Falling VC funding hits life sciences lending

A drop in venture capital funding in the life sciences sector is affecting commercial real estate transaction activity – and loan origination volume.

Venture funding for US life sciences companies totaled $49.2 billion in 2021, according to Cushman & Wakefield data. In 2022, that total slipped 28 percent to $35.8 billion – the same amount of venture capital funding allocated in 2020. That shift, along with recessionary signals and broader volatility, is having a knock-on effect on life sciences real estate.

“Loan momentum is not steady; it has downshifted,” says Abby Corbett, global head of investor insights at Chicago-based real estate advisory firm Cushman & Wakefield. The loans and deals that do get done are of the highest quality because that is where the capital is flowing, she notes.

Felt by all

The trends affecting the broader commercial real estate debt markets are being felt in the life sciences market, with Corbett citing the impact of rising interest rates and a drop in liquidity.

That said, the lending markets are not completely locked up – just more limited, Corbett says. Banks and insurers remain particularly cautious and are largely focusing on their existing loan books in lieu of originating new loans unless it is for an existing top-tier borrower.

“Loan momentum is not steady; it has downshifted”

Abby Corbett
Cushman & Wakefield

“In many cases, the deal profile for life sciences may be more compelling if it has more of an industrial component, as opposed to viewed as an office asset,” Corbett adds. “This gets to the complexity of life sciences as a niche subsector. It will require lenders and buyers that have ample enough expertise to feel enough conviction to entertain transacting in this environment.”

As transaction volume has dropped, vacancy rates have started to tick up across major life sciences hubs. Sandy Romero, a research manager at Cushman, says this is in part because of increases in vacant sublease space.

Under the microscope

Romero says rents started to soften in some markets in the first quarter of 2022, but are holding steady and continue to increase in others. “The construction pipeline is robust, however, some developers are starting to pull back some of their proposed projects,” she says.

Romero notes 17 million square feet of new life science space is due for delivery in 2023, meaning vacancy rates will continue to increase in markets expecting large deliveries of vacant space this year. Top markets including San Diego, San Francisco and Boston are among those where life sciences asset supply is only increasing – be it from construction or asset conversions.

Even with the venture capital pullback and fluctuating vacancy rates, Corbett says Cushman has seen an uptick in commercial real estate investor interest in the life sciences sector. Quality of income, asset and equity will remain a key focus for any asset, including for life sciences properties seeking financing, she adds.

This period of dislocation is an area of opportunity for debt market participants that can lend on quality properties because yields are relatively better, Corbet adds. “Additionally, those [lenders] that have the desire and liquidity have fewer lenders to compete with on terms, so there’s likely the opportunity to negotiate even more attractive terms [from the lender’s perspective].”