By Jacob Bourne
The Nationwide real estate trend of rising costs and limited space availability is acutely felt in the Bay Area’s expanding life sciences sector, which includes pharmaceutical as well as a range of chemical and biological research companies. JLL’s 2016 Life Sciences Outlook report provides a close look at the sector’s significant hubs around the country, finding that the Bay Area has the second largest amount of rentable lab space next to Boston. The highest concentration of the region’s companies have been in the Mid-Peninsula for decades, mainly South San Francisco, but with escalating demand, spaces are popping up in other submarkets. Within the Mid-Peninsula, companies in the North County cities had the highest national year-over-year rent growth of 51.6 percent. The influence of higher education institutions such as Stanford University, UCSF, and UC Berkeley, continue to play a vital role in the region’s robust life sciences sector.[contextly_sidebar id=”Qsqv6WPXGTsU2QzTdwHVqO5sbpqReC3l”]“It’s one of the Bay Area’s secrets that no one really looked at until you had lab space being built,” revealed Christian Basconcillo, research manager, JLL. “What’s ironic about life sciences in the Bay Area is that the majority of the focus is on tech and so a lot of people don’t realize that the region has one of the largest clusters of life science companies. The companies are tapping into the highly educated talent that’s here, just like the tech sector.”
In life science clusters across the country, 2015 set the record of $520 billion in pharmaceutical and biotech transactions. Overall trends like wage growth, greater attention from real estate investors and swelling venture capital has also played a role locally. As in the tech industry, competition to attract and retain top talent has heightened for life science companies. With more capital flows to smaller and mid-size companies, larger more established players have sought mergers and acquisitions to stay relevant. Bay Area companies received 21.3-percent of the nation’s total venture capital funding in 2015.
“Over the past 24 to 36 months, companies have started to grow,” explained Basconcillo. “To grow a head count you need more space and there’s not a lot of inventory. Some landlords are looking to convert spaces, but labs are expensive. It’s very expensive to build so a lot of developers won’t go on spec. It’s a volatile industry. With the current trends companies are growing rapidly and need high quality lab space.”
The nature of the industry lends itself to volatility because companies can spend vast amounts of money and time on developing products like a drug or medical device only to have it fail to receive government approval. This lends itself to high spending in the R&D category, which in the Bay Area amounts to 50.6-percent of the sector’s employment and 48.9-percent of this entity subtype in operation.
The report also looked at movement in the Oakland-East Bay and San Francisco’s Mission Bay submarkets. In Mission Bay at 1800 Owens Street, developer Kilroy’s project, The Exchange, is slated for completion by the end of next year, adding 260,000 square feet of life sciences space. The only East Bay project currently under construction is Wareham Development’s Emery Station in Emeryville, to provide 250,000 square feet of office-life sciences space in 2017. Mid-Peninsula is home to the largest life sciences construction project in the nation. The Cove in South San Francisco will provide over 1 million square feet to tenants by developer Healthcare Properties. Phase 1 is geared for 2016 completion with 116,000 square feet of pre-leased space by CytomX and Denali. Also in South San Francisco, Google’s life science entity Verily, leased 400,000 square feet at 249 East Grand Avenue earlier this year.
“We tend to see office development in cycles but don’t hear much about life sciences,” Basconcillo said. “There’s a lot of activity and people are noticing.”