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Could SVB Meltdown Deal a Major Blow to Life Sciences’ Hot Streak?

Life sciences real estate has boomed over the last few years, following a major breakthrough in gene editing in 2010 that has created a long runway for biotech startups and continued research, fueling the need for more life sciences labs and office space. With the urgent need for a vaccine during the early months of the pandemic, the sector got even more of a boost, posting historic numbers in 2021. But the hot streak has tempered over the last year as venture capital has dried up across many industries. But there are still booming markets around the country, and the segment is considered one of the strongest in real estate. 

It’s been a critical sector to the overall health of the country’s office market, which has struggled to get back to pre-pandemic figures now that hybrid and remote work has become a permanent fixture and many companies have downsized their space footprints. As a result, life sciences real estate has been seen in some places as a potential office market savior. Last month, San Francisco Mayor London Breed said that she wanted to eliminate some code barriers to make it easier for empty office buildings in the city’s downtown to be converted into biotech space. Breed cited the city’s 5 percent life sciences vacancy rate compared to its office vacancy rate of more than 25 percent as a deciding factor. 

In 2021, the life sciences real estate sector hit all-time highs in funding, job growth, demand for lab space, and new construction. The market had never been stronger, and it was a moment CBRE dubbed as the kicking off of “the century of biology.” But last year saw something of a slowdown for the sector, which didn’t post the same kind of numbers last year as in 2021, in what JLL’s life sciences leader Travis McCready called an “odd year” for the segment. But despite a quieter year, life sciences still produced solid numbers, with individual markets from the well-established to the more emerging having big years. New York City’s biotech sector had one of its best years on record in 2022, hitting an all-time high in leasing activity. The growth has been spurred in part by the city’s $1 billion initiative into the life sciences sector, LifeSci, which leaders hope will build the city’s life sciences sectors into one of the top markets in the country. Philadelphia, another growing life sciences market, had a banner year of its own in 2022, posting historic leasing numbers and announcing significant new development plans.

Yet after one of the largest bank failures in US history last week, that bright future of continued demand could be in jeopardy. Silicon Valley Bank (SVB) was abruptly shut down by the California Department of Financial Protection and Innovation after the bank disclosed that it had taken a massive $1.8 billion hit from a $21 billion fire sale of its bond holdings. As a bank synonymous with startups–SVB’s data showed it was involved in 44 percent of nationwide health and tech IPOs last year—a huge number of biotech startups bank with SVB. The bank’s collapse reportedly sent “shockwaves” through the biotech sector as companies grappled with what would happen next and how it would impact their business plans.

In Philadelphia, industry members worried about the implications for local companies that banked with SVB. “The closure of SVB potentially creates a dire situation for many Pennsylvania life sciences companies and their employees,” said Christopher Molineaux, CEO of the industry trade group Life Sciences Pennsylvania. Life science leaders in Boston (which, along with neighboring Cambridge, is the country’s largest and most established life sciences market) were equally worried about what the fallout from SVB’s collapse would mean for the city’s biotech sector and the wider economy, where biotech and life sciences play a crucial role. “There’s a big SVB-sized hole in the ecosystem,” said Ari Glantz, executive director of the New England Venture Capital Association. 

While there has been some relief after the Biden Administration promised SVB customers that the government would backstop the bank’s assets and they will be able to gain full access to their deposits, there are longer-term effects from the situation that industry leaders worry will do damage to the ecosystems of life sciences clusters around the country. SVB built a reputation for working with startups from the earliest phases and was more willing to lend to small upstart companies than other banks. It’s unclear if a similar kind of bank could replace SVB in this way. The Cambridge-based firm Atlas Venture is one of Massachusetts’s largest backers of biotech startup firms. After the SVB news broke last week, the firm began drafting agreements with “a couple dozen” startups within its portfolio to extend short-term loans to companies who may have frozen funds, said Jason Rhodes, a partner at Atlas Venture, who called SVB a “very longstanding bank that has served the innovation community very well.” With traditional banks typically moving much slower than SVB, which helped startups get up and going and into R&D labs, it could mean a slowdown in innovation for the sector.

We’ll continue to get a better understanding of the fallout from SVB’s collapse in the coming weeks, but what’s clear now is that the event has undoubtedly shaken the life sciences and biotech markets—especially startup companies, which are an essential part of the sector. Recent outlooks by major brokerages and other organizations released before the recent bank debacle predicted that the life sciences sector would have some headwinds this year due to continued inflation, and biotech has struggled over the last year as VC funding dried up. The sector’s years-long growth streak could decelerate with the added factor of SVB’s meltdown.

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