Life Sciences

• The life sciences sector is expected to stabilize in 2026 as construction slows, venture capital activity improves, and supply-demand conditions begin to rebalance across major research hubs.

• Federal funding uncertainty and proposed pharmaceutical tariffs will continue to pressure sentiment next year, even as innovation and onshoring of manufacturing support long-term fundamentals.

• AI-driven efficiency gains and demographic demand for new therapies position the sector for renewed growth beyond 2026, with manufacturing-oriented assets outperforming in the near term.

The life sciences sector and its supporting real estate had experienced unprecedented growth since the onset of the pandemic, driven by the race to develop, manufacture, and distribute COVID vaccines on a large scale. In 2021, a record amount of venture capital funding was deployed in the sector, but the subsequent years dropped back closer to pre-pandemic levels.

In response to heightened interest, real estate developers significantly expanded the construction pipeline, reaching historic levels by 2023. The industry is now navigating occupancy losses related to this oversupply, and while the peak of deliveries has passed, 2025 has brought new challenges. The current administration has proposed substantial cutbacks to federal funding for the sector and is working to enact pharmaceutical specific tariffs, and pressuring pricing with the “most favored nation” mandate.

Despite the current obstacles facing the life sciences sector, there are reasons to remain optimistic about the long-term outlook. The aging demographic in the United States will drive sustained demand for pharmaceuticals and related health care innovations. Technological advancements and ongoing innovation position the sector to meet this demand, adapt to challenges, and support continued growth and resilience.

Life sciences real estate includes any property that supports the research and operations of companies involved in pharmaceutical and biotech research, development, and production. This includes any property where 100 percent of the space is laboratory, manufacturing, or supporting office space. Revista currently tracks over 400 million square feet of existing life sciences space in more than 3,100 buildings across the United States. These buildings are mostly owned by third-party investors, with 54 percent of square feet representing either REIT or private investor ownership. The remaining inventory is owned by the occupying user, typically a pharmaceutical or biotech company or university. This dynamic is most pronounced in the core clusters—Boston, San Francisco, and San Diego. In these three markets, 78 percent of life sciences inventory is owned by either a REIT or private investor.

Responding to increased space demand in the sector, the construction pipeline began its upward march in 2022, peaking at 63 million square feet nationwide in 2Q2023. Much of this pipeline was speculative—assuming demand would fill the space upon completion. Unfortunately, this coincided with a reset in venture capital funding for life sciences, a result of rising interest rates and lower risk tolerance. This decrease in capital reduced the number of companies achieving funding and shortened the runway for many start-ups, causing them to be more careful with the amount of space they lease and to work harder to increase efficiency. Demand for space softened substantially.

As these projects began to reach completion, occupancy began to decline. Over the three-year period from 2Q2022 to 2Q2025, occupancy fell from 95.5 to 86.0 percent; almost 1,000 basis points. 

Starting in late 2023, and continuing into 2025, construction starts have materially slowed. Most of what is being started in the current environment are projects that are self-developed by the pharmaceutical/biotech company or build-to-suit projects by third-party developers. This shift will give a much-needed break in the new supply picture with much less unleased space coming to market.

Some areas have seen more significant declines in occupancy, while others have been more insulated. The top three cluster areas—Boston, San Francisco, and San Diego—have seen substantial investor-driven inventory growth in recent years and the resulting occupancy deterioration. In 2Q2025, Boston stood at 80.1 percent, San Francisco at 79.0 percent, and San Diego at 73.3 percent. All three have fallen from occupancies in the mid-90s in 2022 when space was scarce and demand high. Meanwhile, Philadelphia has been a particularly strong market. Inventory has grown more than 21 percent in the past three years, but occupancy loss has been muted. Typically, those areas with greater amounts of user-owned inventory and/or biotech manufacturing are more sheltered, as these properties have seen less of a reduction in demand.

Even within the largest clusters, not all submarkets are created equal. Many of the up-and-coming micro-markets were more impacted than the longstanding core research hub locations. For example, Cambridge in Boston, the most concentrated and established research hub, has not seen the same decline as the urban edge, a newly expanding research area nearby.

Life sciences property acquisition activity remains sluggish in the first half of 2025. Cap rates continue to expand, climbing from a trough of 4.4 percent in early 2022 to 6.6 percent in the most recent quarter. If interest rates continue with some measure of downward progression, activity may pick up. In the current market, there are opportunities for both stabilized prime assets in established research hubs as well as new developments still struggling to lease up.

The challenges facing the life sciences sector appeared to be easing as 2025 began. The prior year, 2024, marked the peak in new project completions, while the rate of new construction starts had slowed significantly. Combined with increasing venture capital funding, the sector was poised to begin a meaningful recovery. However, new obstacles came with the new administration, including significant proposed budget cuts to National Institutes of Health (NIH) funding. NIH funding plays a crucial role in supporting early-stage research, with most awards granted to universities and hospitals. This foundational research is where many start-ups originate. Continued reductions in NIH funding raise concerns about the future pipeline of start-ups, as fewer research initiatives may lead to fewer new companies emerging in the coming years.

In the short term, while some universities and hospitals may lease space for their research activities, many continue to operate out of properties they own. As a result, the immediate impact on leasing demand may be limited, but the long-term effects on industry growth and innovation could be significant.

Beyond the proposed reductions in federal funding, several other factors are contributing to heightened risk perceptions among investors in the life sciences sector. The introduction of pharmaceutical-tariffs, which could significantly increase costs for companies that rely on global suppliers, combined with ongoing policy efforts to ensure that U.S. pharmaceutical pricing remains at the “most favored nation” status are pressuring industry profitability. 

In addition, there is ongoing uncertainty regarding the recent Food and Drug Administration staffing cuts, which may affect the timing and efficiency of drug approval processes. While these policy developments remain in flux, together they are compounding the challenges faced by life sciences companies and further dampening investor sentiment during an already uncertain period. 

There are some silver linings and green shoots. Beginning with supply chain issues in 2020 and 2021, many pharmaceutical companies began preparations to “onshore” or “reshore” their manufacturing operations. For some, those plans are now coming to fruition at just the right time. More than a dozen of the largest pharmaceutical companies have announced plans for significant investment in their U.S. manufacturing in the near term. Life sciences properties that contain a manufacturing component have consistently higher occupancy—still above 90 percent nationwide. 

Artificial intelligence (AI) has also been making a splash. AI has a unique use case in biotech as a way to speed up drug discovery and streamline clinical trials. This increased efficiency may help many companies achieve more with less funding, which is certainly helpful in the current environment.

Despite the current headwinds, the life sciences sector remains in its early stages and holds substantial long-term growth potential. The sector will be driven by ongoing drug discoveries and technological innovations, which could continue to shape and expand the industry. With an aging population and increasing prevalence of chronic disease, demand for new treatments and healthcare solutions will likely be sustained. Although the path forward may include periods of uneven growth and supply-demand fluctuations, substantial potential and opportunity remain as the sector grows and matures. 

– Revista