San Diego Lab Space Market Reports Q3 2023

San Diego Lab Space Market Reports Q3 2023

Lab Market Struggles to Recover

  • The Central San Diego Laboratory market continued to lose space in Q3, as it recorded 189,000 sf of negative net absorption, bringing the YTD total to over 712,000 sf. This is the first time that the market has experienced four consecutive quarters of negative net absorption.
  • Leasing activity also declined from previous levels, as only 88,000 sf were leased in Q3 (compared to 293,000 sf in YTD). This is a sharp contrast to the last three years, when the market averaged nearly 600,000 sf of leasing activity per quarter.

Rental Rates Stagnate

  • Rental rates in Central San Diego have remained stable over the last few quarters, as the demand for lab space has cooled down from the Covid-19 years. However, the effective rents have been under pressure, as landlords have been offering more concessions to attract tenants. The overall average asking rental rate is $6.59 NNN, unchanged from year-end 2022. This figure is a weighted average, and is influenced by the high rates of new construction projects.

Big Pharma Boosts Demand

  • Demand for lab space was low in 2023, after it dropped below 1M sf in late 2022. However, it has been revived by a few large big pharma requirements that have increased the demand to a healthy level (1.9M sf at the end of Q3). Nevertheless, many requirements are still on hold (due to the uncertain economic/financial environment), as companies are trying to conserve their cash and adopt a more cautious approach in the short term.

Construction Activity Reaches Record High

  • There are 4.77M SF of Laboratory products currently under construction, countywide. Most of them are located in Sorrento Mesa (1.45M sf) and Downtown (1.8M sf). Of the 3M sf under construction in Central San Diego, 39% has been pre-leased (while Downtown has not seen much demand).

VC Funding Increases, But Still Below 2022 Levels

  • Although the funding for Life Science has slowed down since the Covid-19 years, San Diego has received $1.55B from 47 deals in Q3, and is expected to exceed the $2B mark by the end of the year. This is almost 60% higher than the 20-year historical average of $1.24B annually.

Sublease Remains Elevated

  • At the end of Q3, the total sublease space on the market was still over 900,000 sf, mostly concentrated in the core markets, where it accounts for ~37% of all available space. Despite the high supply of sublease space, there have not been many significant sublease transactions, nor many new subleases added to the market.