A recent report by the Burnham Life Sciences Group shows that a decline in San Diego County lab vacancy from 9 percent to 7.3 percent this year alone, reflecting a continuing tightening of this specialized market and quickly limiting the number of suitable locations for lab companies looking to relocate or expand here.
New lab development projects are seeing strong tenant interest and will likely be leased upon completion. Where existing space is concerned, there are just 989,000 square feet of vacant space in a market with 13,552,177 square feet of inventory. Of this, the availability of existing lab space 30,000 square feet and smaller is becoming increasingly scarce, particularly where clean rooms, manufacturing facilities, vivarium space and competitively priced incubator labs are concerned.
"Whereas in 2004 and 2005, lab companies had the luxury of several quality existing space options in each submarket, today most areas have just one or two such options for a given requirement," said Brent Jacobs, who along with Greg Bisconti and Brian Cooper, belongs to the Burnham Life Sciences Group. "There are a few exceptions, such as Torrey Pines, which continues to deal with high overall vacancy and a sizable amount of sublease space as well. However, on a countywide basis the market is approaching an environment where it will be difficult to meet the needs of companies who fall under the 30,000-square-foot threshold."
According to Jacobs, much of the growth over the past year is the result of a slowing market for public offerings that in turn has forced companies to be more creative with their funding sources. "Collaborations, licensing agreements and acquisitions have financed a large part of the growth we've seen," he said. "Additionally, federal funding in the bioterrorism sector remains strong, venture capital remains steady for deserving technologies, and there is a notable increase in companies who are interested in relocating to San Diego from outside the area."
Much of this interest is being driven by the remarkable growth of local research institutions. According to Bisconti, examples include the Scripps Research Institute, which leased 166,000 square feet in 2005, announced a new 364,000-square-foot research facility in Florida and is currently reviewing a new 100,000-square-foot requirement. "Additionally, the Burnham Institute leased 75,000 square feet in 2005 and, following its announcement of a new 175,000-square-foot Florida location, enters 2007 with plans for an increased San Diego presence," he said. "The La Jolla Institute for Allergy and Immunology (LJIAI) took occupancy of a130,000-square-foot facility in August, of which LJIAI will occupy 80,000 square feet and Gemini Sciences will occupy 50,000 square feet."
Of particular interest is the arrival of the J. Craig Venter Institute, which is expanding from its East Coast location. The Burnham Life Sciences Group represented this institute in its lease of 18,000 square feet in Torrey Pines, and there are indications that it may be planning significant future expansion in San Diego. "Additionally, there is a related commercial venture targeting the multibillion-dollar renewable energy business, which could draw other companies to San Diego from this blossoming new technology sector," according to Cooper.
Another indicator of future demand for San Diego lab space is the biotech industry's strong resurgence in the San Francisco area and a corresponding expected increase in venture capital. According to Burnham's Bay Area counterparts, Genentech and Amgen have expanded substantially, and early- to mid-stage companies have already seen increased funding, creating over 2 million square feet of new demand in that market since August.
"In San Diego, on a lesser scale, we are seeing the growing momentum of small- to mid-size companies amidst increasing collaborations, acquisitions and earlier stage funding," said Cooper. "Unfortunately, vacancies smaller than 30,000 square feet are scarce and landlords see increased leverage as tenants have fewer quality options open to them."
According to the Burnham life science report, a flight to quality has helped drive the North County lab vacancy rate to the lowest in the county -- 1.4 percent. Currently, there are only 25,000 square feet of available lab space left in this submarket.
Sorrento Mesa has also become one of the county's tightest submarkets with just 3.6 percent vacancy, down from 9.5 percent vacancy at the end of 2005. Contributing to its strong performance so far this year are a number of notable transactions and subsequent move-ins, including 48,000 square feet occupied by BioVerdant and Pharmatek on Carroll Road, and 25,000 square feet occupied by Phage Biotechnology on Nancy Ridge Drive.
Neighboring Sorrento Valley continues to be one of the few places where affordable incubator lab space can be found, but this space is disappearing fast. While the Burnham report shows that Sorrento Valley's 9.5 percent vacancy rate is slightly higher than the San Diego average, it also shows that this is a small submarket, with just 1.7 million square feet of inventory. Much of what space is available is in need of renovation. "With landlords only providing limited improvement allowances for this purpose, the cost burden usually falls on the tenant," said Bisconti.
Torrey Pines continues to struggle with one of the county's highest vacancy rates, 13.9 percent or 662,000 square feet of available space -- one-third of which is up for sublease. Unlike the rest of the county, most of this inventory is in blocks greater than 30,000 square feet in size.
"The high Torrey Pines vacancy rate reflects corporate reorganizations and simultaneous campus consolidations by large tenants in this area," said Cooper. "With the likes of Schering Plough and Merck holding leases, there has been little incentive for landlords to market the space or otherwise provide incentives to entice tenancy. And with no improvement dollars available, the discounted rents have not been sufficient to lure companies into these subleases. As a result, the overall vacancy numbers in Torrey Pines appear worse than they are, and the reality is that existing lab space of high quality is hard to find on a direct-lease basis."
According to Bisconti, there are several positive highlights in Torrey Pines, including the development of Sidney Kimmel Cancer Center's new 65,000-square-foot headquarters building, and the arrival of the J. Craig Venter Institute, which is headquartered in Rockville, Md.
"The demand for quality lab space in San Diego County is expected to continue at its current pace, or stronger, straining the already limited supply of smaller options that early- to mid-stage companies tend to look for," said Jacobs. "Any company that anticipates needing space to expand in another 12-24 months would be wise to act now, as rents will only increase as the market becomes even tighter than it is today."
The Burnham Life Sciences Group is a specialized industry group within Burnham Real Estate, a company providing comprehensive real estate services to clients throughout the southwestern United States. Established in 1891 and headquartered in San Diego, the company has five 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.
Grove and Haney are with The Grove Agency.