Report: Bay Area Life Science Real Estate Shaky

The good news is that the San Francisco Bay Area is one of the few life science hubs in the US markets with the necessary critical mass of tailored life science real estate, and that Obama Administration initiatives will help the biotech industry, fueling demand for Life Science space and helping return the local market to equilibrium, Foresight principal Susan Persin states in her report. Additionally, Persin says demographic trends point to an aging population base that will demand more health care services.

That is then, however; this is now: The Bay Area's 28 million square feet of Life Science real estate is cresting 20% overall vacancy--up from the mid-teens this time last year--due to a combination of overbuilding and deteriorating demand as tenants have pulled back in recent months, according to Foresight Analytics' report, which cites data from a NAI BT Commercial report. Rents, which vary widely by submarket and quality of space, are down between 10% and 15% from last year, when year-end rents averaged $2.30 per square foot per month "and are expected to contract further as the year progresses," according to the report.

Prompted by a dearth of available space in 2005, developers added significantly to the Bay Area Life Science real estate market in recent years, including 1.8 million square feet in the past two years. Tenant consolidation and sublease space also have added to the supply side.

At year-end 2008, the Bay Area contained more than five million square feet of available Life Science space, according to the report. The greatest amount of available space was located in the East Bay (2.3 million square feet) and San Mateo County (two million square feet), states Foresight Analytics, citing NAI BT Commercial.

"In terms of core business and demand for drugs, biotech businesses are somewhat immune to the global economic downturn [and] the Economic Stimulus Plan provides…$1.5 billion for biomedical research facilities and construction…[and]…$3 billion for the National Science Foundation," Persin states. "The long term outlook for the biotech industry and Life Science Real Estate market is good. Over time, the market will recover, leaving long term investors in a good position.

"In the meantime, soft market fundamentals and a tight financing environment will result in buildings selling for lower prices this year. Borrowers that currently need to refinance existing loans are increasingly required to enhance their equity because of changing lender requirements or declining building values. Some may be forced to sell at discounted prices that will be attractive to investors."

San Mateo County is the Bay Area's largest Life Science submarket, with 12.6 million square feet of space, according to the report. Availability increased dramatically to 21.8% in 2008 from 9.7% one year earlier. The East Bay submarket, which includes areas around UC Berkeley and Stanford, has had a vacancy rate of approximately 30% since Biomed Realty Trust acquired a former Sun Microsystems Campus in 2006 for redevelopment into Life Science space, and additional space has become available as a result of Roche vacating its Alameda Campus. Santa Clara County in the South Bay posted a 14.9% vacancy rate in 2008. San Francisco is the smallest submarket, with about one million square feet of space. Vacancy jumped to 21.8% in 2008 from 9.7% in 2007.

East Bay rents are the most affordable in the area at $1.65 to $1.85 per square foot in Oakland, Berkeley, and Emeryville. Santa Clara County rents are similar to Oakland, while asking rents for new, high-quality space in San Francisco's Mission Bay redevelopment area are nearly $6.00 per square foot, according to the report.

The report names four major players in the Bay Area market: BioMed Realty Trust, Alexandria Real Estate Equities, Healthcare Property Investors and Wareham Development. The following is an edited version of the report's Bay Area breakdown for each company:

• BioMed owns 11 properties totaling 2.6 million square feet in the Bay Area, representing 25.4% of the REIT's total assets, according to the report. Most of its local portfolio is concentrated in the southern part of the East Bay. In total, BioMed's San Francisco area portfolio was 49.2% leased at the end of 2008, due in large part to availability at its 1.4 million square-foot Pacific Research Center redevelopment of Sun's former campus.
• Alexandria Real Estate Equities owns 17 Bay Area properties totaling almost 1.5 million square feet that represent 12.7% of its portfolio. The company reported year-end 2008 occupancy of 98.4% for its Bay Area properties, up from 95.8% at year-end 2007. Its largest concentration is in San Francisco's Mission Bay, where it purchased rights to develop 2.1 million square feet in 2004 and 2005.
• Health Care Property Investors purchased the Slough Estates life science portfolio of San Francisco and San Diego properties in 2007. HCP's San Francisco area properties include 870,000 square feet in South San Francisco at Britannia Oyster Point and Britannia East Grand. The company reported occupancy for its total Life Science portfolio of 91% at year-end 2008, up from 83% in 2007, and has a strong pipeline of Bay Area Life Science construction projects.
• Wareham Development owns about 1.6 million square feet of life science real estate in the Bay Area, most of which is focused in Emeryville, Berkeley, and Richmond, with a small presence in Marin. Wareham's Life Science space is generally located near UC Berkeley, which is the traditional East Bay biotech hub. The company recently reduced its local profile after selling five buildings totaling 160,000 square feet to tenant Novartis, but plans to start construction this year in Emeryville and Berkeley.