The State of Lab Space in San Diego

Hot Topic: The State of Lab Space in San Diego

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.