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San Diego biotech real estate market on upswing

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Last year's surge toward biotechnology was made unmistakably clear by big pharma's emerging interest in biotech established by abundant M&A activity, coupled with record-high placement of venture capital funds into life sciences.

San Diego life science firms secured $1.3 billion in venture capital in 2007, generating a 51 percent increase over 2006 investments and accounting for 64 percent of funds invested across all sectors (Source: San Diego Metropolitan, Jan. 21, "Venture Bucks"). Big pharma, beginning to look to biotechnology to secure its future success, was very active in acquiring life sciences companies. Major acquisitions in 2007 included San-Diego-based NovaCardia for $325 million.

The good news for the San Diego region: This M&A activity and venture capital trend is expected to continue through 2008, according to a recent report published by auditing firm KPMG. The report, which surveyed 350 venture capitalists, entrepreneurs, corporate buyers, investment bankers and research analysts on trends in venture capital over the upcoming two years, found that 85 percent of respondents indicated their expectation of venture capital activity to continue growing or remain at current levels. Fifteen percent of respondents forecast the life sciences sector to receive the most capital over the two-year period, placing it second behind the greentech/cleantech sector.

Nexus Properties is developing a $54 million, two-building life sciences campus at I-805 and La Jolla Village Drive, with occupancy of the first facility anticipated by early 2009.

Absorption levels for biotechnology real estate in San Diego have felt the positive affect of this growing relationship between big pharma, venture capital and biotechnology.

Year-end 2007 direct vacancy rates for wet lab space migrated downward to 5.05 percent in Sorrento Valley; Sorrento Mesa vacancy decreased to 4.30 percent; and UTC led the county with a 4.18 percent vacancy rate. This downward trend in vacancy has continued throughout the first two months of 2008, with sustained leasing activity among 5,000- to 20,000-square-foot tenants forecasted to continue throughout the year.

With the exception of a few companies, San Diego's life sciences companies are clustered within the submarkets of Torrey Pines, UTC, Sorrento Valley and Sorrento Mesa. The lab market in San Diego stands at approximately 8 million square feet of specialized lab space and another 4.7 million of owner-occupied lab space.

"Tenant demand for this product type in the UTC market has been historically strong and should continue, given the surge in biotechnology venture funding," said Tom Mercer of Colliers International. Mercer, along with Chad Urie and Michael O. Reidy of Colliers International, are representing Nexus Properties Inc., a leader in the development of biotech research facilities with more than 1 million square feet in San Diego County.

Nexus is currently developing a $54 million life sciences campus at La Jolla Village Drive and Interstate-805 in UTC. The two-building, 161,871-square-foot project is under way with occupancy of the first building, consisting of 58,904 square feet, anticipated by first-quarter 2009.

Nexus has constructed multitenant and build-to-suit laboratory facilities to serve the needs of numerous life science companies such as Ligand Pharmaceuticals (Nasdaq: LGND), Johnson & Johnson (NSYE: JNJ), Amgen (Nasdaq: AMGN) and Neurocrine Biosciences (Nasdaq: NBIX), as well as incubator facilities for smaller biotech companies.

According to Colliers, demand by small-tier biotech companies -- users of 3,000 to 20,000 square feet -- should continue well into 2009. As these startups continue to grow, they will demand significantly more space.

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