SAN DIEGO—Market uncertainty as well as a natural “breather” before the election were largely responsible for San Diego's 27% decrease in overall venture-capital funding in Q3 as compared to the 10-year average in the San Diego market, JLL managing director Chad Urie tells GlobeSt.com. According to the firm's Q3 Life Sciences Outlook, San Diego biotech companies secured $149 million in VC funding among 11 deals, a 24% decrease from the prior quarter but a 172% increase from Q4 2014. San Diego trailed only San Francisco and Boston/Cambridge in terms of VC invested into biotech during Q4 2015.
In addition, the report showed that after a strong 2014 that saw record leasing activity and healthy rent growth in life-sciences real estate, 2015 continued to build on the momentum from the prior year with 1.7 million square feet of gross leasing activity, a 31% increase from the five-year annual average. Transactions for new build-to-suit facilities have reached rents in the mid-$4-per-square-foot NNN range, a 10% to 15% increase from the end of 2014. Likewise, rates for second-generation class-A lab space have increased. Starting rents for deals signed at the end of 2015 ranged from the mid-$3 to low-$4-per-square-foot NNN, an increase of approximately 10% during the year.
Also, over the past 12 months, more than 800,000 square feet of office buildings has been acquired by life-science landlords, who are actively repositioning these assets into new class-A wet-lab facilities. To date, approximately half of this new inventory has already been leased.
We spoke with Urie about the decrease in overall VC funding, how this market will fare now that the election is behind us and other factors influencing VC funding in San Diego.
GlobeSt.com: What do you feel is responsible for the 27% decrease in overall VC funding in Q3 as compared to the 10-year average in the San Diego market?
Urie: There are a few reasons you saw a pullback in overall VC funding, but the primary reason revolved around market uncertainty. The primary factors were the pending presidential-election outcome concerning clarity around new policy initiatives, as well as questions regarding the amount of runway left in this market cycle. It's also important to understand that the proceeding four quarters were all well above the 10-year average so a natural “breather” before the election was more than likely to occur.
GlobeSt.com: Now that the election is over, what do you anticipate will happen in regard to this funding in the new year?
Urie: We've already seen the markets respond positively to certainty over the election and optimism that change in policy will be pro-business. This optimism should kick-start VC funding starting next year as leaders in the investment community understand the landscape they are facing and are more willing to make educated bets. Venture's role is to drive innovation, create new job opportunities and advance the economy, and it's unlikely that this incoming administration will want to create a climate that isn't conducive. We remain in an age of breakthrough technologies in areas such as communication, cancer, drug development, personalized medicine and others, but the integration between these technologies to me still seems at the infancy stages. I think each industry is likely in a different inning of the cycle, but there remains tremendous opportunity.
GlobeSt.com: What other factors are influencing VC funding in San Diego?
Urie: For some time now, most of the VC capital commitments have been focused on later-stage companies that provide quicker liquidity returns. Investors are simply writing bigger checks for fewer deals. I think VC investors like to think they are discovering the next unicorn, and some do, but for many in this climate over the past year it has been a herd mentality where investors make larger, safer and fewer bets. We've seen that, despite the decline in overall VC deal flow this past quarter, promising companies that have demonstrated that quality technologies are having no trouble closing sizable financing rounds while for earlier-stage companies it's been a bit more difficult. Fighting cancer has become a national initiative at both the private and public levels and for policy advisors at governmental levels. Strides are being made in oncology and biomarkers, and companies such as GRAIL and Human Longevity Institute have received sizable financing rounds.
GlobeSt.com: What else should our readers take away from your report?
Urie: I couldn't be more excited about San Diego's (and other national biotech hubs') position to capture growth in the life-sciences industry. The climate seems ripe for growth in terms of venture-capital investment. Despite a thawing IPO market, venture-backed companies have found lucrative exits through strategic acquisitions and buyouts, and that should only increase in 2017. Should the Trump administration provide a repatriation opportunity for big pharma to bring back overseas locked-up capital, it's hard to see how that capital won't be deployed into replacing aging drug pipelines and fostering new innovations. This should only increase liquidity possibilities for VCs and start-ups. Secondly, should the 21st Century Cures Act pass, the Senate this will provide increased NIH funding (something San Diego relies very heavily on) for new research, new technologies and new opportunities while adding to the employment base in the sector. Changes in the FDA will also provide speed to market for many drug discoveries and compress the return cycle on early-stage capital investment. Lastly, the possible loosening by the Trump administration of current regulatory and oversight issues might also create a climate for large pharma or biotech companies to maneuver more quickly and effectively and dedicate more resources towards core competencies such as drug discovery.
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