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Biotech leasing improves in San Diego County

Following last year's return of about 300,000 square feet of space in San Diego County's estimated 15.7 million-square-foot biotechnology market, conditions appear to be slowly improving.

Aided by the removal of some former Pfizer (NYSE: PFE) buildings from the inventory, the county's overall life science space vacancy rate fell to 10.3 percent in the second quarter -- from as high as 13 percent less than two years ago -- according to a new Cushman & Wakefield Life Sciences report.

"To that end, it feels like we are at the bottom of the market and that a slow gradual recovery is under way," the report states.

The industry's resurrection appeared to start at the end of 2010 when Alexandria Real Estate Equities (NYSE: ARE) paid $128 million to acquire the 360,000-square-foot Nobel Research Center in the University Towne Centre area.

While Biogen Idec (Nasdaq: BIIB) was preparing to move out of the space, Illumina (Nasdaq: ILMN) was agreeing to pay $335 million in rent over the next 20 years to go into the property.

The three big biotech real estate investment trusts -- Alexandria, Rancho Bernardo-based BioMed Realty Trust (NYSE: BMD) and HCP -- now own about 1.7 million square feet, or more than 10 percent of the market in San Diego County.

Greg Bisconti, a Cushman & Wakefield senior director who specializes in biotech space, said with REITs getting the prime spaces, much of what remains is functionally obsolete.

"In older buildings, you also may have 30 to 50 cents more per-square-foot in maintenance costs," Bisconti said. "Nearly all the tenants are moving laterally or into high-quality space. Almost no one is going into the lower-end space unless it is practically given away."

Bisconti, who has noticed an upward pressure on Class A rents, emphasized that even the most expensive space is a bargain in San Diego compared to the other big life science markets of San Francisco and Boston/Cambridge.

Nearly 200,000 square feet of leases were recorded in five major lease transactions in the county during the second quarter of 2011.

New leases were signed for Verenium (Nasdaq: VRNM), Genomatica, AnaptysBio Inc., Synthetic Genomics and Halozyme Therapeutics (Nasdaq: HALO) during the second quarter.

In Torrey Pines, Verenium, an ethanol-from-waste products researcher, signed a 60,000-square-foot lease at the former (now redeveloped) Merck (NYSE: MRK) campus.

Torrey Pines, with nearly 5.04 million square feet and a 9.8 percent vacancy rate, is the largest life science submarket by far and harbors a biotech cluster with the University of California, San Diego, the Salk Institute and others at the region's heart.

The former 105,000-square-foot Merck campus, comprised of a 60,000 and a 45,000-square-foot building along General Atomics Court, are currently being redeveloped by Alexandria.

"We expect this to be the first of several large-scale redevelopment projects in Torrey Pines, and a sign that higher quality real estate will be the emphasis of the REITs over the next three to five years," the C&W report said.

Synthetic Genomics, currently working with ExxonMobil Research on the next generation of biofuels, completed an expansion into a neighboring building in Torrey Pines, leasing an undisclosed amount of space.

C&W reports Sorrento Mesa is the second largest biotech submarket in the region with more than 4.75 million square feet of space. The second-quarter vacancy rate was 7.6 percent.

Genomatica has completed an expansion and lease restructuring at its headquarters in Sorrento Mesa, reducing its overall rental rate and extending its term.

A significant event in Sorrento Mesa was when AnaptysBio relocated from Torrey Pines during the second quarter to go into the old Favrille Building, nearly doubling the company's size from 15,000 to 29,000 square feet while halving its occupancy costs.

In Sorrento Valley, Halozyme, a biomedical pharmaceutical company, completed an early blend/extend of its existing 58,000-square-foot space in a recently acquired Biomed Realty Trust-owned building. Originally developed for Avanir Pharmaceuticals (Nasdaq: AVNR), the building reportedly features one of the only Class A lab environments in Sorrento Valley.

Sanofi-Aventis has completed its $20 billion acquisition of Genzyme (Nasdaq: GENZ) in Sorrento Valley, triggering the closure of Genzyme's San Diego facilities.

The University Towne Centre submarket is still recovering from a large influx of inventory during the middle of the last decade and posted an overall 24.2 percent vacancy rate as of the end of June.

Much of that space is attributable to the roughly 450,000-square-foot Campus Point office complex purchased by Alexandria for $113.5 million as of the end of last year. This space, formerly occupied by Kyocera (NYSE: KYO) is undergoing a significant renovation.

Alexandria incidentally owns vacant property around the La Jolla Commons master plan where as much as 200,000 square feet of biotech space may eventually be developed.

As Illumina enters the Nobel Corporate Center, it is vacating about 190,000 square feet of sublease space in a BioMed Realty Trust-owned building at the end of Towne Centre Drive that C&W is currently marketing.

The markets of Carlsbad and Oceanside, which have had a lot of trouble filling up conventional office space, managed to keep their combined biotech vacancy to 3.3 percent in a submarket with about 1.8 million square feet of inventory, though there were no transactions to report for the first and second quarters.

The most significant lab transaction in Carlsbad recently involved a 175,000-square-foot build-to-suit transaction between Isis Pharmaceuticals (Nasdaq: ISIS) and Biomed Realty Trust, with targeted completion in the fourth quarter of 2011.

The C&W report said that if there is any surprise in the data, it is how few life science spaces of more than 50,000 square feet are available in San Diego County.

As leases are signed, consolidations are happening that may also change the picture. Novartis (NYSE: NVS), which announced its acquisition of Genoptix (Nasdaq: GXDX) in the first quarter, was the last one standing in the bid for Gen-Probe (Nasdaq: GPRO). Genoptix and Gen-Probe collectively occupy more than 800,000 square feet in San Diego, C&W notes.

It wasn't immediately clear how and if a Gen-Probe acquisition by Novartis would impact Gen-Probe's space requirements at its Sorrento Mesa offices.

Shire Pharmaceuticals also recently completed its $750 million acquisition of Advanced Biohealing, and the subsequent announcement to add personnel suggests they will continue the goal of staying in San Diego. The report said plans ultimately call for Advanced Biohealing to grow into as much as 400,000 square feet at its Torrey Pines location.

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