Life Science Spec Development Up in San Diego

The life science market is booming in San Diego. According to a recent report from Cushman & Wakefield, San Diego is the third largest life science market in the country with rental rates at all-time highs. This demand has triggered new investment capital and speculative development in the market. Developers that have taken on risk of speculative projects have seen high returns and quick lease up in response. In the last four years, specifically, San Diego has seen 4 million square feet in life science space come to market.

“Rates are at an all time high across the country, and demand in some of the key markets far outstrips supply. In the major life sciences hubs, developers who have taken the chance to build good spec lab have been rewarded with quick lease-up and continued growth of their tenant base,” Greg Bisconti, executive director of the national life sciences practice group leader at Cushman & Wakefield, tells GlobeSt.com. “It’s candidly the only way to succeed in our market. We are at a point where the demand is generally bumping up against or outstripping supply. As an extreme example, our Cambridge lead, Bob Richards, estimated about 3 million square feet of demand against about 100,000 square feet of near term supply.”

In addition to the rise in speculative lab development, new capital sources have entered the San Diego market. These players are investing in both lab space as well as tech office space, both of which are used by life science companies. “In response to the expansion and opportunity, more capital sources and institutional real estate investors are getting up to speed on life sciences real estate,” says Bisconti. “While the life sciences REITs like Alexandria, HCP, and Biomed—which is no longer a REIT—are way ahead of the curve, we are seeing private equity firms, opportunity funds and high net worth players moving into the space in a big way. Alexandria, Biomed, Kilroy and others are taking interest in tech office demand, leveraging their incredible design and construction expertise to create workplaces that tech and life sciences companies alike will value.”

The new capital players and development activity could be seen as competition for existing owners in the property; however, the demand is strong enough to absorb the new activity and justify rising rents. “While that might offer competition to the incumbent lab landlords, I think there’s enough business to go around and competition will be good for the end users in terms of better product and competitive rates,” adds Bisconti.

San Diego isn’t the only market that has benefitted from rising life science demand. The Bay area, arguably the top life science market in the country, is seeing similar market patterns. “The Bay Area, similarly, can’t seem to keep up with the demand of life sciences tech companies, despite adding millions of square feet of new inventory,” says Bisconti. “In San Diego, we’re seeing the first signs of big tech like Amazon, Apple, and Google setting foot here. If you look around the country, these users tend to move in large-scale space increments, so just one of these players could have a significant impact on a developer’s outlook for delivering speculative product.”