Forum: Life sciences real estate market faces headwinds as AI reshapes industry

The life sciences real estate market is grappling with a perfect storm of reduced venture capital funding, oversupply and evolving technological demands, but North Carolina remains positioned relatively well compared to other major markets, according to industry experts speaking at the NCLifeSci Lab Space Forum held July 17 at the NC Biotechnology Center. 

The event was sponsored by Cushman & Wakefield, EquipNet, HiPP and Nikon. 

Travis McCready, head of industries and leasing advisory at JLL, described the current market environment during his presentation as "topsy turvy" with "the really hostile reality of having to deal with depressed demand as well as oversupply across the United States." 

Venture capital shift creates funding challenges 

McCready said that the venture capital landscape has fundamentally changed, with two key words defining the new reality: later and larger. 

"The super majority of our VC requests and rounds now are going to late stage clinical assets in large rounds," he said. "You see a very clear dip in the number of first round financings, which is an indicator of monies that are going to first time biotechnology entrepreneurs, and that should trouble us all." 

In real estate terms, this shift has created what McCready described as a "flight towards quality scientific assets," with companies increasingly seeking prime locations in established innovation hubs rather than suburban campuses. 

"We no longer want as scientists, as innovators, we no longer want suburban campuses in the middle of nowhere, protected by gates with a high wrought iron fence to keep people out," McCready said. "We want quality assets in innovation communities where there's porosity, there's bumping and connecting and there's an opportunity for multiple different technologies to have a relationship with one another." 

AI transforms laboratory space requirements 

Perhaps the most significant long-term trend McCready highlighted was the impact of artificial intelligence on the life sciences industry. According to global data he cited, AI has already helped isolate or repurpose at least 3,000 drugs making their way through clinical trials, and over 500 AI-native biotech companies are now operating in the United States. 

"AI is changing how we think about life sciences and doing work in the life sciences overall," McCready said. The technology is creating demand for what he termed "self-driving labs powered by artificial intelligence" and changing the fundamental definition of research. 

This technological shift is already impacting real estate markets, particularly in California, where AI companies are driving demand, McCready said. However, he noted that AI biotech companies present unique challenges for real estate developers. 

"They're completely confused. They don't know whether they're a biotech company or a tech company, and as a result, they don't know and they don't necessarily need pure play lab space," he explained. "Less and less pure play lab space is being absorbed as a result of these AI biotech companies." 

North Carolina's competitive position 

Despite national challenges, McCready highlighted North Carolina's relative strength in the current market.  

"Depending on your data set, depending on your metric here, North Carolina is actually doing really well," he said, attributing this success to the state's combination of biomanufacturing assets, lab assets and a business-friendly environment. 

The challenge for the state's life sciences community is AI competitiveness, he said. 

"As AI worms its way more and more into the life sciences going forward, the question for you is, will you be able to compete for that work going forward?" 

Panel Discussion reveals lab space challenges 

Following McCready's presentation, he moderated a panel discussion featuring local industry leaders who explored the practical challenges facing the North Carolina life sciences real estate market. The panel comprised 

• Deb Boucher, vice chair, Cushman & Wakefield 
• Lakshmi Ethirajan, Ph.D., chief executive officer, SmaBio Labs 
• Chase Jenkins, vice president of project delivery, HIPP Design + Consulting 

Infrastructure and regulatory challenges 

Ethirajan, CEO of a small contract development and manufacturing organization, highlighted the complex infrastructure requirements beyond basic laboratory space. 

"We talk about lab space, but there's other spaces that CDMO needs. For example, genuine manufacturing warehouse, and we will need vault space. If you offer DEA service, you will need a vault, a cage, so it's not just lab space," Ethirajan said. 

She also emphasized the regulatory complexities that companies face as they transition from shared incubator space that many start out in. 

"When you are going into clinical trials, there are regulations. That means we follow FDA guidelines. That means we follow ICH guidelines. Do we have that type of facilities in the shared lab space? Maybe not, because how are you going to prove that there's no cross contamination?" 

Real estate market dynamics 

Boucher said she has worked in North Carolina's life sciences real estate market for nearly two decades. 

"Twenty years ago, we were kind of relegated to shabby flex buildings, kind of in the shadows of RTP, and it's really come a long way since then," Boucher said. 

However, she noted the current funding environment has created significant challenges. 

"We have definitely seen over the last two years when interest rates really started to rise, that just changed the game for R&D, because it just became more expensive to have these businesses." 

Boucher emphasized that many companies are failing not due to scientific setbacks but financial constraints. 

"We have had many clients that it wasn't because of some disastrous result on some studies or bad data, it was just they ran out of money,” she said.  

Design and engineering perspectives 

Jenkins highlighted the increasing complexity of life sciences facilities. 

"Life sciences has always been complex, but it continues to become more complex. Whether it's small or large molecule, biologics become more challenging. The APIs we use become more dangerous. There's more containment requirements, diversity requirements," Jenkins explained. 

He noted that this complexity creates tension between developers seeking flexible spaces and tenants requiring highly specialized environments: "That is the opposite of what a developer is looking for, which is, let's make a flexible space that appeals to a lot of people." 

Credit and financing challenges 

The panel discussion revealed significant challenges around financing and credit for early-stage companies. Boucher explained how creditworthiness affects access to tenant improvement funds. 

"If you have really great credit, if you're a Pfizer and Novartis or whatever of the world, you can get as much money as you want for improvements," she said. "What becomes a challenge is that a lot of the companies that are most stressed about the situation are younger, smaller and they certainly don't have any institutional-quality credit." 

The future of laboratory space 

Looking ahead, the panel discussed how automation and AI will reshape laboratory requirements. Jenkins said that the industry is quickly moving towards automated processes that will require rethinking both lab structure and supporting infrastructure. 

"Instead of people working on the process or in the process, they're working on the automation around the process, and improvement to the automation and the AI," he said. 

However, Ethirajan cautioned that regulatory compliance remains paramount: "How are we going to comply with proving that quality is still not compromised? Because patient safety comes first, quality comes next, and then everything else comes." 

Collaborative approach as competitive advantage 

McCready concluded the forum by highlighting North Carolina's unique collaborative culture as a key competitive advantage. 

"One thing I always love about coming down to North Carolina is that your competitive advantage is the fact that you work together," he said. "It doesn't matter that Deb and I and the JLL team that we compete in the open marketplace. It's absolutely irrelevant. One thing that we have in common is that we want to see this market succeed and see North Carolina succeed, and that, at the end of the day, is your competitive advantage."