San Diego is number three nationally in lab space as we close out 2018, with further growth expected heading into 2019. San Diego continues to see booming growth in biotech lab and life sciences sectors, which are becoming the biggest drivers of the city’s economy.
Much of the growth in these sectors is due to the young talent in the area, thanks to several research institutions located in and around San Diego. University of California at San Diego, Scripps Research Institute, and Salk Institute for Biological Studies all inject talent into the San Diego workspace, helping it become one of the leading hubs for biotech in the nation.
Data from Yardi Matrix showed that biotech office and lab vacancy was at 12.5% in the third quarter of 2018. However, when looking at spaces that work for lab space tenants, that rate drops to under 7% vacancy. Simply put, there is a lack of available space in San Diego’s biotech lab market, which the building of new space being too slow to accommodate many firms looking for facilities that are move-in ready.
Over the past few years, firms are increasingly looking for a campus-style environment with a variety of perks and amenities that will help make them more attractive for employees, both in terms of recruiting new talent and retaining current talent. While this manifests itself in various ways, new designs have a distinctly creative feel, putting greater emphasis on spaces that encourage flexibility and collaboration.
Landlords can benefit from this demand by offering move-in ready options for firms, which will help them grow and expand as their firm grows. There also been a large amount of capital put into developing on-site amenities including fitness centers, restaurant, and conference centers, which are attractive to firms and employees alike.
San Diego is known for a biotech community that is primarily focused on research and development. While both early and mid-0stage companies are in the market, much of the growth has been driven by early stage companies which has benefited from a large amount of venture capital resources in the area. This has led to many developers either building or retrofitting spaces to meet changing demands, usually in the 2,000 to 10,000 square foot range.
The main heart of the San Diego biotech and life science community is situated in University Towne Center (UTC), Torrey Pines, Sorrento Valley, and Sorrento Mesa, with approximately 15 million square feet of space between them. These four submarkets are located within five miles of each other, and have received new construction or lab conversions on more than two million square feet of space over the past few years.
Many of the future projects are likely to be located in the UTC, Torrey Pines, and Sorrento Mesa submarkets. One example is a 113,000 square foot project by Alexandria Real Estate Equities in the UTC area. Called GradLabs, this facility will feature furnished suites with high-level amenities and services.
The Bottom Line
While direct vacancy rates sit under 7% for lab spaces, even that low number may be inflating the amount of space that is truly available. Many of the vacant spaces are second-generation spaces that are either obsolete, or shell space that needs to be built out (a process that can take 8-10 months for design and construction). The dearth of move-in ready spaces is a big impediment for continued growth in the short-term.
In the long-term, with large amount of capital investment into the life science sector, demand should remain very strong into 2019 and the future. Trailing only Boston and San Francisco as a life science community, the city is growing thanks to six major universities and dozens of research institutions. In total, more than 600 life science companies are located in San Diego, which lead to almost $15 billion in economic impact each year. With everything from an impressive talent pipeline to established companies, the city’s lab space market will continue strong.