Life Science Firms Ramp Up Leasing in 3Q18
Large life science companies contributed to increased leasing activity in San Diego, in the third-quarter, with three lease deals of 50,000 square feet and up.
San Diego’s life science tenants helped to ramp up leasing activity in the third quarter. There were three large life science lease transactions, defined as leases 50,000 square feet or more, during the third quarter, according to the recent life science report from JLL.
“The overall growth of the life science sector has caused revenue to increase among a number of San Diego’s prominent firms, causing subsequent growth in real estate needs,” Grant Schoneman, managing director at JLL, tells GlobeSt.com. “An example of this was the Trilink Biotechnologies transaction that was signed early in the third quarter. Trilink Biotechnologies, a local San Diego firm that has seen exceptional growth over the past few years, signed a lease to move into a new 100,000 square foot facility.”
Life science firms are growing in the market, and in the third quarter venture capital investment surpassed $5 billion. Quality talent pools have helped to fuel growth of existing companies and investment activity. “National and international companies have continued to select San Diego as a preferred location to open new R&D facilities, taking advantage of the hiring potential in the region,” adds Schoneman. “The Genopis lease was an example of this trend. Genopis, a new U.S. entity established by large South Korean life science firm, ViroMed, selected San Diego to open a new 68,000 square foot DNA production facility, leveraging the large pool of highly experienced scientific talent found in the area.”
Even with increased activity from large users, total absorption of life science space was 10,567 square feet and the vacancy rate is 9.5%, up 120 basis points from the third quarter last year. There were 16 total deals completed during the quarter, compared to 19 transactions in the second quarter. “The dip in activity was largely due to a decrease in small tenant activity,” says Schoneman. “The second quarter recorded 10 completed transactions under 7,000 square feet, while the third quarter had only five transactions under 7,000 square feet. However, despite the total number of transactions being down, the total square feet leased during the third quarter far surpassed activity in the second quarter. The third quarter produced 374,000 square feet of total leased space compared to 207,000 square feet during the second quarter.”
With a relatively low supply of life science space, rental rates have continued to grow. In Sorrento Mesa, rental rates increased 10% year-over-year to $3.60 to $3.75 triple net. “The strong life science sector has seen rental rates in the nation’s key life science markets increase significantly over the past four years,” says Schoneman. “The combination of a very strong life science sector along with several large real estate funds that have capital to invest, have pushed cap rates for life science real estate to historically low values. Between Boston, San Francisco and San Diego (the three largest life science markets in the country) market valuations are at all-time highs and cap rates have decreased into the 5% to 6% range.”
Overall, the market has performed well this year, and the fourth quarter should be no exception. “The outlook for the San Diego life science market is positive,” says Schoneman. “The strong VC investment activity throughout the first three quarters of 2018 is forecasted to drive growth among small to mid-size firms. Healthy leasing among larger biotech firms is expected to continue in the fourth quarter, with activity projected to produce over 250,000 square feet of completed transactions. Looking forward to 2019, local biotech landlords have new ground-up developments that are currently under construction and will be delivered to the market in the next 12 months to capitalize on the growing sector.”