Market Observations

• The pace of M&A activity, driven by Big Pharma, is expected to stay consistent during the latter half of 2024, despite potential headwinds.
• Venture capital funding for life science companies is declining, but volumes are still in line with quarterly averages from 2015 to 2019.
• Layoffs continue in the local life science sector, with employment growth expected to remain subdued throughout much of the next year.
• The supply imbalance is still affecting laboratory vacancy rates across Greater Cambridge, which have increased for the eighth consecutive quarter.
• Tenant demand remains elevated at around 1.9 million SF, though several requirements are contingent on additional funding or are on hold.
• Tenants are leasing less space for shorter terms.
• Average direct deal length is down by 41.0% from the peak, and transaction sizes are down by more than 50.0%.
• New construction contributed to higher rents in the first half of 2024, but pricing continues to correct across many markets in Greater Cambridge.
• The region’s laboratory inventory has more than doubled since Q4 2019, now totaling nearly 45.0 million SF.
• The higher interest rate environment, challenging market fundamentals, and wider bid-ask spread are limiting capital markets activity.

Economy

Tight Labor Conditions Are Hampering Employment Growth

Greater Cambridge’s unemployment rate dipped below 3.0% for the first time in nearly five years. At 2.8% in May of 2024, local unemployment is well below the national average of 4.0%.
While layoffs persist in select industries, including TAMI and biotechnology, limitations on labor availability are also impacting job gains at the metro level. Year-over-year growth in Greater Cambridge total employment continues to trail the national average as a result.

Massachusetts Business Confidence Appears to Be Improving

Local employers are starting to feel more confident about the economy. Ending a two-month slide, the AIM Business Confidence Index improved markedly in May 2024.
Optimism among Massachusetts business leaders is due to stable economic conditions at a macro level and more predictable inflation trends.

Long-Term Trends Highlight Immense Growth in Life Science Industry

Over the last 20 years, employment gains within Greater Cambridge’s life science sector have far outpaced growth within traditional office-using industries. Current headwinds
will limit near-term expansion in life science employment, and layoffs will continue to impact local payrolls through the end of 2024

Private Capital Remains Selective, but Investors Are Preparing for New Investments

The $2.7 billion raised during the first half of 2024 is well below recent volumes, with life science venture capital funding from 2020 to 2023 nearly doubling that. Funding is on pace to match the region’s pre-pandemic averages. New and experienced investors, including Goldman Sachs, JP Morgan, and Foresight Capital, are raising millions of dollars aimed at this industry. Greater Cambridge’s preeminence in the life science space will help attract more of this capital.

Leasing Market Fundamentals

Laboratory Vacancies Have Yet to Reach Their Peak

More new supply delivered in the first half of 2024 than during all of 2023. With another 3.2 million SF slated to come on line by year’s end, 2024 will represent a historic high for completions. Vacancy for laboratory space in Greater Cambridge is now more than five times higher than the 5.1% trough reported just two years ago. East Cambridge maintains healthier market fundamentals, but second-generation space is at risk for significant vacancy, as users now have numerous options.

Large Leases Remain Elusive and Tenants Remain Focused on Built-Out Space

Tenant demand ended the second quarter of 2024 close to 1.9 million SF, and 10 users are actively looking for 50,000 SF or more of laboratory space. Transactions are taking longer to execute as several requirements are contingent on additional financing. During the first half of 2024, leases averaged roughly 21,000 SF, which represents a significant decline from the height of activity in 2022. Users are opting for shorter, more flexible options in subleases and spec suites that reduce their need to come out of pocket for space fit-outs

Second-Quarter Leasing Volumes Were Comparatively Low

Recent improvements in leasing velocity gave way to fewer transactions in the second quarter of 2024. On the heels of a recent acquisition announcement, AbbVie agreed to lease 72,000 SF of space at Cambridge Crossing in East Cambridge. Pace Analytical and LFB USA both executed lease extensions during the second quarter of 2024, while Treeline Biosciences nearly doubled its footprint in Watertown. A full leasing recovery will likely lag other industry demand drivers.

Laboratory Rents Are off Materially from the Peak

Pricing for laboratory space in Greater Cambridge is off 8.6% from the peak due to weaker market fundamentals. User-centric market conditions will persist due to supply-side pressures, and tenants will maintain negotiating power. New construction may keep lease rates elevated, but expectations are for further price reductions in the coming quarters.