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San Diego biotech market heating up

The life sciences industry in the region dates back to the 1960s when San Diego designated Torrey Pines Mesa as an area for "scientific research and development activities."

Today, San Diego is one of the nation's premier biotechnology markets, trailing only the San Francisco Bay area and Boston, and is home to over 200 pharmaceutical and biomedical companies. The region added about 18,000 biotech/life sciences jobs from 1990 to 2003 with an addition of another 8,000 jobs expected between now and 2007.

Life sciences companies have renewed interest in expanding their facilities, and overall leasing activity is expected to continue to increase steadily during the next 18 to 24 months. A substantial amount of laboratory sublease space still remains available. However, much of this is older or poorly designed product. Growth in quality laboratory supply has been relatively restrained and new laboratory construction is non-existent. Increased demand with fewer quality space options available suggests a shift to a landlord's market by year-end 2005.

The San Diego biotech market consists of 9.3 million square feet of highly specialized laboratory space in four major sub-markets: Torrey Pines, UTC/Eastgate/Campus Point, Sorrento Mesa and Sorrento Valley.

Torrey Pines, with over 6 million square feet of lab, R&D and office space, has emerged as the prime location for pharmaceutical and biomedical research. About 76 percent of this sub-market is dedicated to life sciences companies, most focusing on very late-stage clinical trials or marketed products.

The Scripps Research Institute currently owns or leases more than 1.2 million square feet of laboratory and administrative space in Torrey Pines, employing over 1,100 researchers. Pfizer Inc. will soon fully occupy a new 10-building campus, consisting of just under 1 million square feet for its 1,500 employees. The rental rate for lab space is the highest in the region, averaging $2.50 to $3.40-per-square-foot triple net, with a typical lab consisting of more than 20,000 square feet. The direct vacancy rate is currently 6.6 percent and may increase slightly due to tenant relocation and/or campus consolidation.

Recent Torrey Pines Science Park transactions include Anadys Pharmaceuticals leasing 50,000 square feet, Skye Pharma renewing a lease for 21,000 square feet of manufacturing space, and Stratagene consolidating operations by signing a five-year lease for 44,000 square feet of wet lab and office space. The shortage of available land in Torrey Pines has accelerated the expansion of life sciences companies into the adjacent markets of UTC/Eastgate/Campus Point, Sorrento Mesa and Sorrento Valley. These areas encompass more than 10 million square feet of biomedical and related space.

Like Torrey Pines, UTC/Eastgate/Campus Point tends to attract mature, publicly traded corporate tenants with well-advanced product development. This sub-market consists of a 12 percent biotech base with the majority of space, 61 percent, office.

Further expansion is restricted due to the limited supply of developable land. A small number of R&D facilities suitable for conversion to biotech and a few build-to-suit opportunities are available. The vacancy rate for biotech space is 6.15 percent. Lease rates range from $2.50 to $3.10-per-square-foot triple net. Recently, Amylin Pharmaceuticals took more space at 4570 Executive Drive for a total of 77,539 square feet of wet lab space. Covex leased 45,000 square feet of laboratory/office space formerly occupied by Triad. Sorrento Mesa has become the logical expansion market for biotech companies requiring more space. Several industrial/R&D buildings in the area have been converted to lab space offering tenants from the Torrey Pines or UTC/Eastgate sub-markets more affordable alternatives. More build-to-suit sites are also available here. The biotech sector, which makes up 10.57 percent of the market, posts a vacancy rate of 6.14 percent. Rents average $2.00 to $3.25-per-square-foot triple net, depending on class of space, degree of lab improvements, length of term and project scale.

Recent lease transactions of note include Biocept's 38,369-square-foot wet lab space at 5810 Nancy Ridge Drive. Last year, Kalypsys signed a 38,000-square-foot deal at Multi-Tech Properties' Wateridge Summit.

Gen-Probe expanded by occupying 29,000 square feet of new biology space at Wateridge with plans to consolidate in 36 months when the 274,000-square-foot expansion building located on the Sorrento Mesa campus is complete. Biosite Inc. is also expected to occupy about 352,000 square feet in January 2005 with expansion options up to 800,000 square feet. Sorrento Valley developed as an ancillary market to Torrey Pines and is home to many startup biotech operations.

About 39.7 percent of the sub-market is dedicated to biotech. With a base of older R&D buildings more easily converted to lab space, the sub-market provides an economical option for first stage firms. The vacancy rate is 11.06 percent and monthly rental rates range from $2.00 to $2.40-per-square-foot triple net.

In two recent deals, Eli Lilly (AME) leased 19,000 square feet of wet lab space at Sorrento West on Flintkote Avenue, and Rigaku leased 10,522 square feet at the Sorrento Science Park on Sorrento Valley Boulevard.

Generally, tenant improvement costs for lab space in all markets are running between $90-per-square-foot and $130-per-square-foot, although many landlords will not fund all of those costs. Landlords are scrutinizing the credit-worthiness of less established life sciences users, and it is common for small- to mid-sized companies to post a significant letter of credit or other forms of security deposit and possibly fund some of their tenant improvements.

Prepared by Chad Urie, associate vice president of Colliers International

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