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.
