Bay Area Life Science Vacancy Surges in Flood of New Supply

The vacancy rate surged in the Bay Area’s 43M SF life science market in the third quarter as the market continued to battle occupancy losses amid a flood of new supply.

The San Francisco Peninsula, the largest submarket with nearly 22M SF of life science inventory, ended the quarter with a total vacancy rate of 34%, a 470 bps increase from the previous quarter. Negative net absorption in the Peninsula totaled minus 547K SF.

The overall vacancy rate for the Bay Area rose to 27.7% in Q3 from the second quarter rate of 24.6%, while negative net absorption totaled minus 768K SF, according to CBRE’s latest marketing report.

The year-to-date total for negative net absorption in the Bay Area life science market stands at minus 1.7M SF, close to exceeding the total negative net absorption in 2023.

New life science supply continues to flood the Bay Area as demand falters. A total of nine projects encompassing almost 836K SF, including ground-up construction and full building conversions, delivered in Q3 2024.

Year-to-date deliveries encompass 2.6M SF, more than twice the total of 2023 deliveries. Another 1M SF of new space has been added to the market thus far this year in the form of conversions; conversions totaled 2M SF in 2023.

The largest ground-up delivery in the third quarter, Helio’s 300K SF project known as The Landing in Burlingame, arrived fully vacant. The largest conversion delivery, DivcoWest’s 92K SF 5000 Shoreline project in Brisbane, came in 28% pre-leased.

Leasing activity dipped to 704K SF in the third quarter, which is 31% below the 10-year, quarterly average. Prospective lab tenants in the Bay Area market fell to 38 unique requirements encompassing a total of 1.8M SF in the third quarter.

Despite lagging demand, the life science construction pipeline in the Bay Area at the end of third quarter was filled with 19 projects encompassing nearly 3.8M SF, including 3M SF of ground-up construction and 762K SF of full building conversions to life science use.

The five largest life science projects scheduled to be delivered in the next six months in the Bay Area encompass a total of nearly 1.9M SF. Four of these projects currently have no pre-leased tenants. IQHQ’s 484K SF Elco Yards in Redwood City, slated for delivery in Q2 2025, is 23% pre-leased, CBRE reported.

The average direct lease rate increased to $6.29 NNN/SF in Q3, up from $6.10 the previous month. The submarket with the highest direct lease rate-$7.74-also posted a skyrocketing vacancy rate in the third quarter: more than half of the 1.4M SF of inventory in San Francisco is vacant, with the Q3 vacancy rate hitting 56.3%.

Earlier this month, biotech firm FibroGen paid landlord Alexandria Real Estate Equities $10M to exit the lease on its 234K SF headquarters at 409 Illinois Street four years early at the end of this year, the San Francisco Business Times reported.

FibroGen announced this summer that it would cut more than 300 jobs, about three-quarters of its U.S. workforce, after a new drug to treat pancreatic cancer failed two clinical trials.

On the brighter side, CBRE reported that access to capital by Bay Area life science companies has improved steadily throughout 2024. “This trend should continue into the new year as companies further drive innovation,” the report said.

CBRE projects that “further injections of venture capital and NIH funding should support greater deal volume throughout the rest of 2024 and into the beginning of the new year” in the Bay Area’s life science market.