San Diego Third Biggest Life Science Market in US

The life science market in San Diego is among the top in the country. According to a report from Cushman & Wakefield, San Diego is the third largest Biotech Hub in the country, behind Cambridge and San Francisco. The market has more than 19 million square feet of biotech space, and the number is growing. In the last several quarters, demand has increased by nearly 2 million square feet, and in the second quarter of 2018 alone, tenants absorbed 212,000 square feet of biotech space. The market has always had a biotech presence, but the sector has grown rapidly this cycle.

“San Diego’s life sciences sector has been on a gradual expansion over the last 10 years, since the 2008 recession,” Greg Bisconti, executive director and national practice group leader of life sciences advisory group at Cushman & Wakefield, tells GlobeSt.com. “Over the last year, funding level in life sciences has grown slowly, but the number of financings has decreased. Essentially, we’re seeing more money go into fewer companies, and the typical Series A is approaching $20-30 million versus the $5-10 million that we saw just a few years ago. Additionally, M&A and IPO activity has also hit new highs. While it feels a bit frothy, there is still a lot of money chasing deals and the amount of VC funding being raised is still on the rise. San Diego is known as the Genomics capital of the world. Overall a large part of the growth of the sector has to do with companies like Illumina making San Diego their headquarters.”

The metrics are all improving. Vacancy rates are sub 6% for biotech space, and asking rates are increasing, now at $2.50 to $4.50 triple net, per square foot. Despite the growing demand, it hasn’t yet outpaced supply. “While demand hasn’t really outstripped supply, there is definitely limited space available across every category,” Ted Jacobs, managing director of global life sciences practices group at Cushman & Wakefield, tells GlobeSt.com. “Most notably, the quality of the space is very mixed, and most demand by promising life sciences companies are focused on newer build-out space with on-site amenities. In short, most demand is focused on new, custom designed Class A space while older generation space is falling by the wayside, and as such most transactions take place in this new space or space that was improved in the last few years while older improvements tend to be picked over at discounted rates. In order to compete for talent with other life sciences companies we are seeing class-A space being leased while second generation space that is less attractive often collects dust.”

Luckily, development is keeping in step with demand, helping to supply and fuel the market growth. However, there are challenges. Construction costs are up 20% for the second quarter, according to the report, and few large floor plates will come to market in the second half of the year. “There is still plenty of opportunity to create new space options for growing demand,” explains Jacobs. “We believe this is one of the competitive advantages that San Diego has to other competing life science hubs, in that we can actually address growth needs. In fact, we are starting to see companies come here from other markets, choosing San Diego for its relatively affordable real estate and strong employment base. Industry veterans appreciate the need for existing local scientists and leaders, and have identified that growth and quality of life in San Diego is real and sustainable.”

This activity is creating huge opportunities for current life science landlords and investors. “The handful of existing life science landlords in San Diego are leaps ahead of outside competition, for the most part. Notably, the largest and most active life sciences landlords are Alexandria, Biomed Realty, and HCP,” says Bisconti. “While it is tough to effectively compete against these groups, there are some local lab developers making some wins. Notably, Phase 3 Real Estate Partners and Bollert/LeBeau have landed some key large life science companies. Really, it boils down to capital, experience and location. To compete, you need to demonstrate the ability to provide fully built out lab space for market lab rents. You need to be committed to the space and plan for your returns to exist over the long-term not just within the term of the lease. We see deals with $180-225 per square foot in tenant improvements and only a few months of security deposit for companies that aren’t profitable. It sounds crazy, but that’s what landlords are doing to win tenants.”