A Positive Outlook for the Chicago Lab Space Market
According to a recent Randstadt Life Sciences Talent Trends report, Chicago is one of the top metropolitan areas with higher numbers of professionals in biotechnology and health sciences. Despite this workforce advantage, the laboratory space segment of the Chicago commercial property market has been struggling in recent months. A recent lab space marker report shows the Windy City dealing with a 50% vacancy rate. Across the Chicagoland region, the rate is 40%, thus making it the American market with the lowest leasing activity.
Despite the high vacancy rate for commercial structures with laboratory spaces, which require special HVAC systems plus other features such as sterile filtration and vacuum-sealed clean rooms, market analysts are issuing positive forecasts for the life sciences industry in Chicago. In recent years, the region has been re-emerging as a prime biotech and scientific hub, but this market segment is going through a cyclical downturn prompted by a sudden slowdown in funding of new ventures.
Before looking into the factors driving vacancy rates in the Chicago lab space market, it is important to note that there is a consensus among analysts about the strong long-term growth potential. As the normalization of supply and demand in the segment continues, the Chicagoland region has a lot to gain thanks to its concentration of research institutions, universities, and hospitals. Leaders in pharmaceutical, life sciences, and biotechnology know that Chicago is a prime destination, but they are waiting for financial green lights from executive boards, institutional investors, and shareholders.
According to a KPMG investment insights report, companies operating in the life sciences sector are preparing for the end of the post-pandemic correction cycle. The development of COVID-19 vaccines and the advancement of messenger RNA (mRNA) biotechnologies resulted in a prodigious flow of capital to the sector. Millions of dollars were allocated to the research and development of mRNA therapies to treat cancer patients who live with immunodeficiency conditions.
During the three years of the pandemic, sector stock indices such as the S&P 500 Life Sciences enjoyed substantial growth until they became overvalued, and this is when the capital flow began slowing down. This slowdown marks the beginning of a correction cycle, a natural part of market fluctuations that consists of a decline in asset prices after a period of rapid growth or a "market boom." When this happened to the life sciences sector, the immediate reaction was a pullback in research and development (R&D) efforts.
R&D is a major driving factor in the lab space market. In the life sciences sector, R&D activities require specialized facilities and equipment. These needs directly translate into demand for lab space. When pharmaceutical and biotech companies launch R&D, they generally move quickly because they know about competitors that are either ahead of the game or close to making a move. This creates an immediate need for spaces with controlled environments, specialized ventilation systems, clean rooms, specific temperature and humidity controls, and secure storage for hazardous materials.
Life sciences companies often cut down on R&D and expansion efforts when capital inflows slow down. What happened in the Chicago lab space market is a reflection of the sector correction. The slashed R&D budgets caught developers by surprise at a time when they were completing major projects and adding new ones to their pipelines. In other words, demand for lab space evaporated over two quarters, leaving developers such as Trammell Crow and Sterling Bay with half-leased properties at Fulton Labs and Lincoln Yards. Over the next few months, 480,000 square feet of lab space will be delivered in Chicago, but their pre-leasing levels are only 12%. In the middle of the pandemic, Fulton Labs had a 50% pre-leasing level, and this was at the peak of work-from-home arrangements.
Many venture capital firms that specialize in the life sciences sectors are waiting for a larger market correction. The overvaluation that has characterized Wall Street in recent years is not sustainable; it must follow the economic laws of boom, correction, and bust cycles. The United States Federal Reserve has applied cautious policies to prevent the bust cycle, but a correction is imminent because the market cannot operate in a hangover mode for more than two quarters.
As a seasoned developer, Trammell Crow is already reading the writing on the wall. The company is not waiting on a Wall Street correction to expand Fulton Labs; it plans to add a West End at Fulton annex that will combine retail and office spaces along with amenities for employees. Mark Goodman & Associates is another firm that is working to add over 500,000 square feet of lab and office space for R&D projects. All in all, the future for the Chicagoland lab space market looks good, and it will likely boost other segments of the commercial property market.