San Diego Life Science Market Sees Guarded Optimism As Funding for New Technologies Improves

The group's mid-year life sciences report shows 250,000 square feet of pending lease transactions and over 750,000 square feet of pending sale transactions - a significant portion of which should close by year-end.

"Financing levels are improving, and the slowly increasing availability of capital will help fund growth in research and new technologies," said Brent Jacobs, senior managing director of Cushman & Wakefield's Life Science Practice. "We are seeing fewer company failures this year as we did in 2009. Additionally, the stock market has been on an upward trend since last November, which indicates improved corporate confidence and should translate into more venture capital.

"Working in San Diego's favor is its strong foundation in the biomedical and research sectors and the resulting synergy should translate to improved tenant demand over the next 12 - 18 months. The outlook is slowly improving," he said. "It will just take some time before we see some positive impact of all these factors on the numbers."

The group's report shows that current vacancy of 11.6 percent is up from 10 percent at the same time in 2009 and nearly double the 5.9 percent vacancy recorded in 2008.

"The higher vacancy is consistent with our prediction that growing supply will outpace the increase in demand throughout 2010 and possibly beyond," said Greg Bisconti, senior director with Cushman & Wakefield's Life Sciences Practice. "As with the rest of the economy, decision makers and their backers are optimistic, but remaining very conservative in their commitments."

Bisconti said that as most of the 1 million square feet of sale and lease transactions are finalized, vacancy should hover at its current rate for the remainder of 2010 before trending downward. "We are also seeing an upturn in the volume of 'new' tenant activity - those companies just beginning the search process for space - and expect that transaction volume will increase dramatically into 2011, further helping to lower vacancy."

The Cushman & Wakefield report shows that tenant demand, which is defined by those tenants who are beginning the search process (as opposed to those already in final negotiations), is gradually returning to historical normalcy, currently tracking between 616,000 and 773,000 square feet. This is up from a year ago when demand was 400,000 square feet and compares to an average of 700,000 square feet between 2003 and 2008.

"Certainly, not all of the new tenant demand we are tracking will translate into executed leases or sales, but the current activity reflects the beginning of renewed interest and confidence in the market," Bisconti said. "On the leasing side, it continues to be a tenant's market with landlords willing to restructure leases, provide flexible strategies for shorter-term commitments, and provide lower-rent options for those seeking more permanent occupancy. On the investment side, activity is picking up for the major lab REITs, following a two year hiatus."

Cushman & Wakefield reports that the upswing in investment activity was spurred primarily by the exuberance of Biomed Realty Trust, following their recent S&P BBB-credit rating and over $500 million equity raise. The company recently acquired the 60,000-square-foot Nexus Shell Building at 4775 Executive Dr.

With Biomed on an acquisition spree, other lab REITs are joining in. This includes Alexandria Real Estate Equities, Inc. (NYSE:ARE), which has recently acquired three life science properties and other selected assets and interests of privately-held Veralliance Properties, a local real estate company focused on office and life science assets in Southern California, making Alexandria the largest San Diego County lab landlord with a 1.7 million square foot portfolio.

Other active companies at mid-year 2010 include Pfizer, which formally offered their Science Center buildings CB6 and CB7 for sale or lease, totaling approximately 200,000 square feet; and Biogen Idec, which is reviewing offers for the potential sale/leaseback of their 350,000-square-foot Nobel Campus.

"The economic downturn will continue to paint a challenging environment, but it will also play to San Diego's strong entrepreneurial spirit," said Jacobs. "San Diego companies have become creative in their funding strategies and in reducing operating costs. We have seen a variety of research collaborations and corporate funding/JVs, and even some pre-IPO activity. Amidst the softening real estate market, companies finding success in adverse times will find tremendous opportunities in the coming quarters."

Submarket highlights of the Cushman & Wakefield report are as follows:

Torrey Pines
Torrey Pines, the largest life sciences submarket in San Diego, with 4,741,342 square feet of inventory, reports 14.7 percent vacancy at mid-year 2010. Pfizer's give-back of 200,000 square feet of chemistry space resulted in a 4.6 percent quarter-over-quarter increase (vacancy was 10.1 percent as of March 31, 2010).

"The Torrey Pines submarket is home to some of the world?s leading research institutes, including: UCSD, The Sanford Burnham Medical Research Institute (SBMRI), The Salk Institute, the Scripps Research Institute (TSRI), and, most recently, The J. Craig Venter Institute (JCVI)," said Bisconti. "UCSD, SBMRI, TSRI, and Salk joined forces under the Prop 71 Stem Cell initiative to form 'The Sanford Consortium for Regenerative Medicine.' This $115 million 145,000-square-foot facility, which recently broke ground, is designed to draw and inspire the world's leading stem cell researchers."

Other positive events in Torrey Pines include the recent $600 million joint venture by Synthetic Genomics and Exxon Mobile Research, and the enhancement of The Burnham Institute into the Sanford Burnham Institute.

The Cushman & Wakefield report shows that of the 4.7 million square feet total inventory in Torrey Pines, approximately 17 percent is offered for sublease, and most of which is occupied by credit tenants with expiring terms on the 12-18 month horizon.

Rental rates for Class A laboratory space in Torrey Pines generally range from $2.45 to $2.75 per square foot per month NNN, assuming 60-70 percent lab improvements.

University Towne Centre (UTC)
UTC reports the highest vacancy in the county at 20.7 percent. According to Jacobs, this vacancy is the direct result of the submarkets dramatic growth in inventory in the last few years.

"UTC poses perhaps the greatest competition to Torrey Pines, with new, high-end, Class A product and a location that is more easily accessible and less prone to congestion than Torrey Pines," said Jacobs.

The area is renowned for Campus Pointe, a 450,000-square-foot lab and office project, currently occupied by Kyocera and the Lilly Biotechnology Center San Diego. The building, which recently underwent a complete renovation and transformation, is on track to be Platinum LEED certified and will be one of eight buildings in the country and one of 12 in the world to have achieved this coveted green status.

Rental rates for Class A laboratory space in UTC generally range from $2.45 to $3.00 per square foot per month NNN, assuming 60-70 percent lab improvements.

Sorrento Mesa
Sorrento Mesa, the second largest life sciences submarket in San Diego with 3.5 million square feet of inventory, reports 8.1 percent vacancy.

"Sorrento Mesa continues to be an area where developing life sciences companies mature," said Bisconti. "As these companies attract further funding, they may or may not relocate to a higher profile market such as UTC or Torrey Pines."

The Cushman & Wakefield team completed the largest recent lease in this submarket - a 25,000 square foot lease on Nancy Ridge Drive by Cibus Global, a crop science company.

Other notable activity year-to-date includes Genomatica's continued success and expansion, Kalypsys' sublease offering of 46,000 square feet of Class A lab space on Wateridge Circle, and a lease with a relatively new RNAi company (Traversa).

Sorrento Valley
Sorrento Valley, which is dominated by lower-end (Class C) product, reports 15.4 percent vacancy.

"With rental rates under $2.00 per square foot, Sorrento Valley continues to attract life sciences companies seeking low overhead in order to stretch every research dollar," said Bisconti. "In the past couple of years, Sorrento Valley has seen most of its quality inventory leased up, leaving only a handful of decent options."

The only notable Sorrento Valley-area transaction thus far in 2010 is a 22,000-square-foot lease signed in a Class C building by Pfenex, a Dow spinout.

North County
The North County region, which includes Carlsbad and Oceanside, has the lowest vacancy of any local life science market at just 2 percent. It also has the lowest average rents, with a range of $1.35 to $1.75 per square foot per month.

The most significant lab transaction in Carlsbad involved a 175,000-square-foot build-to-suit transaction between Isis and Biomed Realty Trust.

"Upon completion of its new headquarters in the next 12-18 months, we expect Isis to vacate its existing buildings on Rutherford Road, also in Carlsbad. Although this will make available 100,000 square feet of lab, office, and pilot scale manufacturing space, the company's expansion results in a net gain of 75,000 square feet of absorption," said Bisconti.

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