GlobeSt.com: What stands out for you from your Q1 life-science report for San Diego?

Schoneman: What stands out to me is that all of the lease transactions during the quarter were below 30,000 square feet. The last time this happened was 13 quarters ago, back in the third quarter of 2013. Historically, around two-thirds of all San Diego biotech leases are below 17,000 square feet, so the high volume of smaller deals isn't abnormal; it's just that typically there are larger transactions that occur along with the smaller deals. I don't think this lack of large deal activity in the first quarter is anything to be alarmed about, but I think it's more of a function of a slower deal pace among larger companies. There are currently five larger deals in lease negotiation that are larger than 35,000 square feet, and all have been moving at a slow, methodical pace. It might be the changing political and economic environment that is causing some of these larger deals to take longer than normal, since the companies are taking a more thought-out, conservative approach to their decision-making process.

GlobeSt.com: What does the prevalence of renewal deals indicate about the market?

Schoneman: I think the prevalence of renewal transactions indicates that tenants are being more conservative in their approach to real estate. Three out of the seven renewals completed during the quarter were only for a 12-month lease term. Additionally, the average length-lease term of these seven transactions was only 29 months. I think that the combination of a low inventory of available space and high rental rates was a contributing factor in the uptick in renewals. If tenants were able to make their existing space work for the near future, they saw it best to “kick the can” and wait things out for another year or two.

GlobeSt.com: Why are class-A deals seemingly decreasing in this market?

Schoneman: The trend of companies electing class-A space over class-B and -C space has been established over the past five-plus years and isn't expected to change any time soon. I think the decrease in class-A activity during the first quarter was an anomaly. Much of the decrease was driven by the high volume of small-tenant transactions during the quarter. Smaller companies (with space needs below 10,000 square feet) have a higher propensity to seek out lower cost options in order to preserve precious capital, which is exactly what the market saw during the first quarter. These lower-rent options are often located in the Sorrento Valley and Sorrento Mesa submarkets, and when analyzing the first-quarter stats, 41% of the completed transactions occurred in Sorrento Mesa and nearly one-third of the completed transactions were below 7,000 square feet. The combination of these two factors helped drive the biotech market to produce the results it did.

GlobeSt.com: What else should our readers take away from this report?

Schoneman: An emerging trend during the first quarter was the increase in the number of companies outside of the region looking toward San Diego to expand their national or international R&D footprint. This activity consists of both national and international companies, with companies moving from the Midwest and East Coast as well as China. At present, there are seven companies actively evaluating a move into San Diego (the activity ranges from the tour stage to the lease-execution stage). These companies are anticipated to produce upwards of 150,000 square feet of positive net absorption to the local San Diego biotech cluster.

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SAN DIEGO—All of San Diego's lease transactions in the life-sciences category during Q1 were below 30,000 square feet, which hasn't happened since 13 quarters ago, JLL SVP Grant Schoneman tells GlobeSt.com. According to a recent report from the firm, during Q1, there were more renewal deals than average and a large decrease in class-A deals compared to the quarterly average.

The report also revealed that only 24% of leases signed during the first quarter were in class-A space, which is down significantly from the trailing three-year average where 50% of all leases signed were in class-A space. Total availability for the San Diego life-science cluster ended Q1 at 10.8%, a modest 10-basis-point decrease from the end of 2016.

Also, active tenant demand is anticipated to secure approximately 400,000-500,000 SF of positive net occupancy growth, producing what will likely be another rebound in the second quarter. Rental rates remain at 2016 levels, hovering around $4.00 per square foot per month triple net in Torrey Pines and at UTC/Campus Point. Venture-capital investments into healthcare are up on a national basis by 86%, but San Diego is up only 26%.

We spoke with Schoneman about the report and why class-A deals seem to be decreasing in this market.

GlobeSt.com: What stands out for you from your Q1 life-science report for San Diego?

Schoneman: What stands out to me is that all of the lease transactions during the quarter were below 30,000 square feet. The last time this happened was 13 quarters ago, back in the third quarter of 2013. Historically, around two-thirds of all San Diego biotech leases are below 17,000 square feet, so the high volume of smaller deals isn't abnormal; it's just that typically there are larger transactions that occur along with the smaller deals. I don't think this lack of large deal activity in the first quarter is anything to be alarmed about, but I think it's more of a function of a slower deal pace among larger companies. There are currently five larger deals in lease negotiation that are larger than 35,000 square feet, and all have been moving at a slow, methodical pace. It might be the changing political and economic environment that is causing some of these larger deals to take longer than normal, since the companies are taking a more thought-out, conservative approach to their decision-making process.

GlobeSt.com: What does the prevalence of renewal deals indicate about the market?

Schoneman: I think the prevalence of renewal transactions indicates that tenants are being more conservative in their approach to real estate. Three out of the seven renewals completed during the quarter were only for a 12-month lease term. Additionally, the average length-lease term of these seven transactions was only 29 months. I think that the combination of a low inventory of available space and high rental rates was a contributing factor in the uptick in renewals. If tenants were able to make their existing space work for the near future, they saw it best to “kick the can” and wait things out for another year or two.

GlobeSt.com: Why are class-A deals seemingly decreasing in this market?

Schoneman: The trend of companies electing class-A space over class-B and -C space has been established over the past five-plus years and isn't expected to change any time soon. I think the decrease in class-A activity during the first quarter was an anomaly. Much of the decrease was driven by the high volume of small-tenant transactions during the quarter. Smaller companies (with space needs below 10,000 square feet) have a higher propensity to seek out lower cost options in order to preserve precious capital, which is exactly what the market saw during the first quarter. These lower-rent options are often located in the Sorrento Valley and Sorrento Mesa submarkets, and when analyzing the first-quarter stats, 41% of the completed transactions occurred in Sorrento Mesa and nearly one-third of the completed transactions were below 7,000 square feet. The combination of these two factors helped drive the biotech market to produce the results it did.

GlobeSt.com: What else should our readers take away from this report?

Schoneman: An emerging trend during the first quarter was the increase in the number of companies outside of the region looking toward San Diego to expand their national or international R&D footprint. This activity consists of both national and international companies, with companies moving from the Midwest and East Coast as well as China. At present, there are seven companies actively evaluating a move into San Diego (the activity ranges from the tour stage to the lease-execution stage). These companies are anticipated to produce upwards of 150,000 square feet of positive net absorption to the local San Diego biotech cluster.