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Large blocks of biotech space go vacant, but availability remains low

Despite several San Diego County-based biotech firms vacating hundreds of thousands of square feet through acquisition and merger the past two years, the availablity of large spaces still remains limited, according to a report.

A Cushman & Wakefield report said the county's biotech sector had an average of 213,000 square feet of leasing activity per quarter in 2012. The first three quarters of 2013 dropped to 158,400 square feet per quarter.

Biotech vacancy rates for approximately 16 million square feet countywide were in the 10 percent range throughout the first and second quarters of 2013, with a rise in the third quarter to 11 percent, despite vacancies of large blocks of space.

The pending closure of Amylin Pharmaceuticals in late 2014 -- as the result of Bristol-Meyers Squibb's (NYSE: BMY) $7 billion acquisition of the local biotech firm -- will put about 300,000 square feet of lab and office space up for sublease in the University Towne Centre area, Cushman & Wakefield reported.

BioMed Realty Trust (NYSE: BMR) was building the initial 150,000-square-foot phase of an 800,000-square-foot campus for Shire Regenerative Medicine when that biotech abruptly pulled out of the project late last month.

Pfizer (NYSE: PFE) announced the closure of its CovX space in the University Towne Centre area earlier this year. Pfizer, represented by C&W, is still offering 58,000 square feet of Class A laboratory and office space for sublease.

CovX, which developed peptides that are combined with antibodies, saw the layoff of 100 employees in San Diego when the Pfizer subsidiary unit closure was announced last February.

The 339,455-square-foot Torrey Ridge Science Center in the Torrey Pines submarket, which Pfizer occupied, was the only major vacancy on the market last year, and remains available for lease.

"Despite numerous mergers and acquisitions that involved San Diego-area commercial real estate, San Diego has seen limited quality lab space availability as well as limited major sales and leasing transaction activity during the first three quarters of the year," the C&W report stated.

“Currently, new product is limited but we are anticipating a number of exciting new opportunities coming to the market in UTC and Torrey Pines over the next couple of years,” added Ted Jacobs, an associate director of C&W’s Global Life Sciences Practice Group.

Meanwhile, merger and acquisition (M&A) activity continues to place a downward pressure on space demands.

Greg Bisconti, senior director of C&W’s Global Life Sciences Practice Group, said M&A activity was extremely high in 2012, with acquisitions of local companies such as Amylin; Gen-Probe, by Hologic Inc. (NYSE: HOLX) for $3.7 billion; and Ardea Biosciences, by AstraZeneca (NYSE: AZN) for $1.26 billion.

“M&A activity continues into 2013 with the $175 million acquisition of Althea Technologies by Ajinomoto announced in early March and the recent announcement of Verenium entering an agreement to be acquired by chemicals giant BASF" for $51 million, Bisconti said.

Other transactions that could affect space include Thermo Fisher Scientific's (NYSE: TMO) plan to purchase Life Technologies for $13.6 billion, and Johnson & Johnson's (NYSE: JNJ) announced acquisition of Aragon Pharmaceuticals for as much as $1 billion.

"Due to the slow start in 2013, owners remain motivated and the major life science [biotech] landlords are continuing to upgrade their buildings," the report continued.

Venture capital invested in 174 biotech companies for a total $1.8 billion through the third quarter -- up about 26 percent higher than the same period a year earlier.

In 2010, C&W noted rapid consolidation of the market by three of the country's largest lab landlords, all of which were REITs, resulted in one-third of total inventory and available space being owned by BioMed Realty Trust, Alexandria Real Estate Equities and HCP.

"These owners tend to place a higher emphasis on quality laboratory space and enhancing tenant relationships," C&W wrote. "The owners also commit to upgrading properties and redeveloping older buildings. This results in the end user seeing higher rents but lower maintenance costs for higher quality space."

While this surge in activity has subsided in recent quarters, BioMed and Alexandria in particular have recently raised hundreds of millions of dollars to continue expansion here, as well as in biotech hubs across the country.

For biotech tenants, the report said seven- to 10-year leases will be the emphasis for those wanting permanent occupancy

"Some things to keep in mind are construction costs and timelines are on the rise, new lab developments are six to twelve months away, and the best opportunities require early planning and timing the market for optimal leverage," the report concluded.

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