CBRE: Bay Area Life Sciences Sector Remains Competitive

Bay Area, CBRE, CBRE Life Science Practices, San Francisco Bay Area, Stanford University, University of California, Kidder Mathews, San Francisco County, San Mateo, Santa Clara, Contra Costa County

By Meghan Hall

With top-tier research universities, a diverse talent pool and a booming R&D industry, long term demand for laboratory space is expected to grow in the Bay Area. According to a 2018 report released by global real estate services firm CBRE, the life sciences industry continues its steady pace of growth, but some markets such as the Bay Area continue to outpace others as the lab real estate market continues to mature.

“This is not a boom,” said Dino Perazzo, CBRE Life Science Practices’ executive vice president says. “Rather it is a maturing market that will continue to accommodate entrepreneurial regional biotech companies as well as provide long-term research foundations for an increasing number of pharmaceutical companies.”

The San Francisco Bay Area, which for the study also includes nearby San José and Oakland, has the largest number of life sciences companies in the country, as employers flock to the area to capitalize on the region’s talented workforce generated by major research institutes such as Stanford University and the University of California at San Francisco. Between 2001 and 2014, employment in the life sciences industry increased by 54.4 percent in the Bay Area, more than five times total employment growth.

The Bay Area’s research and development sector made up the majority of this growth; since 2001, roughly 24,000 new R&D jobs have been created and R&D is considered to be the largest source of life sciences employment. The Bay Area’s pharmaceutical industry has also grown quickly with the creation of 7,755 new jobs between 2001 and 2016.

“Life science research goes to where the talent is, and it’s highly concentrated in the Bay Area—still the largest life science research market in the world,” explained Perazzo.

In addition to some of the best labor in the country, the Bay Area is the third largest recipient of NIH funding and received $1.4 billion in 2016 while an abundance of venture capital continues to support the life sciences industry.

According to a real estate market review released in the fourth quarter of 2017 by Kidder Mathews, the laboratory vacancy rate in San Francisco County is zero percent, while nearby San Mateo and Santa Clara counties have vacancy rates of 3.7 percent and 2.7 percent, respectively. Limited demand is expected to continue in Contra Costa County, where vacancy rates are the highest in the Bay Area at 10.9 percent.

However, the CBRE report highlights certain submarkets within Alameda County, such as Fremont and Berkeley/Emeryville, also have vacancy rates that are much higher than the regional average. Fremont has a vacancy of 11 percent, while Berkeley and Emeryville have a vacancy rate of eight percent. Perazzo attributes these to location, although tight vacancy in more popular submarkets is generating interest in ones with more availability. Tight competition for space has pushed more medium-sized companies like Neuralink and Koniku out to neighboring Alameda and San Mateo counties.

“The life science community is extremely collaborative,” said Perazzo. “The research tends to cluster, and 65 percent of the Bay Area lab base is on the Peninsula. No one wants to be isolated.” The Bay Area Peninsula is a somewhat of a broad geographical term, and it encapsulates the majority of San Mateo County. The northern part of the county, where the cities of Brisbane and South San Francisco are located, forms the majority of the life science space. This is the home of Genentech. The mid-Peninsula market, around the cities of San Mateo and Foster City, is home to another cluster of companies and home to Gilead Sciences.

Limited space availability is likely to hinder leasing activity across the Bay Area, and the CBRE report notes that active market demand has slowed slightly due to a lack of available laboratory space. However, while lab space is limited, new projects continue to come online to help alleviate the lab real estate market’s growth. “From a real estate standpoint, the complexity and cost of the labs have driven more of an as-needed supply—no overbuilding—and longer lease investments,” said Perazzo.

San Mateo County currently has approximately 2.5 million square feet of life science space with delivery expected throughout the next two years. San Diego-based Illumina is building 500,000 square feet of laboratory space in Foster City, while Merck & Co. is building a 290,000-square-foot research facility in South San Francisco. Delivery for Illumina’s new space is expected in 2018, and Merck & Co.’s new facility is to be completed in 2019.

Development plans for life sciences use are limited in San Francisco and Santa Clara Counties, but companies such as Rigel Pharmaceuticals Inc., Global Blood Therapeutics and Achaogen, which all have offices South San Francisco, expanded their leases in 2017. Roche, who is expected to occupy 310,671 square feet of space on Scott Boulevard in Santa Clara, and Guardant Health, who will be leasing 50,515 square feet of space in Redwood City, are just two examples of the lease transactions that occurred in the last quarter of 2017.

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