SoCal Is Dominating the Life Science Sector

San Diego is known for its stellar life science market—and for good reason. It is a hub of for life science companies, and they drive tremendous office and industrial leasing activity. However, San Diego isn’t alone. Life Science activity is growing throughout Southern California. According to research from JLL, Los Angeles and Orange County life science companies generate $27.3 billion in economic activity and employ 122,000 people, making it a strong driver of job growth. In Orange County, the market has a 4.8% vacancy rate and only two plus-50,000-square-foot blocks of space available. In San Diego, the industry generates $33.6 billion in economic activity and has seen a 20% increase in employment in the last five years. With such high demand, the market has seen 2.7 million square feet of new lab product delivered since 2016 and a current pipeline of 363,000 square feet. To get a side-by-side look at how these markets stack up, we sat down with Grant Schoneman, managing director at JLL in San Diego, and Jason Lantgen, VP at JLL in Orange County, for an exclusive interview.

GlobeSt.com: Give me a snap shot of the life science activity in your market, and tell me what is fueling leasing activity.

Grant Schoneman: Leasing activity in San Diego during the second quarter continued to be led by small and mid-size companies with space needs under 35,000 square feet—a trend that has been apparent during the past few quarters. Throughout the first half of 2018, over 90% of the completed transactions in the San Diego biotech cluster were with tenants under 35,000 square feet. Further segmenting the small tenant activity, companies with space needs less than 7,000 square feet have accounted for almost 50% of the total leasing activity during the first half of the year. New startup firms, as well as companies opening new operations in San Diego, continue to drive growth among small tenants.

Tenant demand from small to mid-size companies is expected to continue as VC funding remains healthy. Large user activity, which has been insignificant during the first half of 2018, has already picked up during the second half of the year. The month of July has recorded two transactions larger than 50,000 square feet and with more currently under negotiations—compared to only one deal completed over 50,000 square feet throughout the entire first half of 2018.

Jason Lantgen: Orange County has always had a tremendous life sciences industry which has been anchored by companies like Allergan, Johnson and Johnson, Edwards Lifesciences, Medtronic, Alcon, Microvention, all having a significant presence in our market.  It reinforces the strength of human capital that is here.  Executives from those companies will spin off and star their own company, which creates more job and growth in the region. The strength of this truly lies with the foundation of the higher education that is found throughout Southern California, and ultimately the higher quality of life here in Orange County. People don’t want to leave.

The continued growth of Orange County life sciences really comes from the growth across the medical field, which has called for further advancement and greater R&D investment, or M&A, from life science companies to keep up with demand.  The M&A aspect is critical as Orange County has seen strong VC Funding compared to other markets which demonstrates confidence in the region and the quality of new innovation being produced.

GlobeSt.com: How is the market growing, and what is your outlook for this sector in the next three years?

Schoneman: vThe national life science market continues to record significant growth.  Capital is flowing into the sector, with the biotech index growing by 5.6% during the second quarter and another 4.0% during the month of July.  Additionally, the VC markets continue to be robust and are at all-time highs.  The second quarter secured $5.29 billion in funding into the life science sector, the second straight quarter where more than $5 billion was invested.  San Diego has also secured its fair share of VC funding.  The region’s life science sector recorded $335 million during the first quarter of 2018 and followed that up with $431 million in the second quarter.  The second quarter saw growth of 28% from the first quarter and a staggering 184% growth from the same period a year ago.  With investment into the life sciences sector at all-time highs and new technologies being developed and brought to market at faster speeds than in years past, the outlook for the life sciences sector is very positive for the next three years.

Lantgen: It always seems there is a need for new technologies to improve efficacy of existing ones and to treat ailments better, and of course cheaper too.  With an aging population in the U.S., the need for better medical devices and pharmaceuticals is only going to grow more as people require additional help. So, yes, I am bullish on the OC life sciences sector for the long term.

GlobeSt.com: What are the biggest challenges for life science users?

Schoneman: One of the biggest challenges for San Diego life science users is finding a space that can accommodate their current space needs as well as provide sufficient space to support future changes in their space requirements.  The nature of the life science business, especially for early stage companies, can be very sporadic at times and the ideal flexibility that a small biotech company wants doesn’t usually match up with a landlord’s desires.  Occupying space within a large campus or with a landlord that has a large portfolio to grow (and also downsize in some cases) within can be attractive to life science companies.

Lantgen: Finding readily available space is the biggest challenge.  That is the crux of the market, area and question I get on a regular basis from the clients I work with.  There is a tremendous “if you build it they will come” opportunity for investors/developers who would want to develop a life sciences hub.  This is one industry where real estate can play a significant role in retaining talent.  The market here is underdeveloped and there are companies in San Diego, Los Angeles that would prefer to be here but can’t make it work because of supply issues.