Bay Area Life Science Leasing Activity Drops 58%

Demand for life science space in the Bay Area continued to weaken in the second quarter, with the market registering net absorption of negative 466K SF and overall availability approaching 16%.

The disparity between supply and demand during the widely felt slowdown in one the nation’s largest life science hubs is likely to expand as a wave of deliveries from nearly 10M SF of new construction and conversions arrives in coming months, according to the latest market report from CBRE.

“The ongoing slowdown in venture capital funding, triggered by quantitative tightening by the Fed over the past twelve months, has been the leading contributor to a contraction in demand,” CBRE said. “The ongoing challenges in credit and venture capital drew what had been a flood of leasing activity to a mere trickle.”

Gross leasing activity ended Q2 2023 at just 311K SF for the region, just 42% of the total in the first quarter and barely a third of the 10-year average, the report said.

CBRE said “sizable space givebacks” during the second quarter contributed to the negative net absorption in the market. Total availability, which measures both vacant space and occupied space available for sublease, hit 15.6% in Q2, up from 7.9% at the of Q2 2022.

The vacancy rate in the Bay Area’s life science sector, which has stayed in single digits for most of the past three years, hit 11% in the second quarter, the report said.

Total life science employment in Bay Area actually ticked up by 1,700 jobs during the second quarter, to nearly 153K. “However, roughly 15% of active requirements were actively negotiating leases at the close of Q2 2023, which demonstrates the pull-back in momentum in the market,” the report said.

Despite the slowdown, developers continue to break ground in the Bay Area on new, speculative life science projects and office-to-life science conversions. According to CBRE, a total of 56 projects encompassing 9.8M SF are underway.

The total life science inventory in the Bay Area stood at about 36M SF at the end of Q2 2023, with an overall average asking rate of $6.01 per SF on a monthly NNN basis. The largest submarket—the San Francisco Peninsula, with 16.8M SF—ended the quarter with the second-highest average direct rate of $7.23 NNN as vacancies on the Peninsula hit 11.7%, CBRE’s report said.

Construction of new ground-up life science facilities totaled 7M SF in the second quarter, while adaptive reuse conversion projects encompassed 2.8M SF, with conversion projects focused on repositioning “functionally and amenity obsolete” office buildings.

Projects delivered in the second quarter included Nexus on Grand, a 149K SF campus in South San Francisco, and Brittan West, a 174K campus in San Carlos. Conversion deliveries totaled 162K SF in Q2.

Another 1.4M SF in new supply is scheduled to be delivered before the end of the year.

However, two major ground-up life science projects—a 350K SF campus in Emeryville and a 600K SF campus in South San Francisco—have been called off within the last year by their respective sponsors, the San Francisco Business Times reported.