The Research and Development District (RaDD), one of the nation’s largest life-sciences projects, is set to debut in San Diego in the coming months. However, according to a recent report by Bisnow, it currently lacks any biotech tenants.

Why It Matters:

The $1.6 billion project, encompassing 1.7 million square feet of commercial space, is entering a market already grappling with high vacancy rates for both lab and office spaces.

Quick Recap:

San Diego-based IQHQ initiated the project in fall 2020, touting it as the largest commercial waterfront opportunity in California.

• Former Mayor Kevin Faulconer highlighted that it would establish a downtown life-sciences hub, distinct from the industry’s established northern areas near UC San Diego.
• In 2006, the U.S. Navy granted developer Doug Manchester a 99-year lease to develop eight downtown blocks, including a new headquarters for the military branch.
• Manchester completed the 17-story Navy One Building in fall 2020 and subsequently sold most of the remaining project area to IQHQ for $230 million.

Current Challenges:

RaDD has yet to disclose how its 1.7 million square feet will be allocated among office, lab, and retail spaces, and it currently has no announced tenants.

• The city’s overall office vacancy rate rose to 18.2% in March, up from 14.4% the previous year, according to Commercial Edge.
• Life sciences vacancies in core submarkets like Torrey Pines, UTC, Sorrento Mesa, and Sorrento Valley stood at 15.3% in the first quarter, per CBRE.
• Sorrento Mesa, the largest life-sciences submarket, had a 20% vacancy rate.
• Downtown’s smaller life-sciences submarket experienced a vacancy rate exceeding 50% during the same period.

Key Issues:

Life-sciences projects are driving new office space nationwide, with San Diego’s 3.6 million square feet under construction representing 16% of the country’s pipeline.

• The Horton Plaza redevelopment will add another 615,000 square feet this year.
• Downtown’s smaller Genesis San Diego has successfully secured some leases.

The Bottom Line:

RaDD officials mentioned on the Built Podcast in early 2023 that the project aims to create a new economic engine for downtown.

• However, Taylor DeBerry, a life-sciences analyst at Jones Lang Lasalle, told Bisnow that downtown will likely remain secondary to the industry’s core northern submarkets.
• “And currently, RaDD doesn’t have any leasing,” he noted. “I think that speaks volumes about the leasing environment downtown.”

San Diego’s renowned life science sector has hit a new milestone this year, but not in a positive way. The vacancy rate for lab and office spaces has soared to a record 14 percent.

Just three years ago, companies were scrambling for space in key life science hubs like Sorrento Valley, La Jolla, and Del Mar. Now, there are more buildings available than local companies are willing to lease.

Current Trends:

The overall vacancy rate for life science spaces in the area has jumped to 14.3 percent, up from 5.7 percent the previous year, according to first-quarter data from Jones Lang LaSalle (JLL).

• Several companies have downsized or completely vacated their offices recently. For instance, gene therapy firm Locano Bio ceased operations, vacating 39,000 square feet in Torrey Pines. Similarly, gene-sequencing giant Illumina offloaded its UTC office to save millions.
• Many local life science companies are subleasing their unused offices to cut costs or accommodate smaller staffs after layoffs. JLL reports that there are about 1.2 million square feet of available sublease space, nearly double from a year ago.

Market Dynamics:

Taylor DeBerry, senior associate of JLL’s life science group, notes that the market is seeing unprecedented levels of sublease space due to the over-exuberance during COVID-19. Companies are now pulling back as venture capital becomes harder to secure.

• San Diego startups raised $1.57 billion in venture capital in the first quarter of 2024, a significant improvement after a slow year. However, venture capital deals have been sparse since the record-breaking year of 2021.
• Life science investors are now more selective, writing bigger checks to fewer companies, which in turn are cautious about their real estate spending.

Tenant Market:

The balance has shifted from a landlord’s market to a tenant’s market. Tenants are now looking for better deals and have more options to choose from.

• The JLL report indicates that life science tenants prefer newer buildings, securing premium spaces at lower rates due to the oversupply.
• Most life science companies are concentrated along Interstate 5 and Interstate 805, near major research institutes. The core clusters include Del Mar Heights/Carmel Valley, La Jolla, Sorrento Mesa, Sorrento Valley, Torrey Pines, and UTC.

Rent Trends:

Asking rents in San Diego’s core life science cluster have decreased by 7.2 percent year over year, marking four consecutive quarters of decline after a decade of growth.

• Del Mar Heights and Carmel Valley have the highest rents at $6.74 per square foot, followed by downtown San Diego at $6.15 and Sorrento Mesa at $6.10. Sorrento Valley has the lowest average asking rent at $5.84 per square foot.
• The overall average asking rent in the first quarter was $6.02 per square foot, down from $6.40 a year ago.

Notable Deals:

Despite the high vacancy rates, some significant deals have boosted real estate activity. Pfizer signed a 15-year lease for 230,000 square feet at the Torrey View campus, the largest lease in two years.

Future Outlook:

The imbalance of supply and demand is unlikely to normalize soon, especially with new projects coming online.

• The RaDD IQHQ campus on San Diego’s waterfront, encompassing 1.7 million square feet, is a highly anticipated project focused on life science labs and offices, along with retail, dining, and green spaces.
• The Campus at Horton, a 10-acre mixed-use development, will feature two 40-story apartment towers, retail, and proposed office spaces for life science companies. Both projects are outside the traditional life science core and have yet to announce any life science leases.

The life science industry, which experienced a surge in growth during the COVID-19 pandemic, continues to show resilience and potential for long-term expansion. The crisis catalyzed an unprecedented focus on vaccine development, testing, and broader health research, leading to a doubling of venture capital funding for startups from $6.6 billion in 2019 to a peak of $31.8 billion in 2021. This influx of capital triggered a construction boom across key life science hubs like Boston/Cambridge, San Francisco, San Diego, and Raleigh-Durham to address the near-zero vacancy rates.

By 2023, the landscape began to shift with the delivery of millions of square feet of wet lab and R&D space and a slowdown in venture capital funding, resulting in increased vacancy rates. The national lab/R&D vacancy rate rose to 13.1%, a significant jump from the 8% average between 2016 and 2020. Despite this, the life science sector’s long-term outlook remains optimistic. Biotech venture capital funding, while down from its peak, is still substantially higher than pre-pandemic levels. The National Institute of Health (NIH) funding has continued its upward trajectory, reaching $38.1 billion in 2023, a 25% increase since before the pandemic. Moreover, there is a robust 82.8 million square feet of new construction in progress, although construction starts have returned to pre-pandemic levels.

Job growth in the life sciences has been strong, with an 11% increase in employment since 2018 and a 2.0% growth in 2023. The industry’s contribution to the U.S. economy was a staggering $2.9 trillion in 2021.

In California, particularly Southern California, the life science industry has had a profound economic impact, supporting 1.19 million jobs and generating $413.7 billion in business output. The state leads the nation in life science employment, with significant NIH and National Science Foundation funding fueling innovation and growth.

San Diego stands out as one of the top life science clusters in the U.S., with over 2,100 establishments contributing to the region’s innovation economy. Despite a slight decline in occupancy rates, the demand for lab space remains high, with significant construction projects underway and strong venture capital interest.

Los Angeles County, though historically behind other life science clusters, is gaining momentum with substantial employment and venture capital investment. UCLA’s recent acquisition of the Westside Pavilion mall for transformation into a research park underscores the region’s commitment to advancing life sciences.

Overall, the life science industry’s future looks promising, with sustained funding, job growth, and technological advancements driving demand for lab space. The upcoming BIO International Convention in San Diego in 2024 further highlights the sector’s vitality and global significance.

Pfizer has secured the title for the most significant life sciences transaction in San Diego for the year 2024

In a landmark deal, the pharmaceutical and biotechnology titan has secured a 15-year lease for 230,000 square feet at a coastal complex nearing completion in San Diego. This transaction is the most substantial life sciences lease in San Diego for the year 2024, surpassing the largest lease from the previous year by more than double.

While the exact financial terms of the lease remain undisclosed, Bloomberg’s reports suggest an estimated value of approximately $290 million. Both the developers and Pfizer have chosen not to divulge further financial details.

The sprawling 10-acre Torrey View campus, encompassing 520,000 square feet, is nearing completion. This development is a collaborative effort by Breakthrough Properties, Mitsui Fudosan America, Investment Management Corporation of Ontario, and AP2.

Pfizer is once again enlarging its property portfolio, bolstering investor trust in lab spaces.

The pharmaceutical and biotechnology behemoth has inked a 15-year agreement for 230,000 square feet within the coastal Torrey View complex in San Diego. This deal stands as the city’s largest life sciences lease for the year and is over double the size of the previous year’s largest lease.

Bloomberg estimates the lease’s value to be approximately $290 million. However, the financial specifics of the lease have not been disclosed by either the developers or Pfizer.

The Torrey View campus, a joint venture between Tishman Speyer and Bellco Capital under the Breakthrough Properties banner, is now entirely pre-leased thanks to the Pfizer contract, which secures two R&D buildings. Becton, Dickinson and Company have claimed the majority of the remaining space. The campus also boasts a conference center capable of accommodating 400 individuals, a fitness center designed by Jay Wright, and a pickleball court.

Following a monumental $43 billion acquisition of Seagen last year, Pfizer’s oncology division has expanded, as reported by Bloomberg.

This San Diego commitment follows Pfizer’s lease signing for 151,065 square feet at the Hudson Valley iCampus in Rockland County, N.Y., valued at upwards of $16 million, which occurred roughly seven months prior.

Many cities across the nation are facing a lack of laboratory space, the essential facilities that life science companies use for research and development. But in California, the situation is even worse. According to recent reports, lab space vacancy rates in the Bay Area and San Diego are around 3 percent, while in Los Angeles they are as low as 1.5 percent. How does this affect the life science industry when space is scarce? What do companies, especially startups, need to know? We asked our members who are experts in life science spaces and commercial real estate for some answers in this three-part Q&A series. The last part features San Diego, where we talked to Daniel J. Ryan, Co-Chief Investment Officer and Regional Market Director, San Diego, at Alexandria Real Estate Equities Inc.

A recent headline claimed that finding lab space in San Diego is ‘almost impossible’ right now. What is your opinion on that?

I think the market is in a big pause right now. The IPO markets have closed. You’ve seen the public biotech stock market index halve. Many companies can’t raise money now at this lower stock price, and they have to make do with what they have. Companies are not moving right now. They’re waiting to see if they can survive this and, if things improve in the next few years, raise money and start again.

The demand has slowed down. Companies have stopped growing. We’re still seeing some reasonable formation with high-quality companies. They’re still getting funded here and there—I just met with one yesterday, and they got funded. But mostly, we’re seeing that the formational activity of the early-stage companies has cooled. And of course, the public companies that I mentioned, they’re hunkering down. My view is that in 2022, you won’t see much happening for the rest of the year. You may see a pickup in activity, but I think everyone is going to have a bit of availability start to show up.

Should we be worried about this?

We’ve seen this before. It’s generally healthy for the market when you think about it, because when capital gets too abundant, bad ideas or bad teams get funded, and that harms people in the long run. They may raise a lot of money, but then they fail spectacularly—and it damages the reputation of biotech.

This is a healthy, though painful, periodic resetting of the markets and capital expectations. That’s simply the reality today: there is not much leasing happening right now.

The leasing that Alexandria is doing—we’re about half the market—are legacy projects we’ve been working on for nine months and are finishing now. We are now digesting a lot of the big leases that we did earlier this year, such as 427,000 square feet with Bristol Myers Squibb, and we did big leases with Singular Genomics and Boundless Bio; the list goes on. We’re still busy, but it’s just digesting a lot of stuff. And we have a lot of development projects.

Does the current lab space situation pose the risk that companies will relocate outside of San Diego, or even the state?

Alexandria suffers from the same thing—we may have lost some great tenants, but they didn’t leave town. They end up going with some secondary or tertiary landlord.

There is lab availability today; there are ways to accommodate people. There will be some deliveries in ’23 and there’s a lot slated for ’24. If the market comes back crazy in early ’23 for some reason, we will probably have tightness again, but I don’t see it happening. I think it’s a healthy stop: It’s squeezing out some of the excesses in both the capital investment side and the development side, and it gives us a chance to catch up with our entitlements and our build.

I think the bigger crisis that we have, and the bigger concern that people have these days, is housing. If we want to keep growing this industry, how do we create more housing, rational housing?

Is there a factor that makes development in San Diego uniquely challenging? Are there other parts of the county outside the biotech cluster in Torrey Pines that are perhaps underutilized and could be considered for lab space?

Torrey Pines is pretty much spoken for, but Sorrento [Valley] and UTC [University Town Center] are not maxed out at the moment.

There won’t be much more to develop up here in Torrey Pines—you hear those jets overhead [from Marine Corps Air Station Miramar]? That’s why we have our 30-foot height limit in the neighborhood, we’re in the APZ (accident potential zone), and since most of Torrey Pines is in the flight path of Miramar, that prohibits density in excess of 0.34 square feet per acre. So, while Torrey Pines doesn’t have a lot of development potential, there is good potential in UTC. Alexandria has some really good projects: We have Costa Verde, which will ultimately be somewhere around 1 million square feet; Science Village, at around 450,000 square feet; and expansion opportunities on the Illumina campus, which will be another 700,000 or 800,000 square feet. In Sorrento, there’s lots of work and lots of growth happening.

As for other parts of the county, it remains to be seen for downtown. I think it’s going to be tough. Some projects downtown might do better, and there are some very, very large developments being delivered in mid-2024. If you talk to the experts, we’re going to have a couple of years of recession, and they’re going to be delivering in the midst of that.

What advice do you have for an upcoming startup that wants to find lab space in San Diego or find their headquarters here?

We have a proprietary product, Alexandria GradLabs—and while that building is full, that’s the type of space those companies want and need: small, prebuilt, and pre-equipped.

There are plenty of resources these days for these startups, including groups such as Connect, the EDC, etc. There’s lots of mentorship, early-stage money—and traditionally that’s something that San Diego is good at. We have a great ecosystem to support startups.