purposes.  

Stage of the supply pipeline:  

Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.  

Under Construction — Buildings for which construction and excavation has begun.  

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.  

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.  

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.    

Market boundaries in the CommercialEdge office report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources. 

Fair Use and Redistribution

We encourage you and freely grant you permission to reuse, host, or repost the research, graphics, and images presented in this article. When doing so, we ask that you credit our research by linking to CommercialEdge.com or this page so that your readers can learn more about this project, the research behind it and its methodology. For more in-depth, customized data, please contact us at [email protected].