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Improved biotech leasing activity sets stage for space shortage

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Where the local biotech real estate market is concerned, year-to-date 2005 leasing activity has been healthy, evidenced by a diminishing number of opportunities for space under 20,000 square feet.

Despite this growing shortage of inventory, rental rate increases have been slow to follow -- a situation that Burnham Real Estate's Life Sciences Group reports will likely be short-lived.

Burnham research shows that San Diego's laboratory market consists of approximately 13.6 million square feet, with an overall vacancy rate of just 9.6 percent, or 1.3 million square feet of space. Approximately half of this available inventory is made up of space between 20,000 and 50,000 square feet, with 28 percent comprised of space larger than 50,000 square feet. Just 24 percent of the county's total inventory is made up of space smaller than 20,000 square feet, and this points to an alarming scarcity of space for early stage companies.

"Specifically, only 10 percent -- or 130,000 square feet of space exists that is smaller than 10,000 square feet, and this impacts the large number of early stage companies who typically have 25 or fewer employees," said Brent Jacobs, senior vice president and principal with Burnham Real Estate's Life Sciences Group. "Given that laboratory improvements take about six to nine months to put in place, tenants should start planning their lab renewal/relocation efforts 12 or more months ahead of their actual need. In fact, it is common for us to actively work with tenants who are just in the idea and preliminary funding stages."

Burnham's Greg Bisconti notes that the specialized needs of life science companies -- particularly where lab requirements are concerned -- further impact space availability.

"A life science company will often be able to utilize only two or three available laboratories out of 10 or 12 that may be available in the right size range and geographic location," he said. "Typically, a life science company has specific functions driven by their stage of product development, and this translates into varying ratios of office space, biology and/or chemistry labs, clean rooms, vivarium space and pilot plants. A facility might fit 90 percent of the company's needs, but that necessary construction of a clean room or vivarium might translate to a $1 million dollar improvement. Often, the landlord considers this a specialized improvement that the tenant should underwrite. A skilled broker can help negotiate a resolve that works for both parties."

It is also important to properly qualify available lab space for a tenant looking for space.

"A space that may be advertised as 'wet lab' in fact may lack adequate air handling, suitable drainage, power, sprinklers or any number of things," Brian Copper, senior associate with Burnham Real Estate's Life Sciences Group said. "The end result is the company wastes valuable time getting key decision makers focused on a building that is riddled with hidden costs. This is where a qualified broker that is well-versed in the life sciences industry can be invaluable."

Local companies need to be aware of the growing scarcity of space, Jacobs advises.

"As more existing space is removed from the market, the quality of space will become more spotty and additional modifications will be required," he said. "This will translate to increased up-front costs (to fund construction or for larger security deposits) as well as longer lead times (six to nine months) for occupancy. The good news is, as long as companies start planning early, we will be able to unearth cost-effective solutions to meet their specialized needs."

The Burnham Life Sciences Group is a specialized industry group with Burnham Real Estate, a company providing comprehensive real estate services to clients throughout the western United States. Established in 1891 and headquartered in San Diego, the company has four regional offices in Southern California and one in Las Vegas. Company services include traditional brokerage along with corporate services, asset services, capital markets, advisory services, strategic corporate consulting and project management. The Burnham Web address is www.burnhamrealestate.com.

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