Too much space – San Diego Union-Tribune

San Diego’s world-renowned life science cluster broke a new record at the start of the year: The vacancy rate for lab and office spaces hit 14 percent — an all-time high.

Three years ago, businesses were fighting for space in San Diego’s main life science hubs like Sorrento Valley, La Jolla and Del Mar. But now, there are more buildings on the market than local companies want to lease.

The area’s overall vacancy rate for life science space jumped to 14.3 percent — up from 5.7 percent during the same period last year, shows first quarter data from commercial real estate firm Jones Lang LaSalle.

A big driver of this trend: Several companies have downsized or left offices completely in recent months.

Gene therapy firm Locano Bio, for example, ceased operations and vacated 39,000 square feet of space in Torrey Pines. Then there’s San Diego’s gene-sequencing giant, Illumina, which offloaded its UTC office to save millions of dollars.

More local life science companies are subleasing their unused offices to save money or accommodate a smaller staff following layoffs. There are roughly 1.2 million square feet of available sublease space on the market — almost double what it was this time a year ago, JLL said.

“It’s been significant,” said Taylor DeBerry, senior associate of JLL’s life science group. “We’re tracking about a million square feet of sublease space in the market right now, and that’s a higher number than we’ve ever seen before.

“A lot of that has to do with the over-exuberance and oversubscribing of space that happened during COVID. Companies are needing to pull back because the venture capital market is not as easy to raise money as it was during that time.”

During the first quarter of 2024, San Diego startups brought in $1.57 billion in venture capital dollars — a big win after a sluggish year for deals. Still, venture capital deals have been few and far between since the record-breaking year of 2021.

This biotech startup got the biggest venture capital deal in San Diego so far this yearLife science investors especially are scrutinizing their deals and writing bigger checks to fewer companies. In turn, these companies are being picky about how they spend their money on real estate, DeBerry explained.

“Tenants are looking for better deals,” he said. “During the heyday (of 2021) and during the COVID period, there just weren’t a lot of options.”

For instance, he said during that time, three tenants were often vying for the same space, so deals moved quickly.

“Now, tenants have a plethora of opportunities, and the balance has really shifted from a landlord’s market to a tenant’s market,” DeBerry said. “And so they’re just doing their due diligence and making sure they’re getting the right deals.”

The JLL report shows that life science tenants here and across the United States continue to go for newer buildings on the market. Tenants have been able to nab premium space for cheaper rates because San Diego’s supply of space is greater than its demand.

Most of the region’s life science companies are concentrated in a few areas along Interstate 5 and Interstate 805, central in the county for commuting workers and near San Diego’s major research institutes. The JLL report defines San Diego’s “core cluster” of life science areas as: Del Mar Heights/Carmel Valley, La Jolla, Sorrento Mesa, Sorrento Valley, Torrey Pines and UTC.

Asking rents in San Diego’s core life science cluster are down 7.2 percent year over year. It marks four straight quarters of rent declines after a solid decade of rent growth, JLL said.

Del Mar Heights and Carmel Valley commanded the highest rent ($6.74 per square foot) followed by downtown San Diego ($6.15) and Sorrento Mesa ($6.10). Within the core of San Diego’s life science hub, Sorrento Valley had the lowest average asking rent of $5.84 per square foot.

Overall, the average asking rent during the first quarter was $6.02 per square foot, down from a year ago when it was $6.40 per square foot.

While available life science space continues to outpace leasing, a few big deals boosted San Diego’s real estate activity in the first quarter.

Notably, pharmaceutical giant Pfizer in March signed San Diego’s largest lease in two years — a 15-year lease for 230,000 square feet of space at the Torrey View campus, currently under construction.

At the same time, this move for Pfizer is a relocation to a smaller space as the company, like so many others, tries to cut expenses after the pandemic.

The imbalance of supply and demand won’t normalize anytime soon, especially as more newly constructed projects come online.

One of the highly anticipated projects is the RaDD IQHQ campus on San Diego’s waterfront that encompasses 1.7 million square feet. The project is centered on life science labs and offices but also promises retail, dining and green space.

There is also the Campus at Horton, a 10-acre mixed-use development that will feature two 40-story apartment towers, retail and proposed office spaces for life science companies.

Both Horton and IQHQ are bigger mixed-use developments in downtown San Diego — outside of its traditional life science core. They have yet to announce any life science leases.

Originally Published: May 24, 2024 at 6:27 PM PST