Next Wave for the Life Sciences Sector

SAN DIEGO—Precision medicine, or matching drugs to patients' genetic makeup, will usher in the next phase of life-sciences users to the San Diego market, JLL's VP Grant Schoneman tells GlobeSt.com. According to JLL, leasing in the sector has been growing significantly, with several firms signing leases in the first quarter—including Illumina for 146,000 square feet, Senomyx for 65,000 square feet, Receptos for 23,000 square feet, Samumed for 18,720 square feet and Explora Biolabs for 13,757 square feet—414,000 square feet of deals under negotiation and another 455,000 square feet of active acquirement in the market.

In addition, rental rates are maintaining peak levels, with asking rental rates for class-A vacancies in Torrey Pines and UTC maintaining levels in the mid-to-high-$3-per -square-foot range and asking rental rates for the same in Sorrento Mesa and Sorrento Valley in the high-$2-per-square-foot to low-$3-per-square-foot range per month. Leasing concessions like free rent continue to decrease, and allowances for moving and cabling have virtually gone away.

Moreover, venture-capital activity in this sector is strong, JLL reports. A total of $1.7 billion of VC dollars was invested into the national biotech sector, and Q1 2015 secured more financings than Q1 2007, which had $1.6 billion. San Diego had eight VC deals completed in the first quarter, totaling $149 million in capital raised, which accounted for a 172% increase in dollars invested from Q4 2014.

IPO activity for the sector slowed its pace in the first quarter, according to JLL. Only two companies IPO'ed during Q1—Tracon Pharmaceuticals ($36 million) and Cidara Therapeutics ($77 million)—although aTyr Pharma has plans to go public in May, targeting an $86-million IPO.

Given the 17 life-sciences lease transactions recorded in the market during Q1 2015—a 21% increase from Q4 2014 and an 11% increase from the same period a year ago, according to JLL—we spoke exclusively with Schoneman about what's driving the strong leasing activity and where he sees this sector heading in the future.

GlobeSt.com: What is driving the strong leasing activity of life-sciences properties in San Diego?

Schoneman: The market is definitely hot. Landlords are asking, “How can I convert typical office space in the right zoning to lab buildings?” San Diego is typically more of an entrepreneurial environment with smaller companies less than 20,000 square feet in size. Many people have started their own company, sold it to a big pharmaceutical or biotech company and then went out and did it again. It's a cycle, and either they have their own cash or a track record, they develop new technologies and run with them with a $30-million venture capitalist falling behind them.

Also, the IPO window has opened and there has been a significant amount of IPO activity in town. Companies are growing from 20,000 square feet to 40,000 square feet, and with that you really start to get positive absorption in the marketplace.

A lot of companies like Eli Lilly, Takeda Pharmaceuticals, Pfizer and Celgene have headquarters elsewhere, but made San Diego their R&D headquarters because of the large talent pool of scientists coming from UCSD and other research institutes here. There's a strong scientific community here in town. 

GlobeSt.com: What do you see as the natural progression of this sector as vacancy tightens and rental rates rise?

Schoneman: Conversions are definitely happening—there's stuff in process now to deliver space within the next 12 months or so. We haven't seen build-to-suit activity here since 2006, but four build-to-suits have been completed in the last six to nine months for companies including Illumina, the Medicines Co. Eli Lilly and Autonomy Corp. The market was non-existent for the last nine years, and now class-A buildings are being built for lab space. We're land constrained, but what land there is is being used for this type of space as well—like Biomed's i3 campus, for example. As the market tightens and rental rates increase, there will be fewer spaces available for tenants looking for class-A space, yet 80% to 90% of companies above the 20,000-square-foot threshold prefer these class-A facilities. Even smaller companies would rather pay higher rent and have access to amenities and nice lab space.

GlobeSt.com: What elements are essential to tenants in this type of space?

Schoneman: Geographically, companies like to be clustered close to Torrey Pines, UTC, Sorrento Valley and Sorrento Mesa. There's 13 million square feet of inventory clustered within those markets along the I-5 corridor because that's where they've started companies. Executives like to be close to home, and that's where the scientists live. There are not many on the I-15 corridor. Most of the smaller and bigger companies want to be down here because the cluster is geographically centered here.

As far as the facilities themselves are concerned, it's all about MEP: mechanical, electrical and plumbing. This drives a lot of tenant-improvement costs, and they need to find a landlord who's willing to fund those costs. The bigger landlords here control two-thirds of the industry in the cluster, and they like to have space that's in Torrey Pines, Sorrento Valley, UTC and Sorrento Mesa because if a tenant moves out, the chance of finding another company to move in is greater if you're in that cluster. The roots are too deep for that to change—it's been that way for many years, and I don't see that changing. The core nucleus is here. It's a good lifestyle and a lot of good communities and collaborative companies.

GlobeSt.com: What else should our readers know about the life-sciences sector here?

Schoneman: There are a lot of neat technologies that are going to be coming out. With regard to human longevity, Craig Venter, the first guy to decode the human genome moved into 125,000 square feet in UTC. Illumina is growing a ton. And there's a new shift to more personalized and precision medicine. San Diego is well established to be a market leader for this type of medicine, which involves customization of drug treatment based on people's genes.