An Updated Look at San Diego’s Lab Space Market Heading Into 2019

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.

Current Trends

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.

The Community

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.

Will New Rules on Inversions Hurt San Diego Biotech?

Recently, new rules have come into effect in San Diego, with the goal of deterring corporate tax-saving “inversions.” An inversion is a way for companies to shift earnings and profits to foreign markets, thus lowering U.S. tax obligations. The question is, will those new rules hurt the biotech research sector in San Diego?

Most experts say no, though there are a few that believe it will hurt the biotech sector.

Some believe that the new treasury rules are simply aiming to penalizing companies that are attempting to shift earnings to low-tax countries. This ensures that companies will continue to use tax avoidance strategies as influences to business decisions, which will make U.S. companies operating globally to not be as competitive as they could be, as well as not attracting as much investment as they could be.

Another viewpoint that believes the new rules will negatively impact biotech companies say that even if the biotech companies don’t currently use inversion tactics, the Treasury Department’s rules will reduce the potential value of inversions, leaving companies less profitable in the long run. This could make the biotech and pharmaceutical companies less competitive than similar companies in foreign settings.

However, many people do not believe the new rules will make a major impact. The biggest reason cited is that many of the San Diego biotech companies are more focused on research, product development and drug trials, as opposed to product sales and income growth. As a result, much of the work done by

San Diego biotech companies is pre-revenue, making the need for inversion much smaller, meaning that there is no significant impact to the biotech companies in the area. These types of accounting tactics are typically made my very large drug companies, which does not necessarily fit the profile of most of San Diego’s biotech firms.

Other experts say that even if these new rules hurt local biotech companies, it is still good for San Diego as a whole. Corporate tax inversions typically come from a large company buying a small foreign company and then moving the headquarters overseas to reduce U.S. tax burdens. This can be seen as an exploitation of the tax codes, which hurts the local economy and local governments. Thus, even if it did hurt the San Diego biotech companies’ bottom’s lines a bit, it would still be a net positive for the economy as a whole.

Photo Credit: Umberto Salvagnin

San Diego Office Space Demand is improving in 2015

Published December 12, 2015 | By San Diego Lab Spaces

image003The market for office space in San Diego are seeing a spike in leasing activity in 2015, as tenants lease more space to house the growing San Diego workforce.

As brought up in a recent article published on Dec. 1, 2014 from the SD Tribune, Offices set to go ‘Robust’ in 2015, By Roger Showley, many San Diego businesses are becoming more profitable. “Consequently, their staff count has risen, on average, by 12 percent. This equates to companies outgrowing their current space and requiring more space. As Tenants leases expire, companies in San Diego will soon be requiring larger space.'”

“January through October 2014 nationally, 679,000 office jobs were added, equating to a space need of 120-140 million square feet. But the actual leases will take down only a projected 65 million square feet this year. If job numbers hold up and leases start to be signed to accommodate more bodies, “net absorption will go from modest to robust in 2015.”

“For all its challenges, the office sector has slowly been tightening for four straight years,” he said, “and 2015 will be the first year where vacancy falls below its pre-recession average.”

Jobs are key, and they are growing in particular sectors, such as health care. Kaiser Permanente is expected to increase its office space to about 100,000 square feet in Mission Valley and Sharp Healthcare wants to build its own building of about 120,000 square feet in Rancho Bernardo.”

As for lab space, San Diego’s fastest growing business sector, industrial building owners in Sorrento Valley are converting their obsolete industrial spaces into Class “A” lab space suitable for high end bio-tech users.

This year alone, rental rates are projected to increase by 7% – 10%, and continue to do so year-to-year.

In San Diego, the fundamentals are all here, a highly educated employment base and a highly desirable business location, rental rates are bound to climb.