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Demand for Biotech Labs Driving Down Commercial Vacancies

Demand for lab space among midsize biotech companies is steadily pushing vacancies downward, perhaps below 6 percent this year, and prompting more subdivision-conversions of large space, according to Cushman & Wakefield Inc. real estate brokers.

Despite the cooling trend among commercial real estate sectors, biotech space is in demand by companies fueled on venture capital deals.

Most of the demand is being driven by users looking for spaces 20,000 square feet or smaller, which until recently has been met by space in Sorrento Valley and Sorrento Mesa.

Not anymore.

“Over time, Sorrento Mesa and Sorrento Valley have almost been picked clean,” said Greg Bisconti, senior director at Cushman & Wakefield’s Life Sciences Practice Group.

Vacancy rates dipped to 6.7 percent last quarter. They have edged steadily downward since an 11.7 percent vacancy glut three years ago, according to a recent Cushman & Wakefield report.

“We spent several years where 80 percent of the activity was in spaces below 20,000 feet. It’s been a slow feeding frenzy down there,” he said. “It wasn’t people lining up outside buildings trying to get space, but you had four or five good choices of 10,000 to 15,000 square feet. That would keep it as close to $2 (a month) as possible.”

The alternative is the more expensive Torrey Pines area, which is comprised of much larger lab spaces, a legacy of Big Pharma operations like New York City-based Pfizer Inc. and Biogen Idec of Massachusetts.


Excessive Inventory

“You had Biogen Idec and Pfizer building their campuses and vacating older buildings , that causes vacancies. And a half-dozen biotechs that went public , they had all this money planning for expansions that didn’t happen and ended up with too much leased space,” said David Odmark, a broker with Grubb & Ellis l BRE Commercial.

The two events caused a glut of inventory that has been slowly winnowed away.

“Since 2003, absorption has stayed steady and it looks like it’s eventually going to get back to normal,” said Odmark.

Bisconti believes that the lack of smaller space will begin to push landlords to begin subdividing their facilities into smaller spaces to meet industry demands.

“Now VC activity is up,” Bisconti said. “This sector is and has been very well-funded in the last few years. That’s why we’re getting down in that 5 and 6 percent vacancy rate. It’s reflective of a healthy startup market.”

It’s also pushing rents upwards, he said.

“You used to be able to find something you wouldn’t have to tweak. Now, there are only so many spaces in those submarkets. Landlords are pushing rent to low- to mid-$2 in the subs.”

Torrey Pines is the only place left to go, he said.

“People are starting to compare, ‘Do I go to Sorrento Mesa and pay $2.45 and make tweaks , it’s Class B with lipstick , or do I go to Torrey Pines and get the nice Torrey Pines lab space for $3?’ ”

“The fact is, space in this area between Sorrento Valley and Sorrento Mesa and Torrey Pines is increasingly scarce,” said Joe Panetta, president and chief executive officer of Biocom, a regional life sciences association. “The more expensive space is here on the Mesa, and the more expensive space tends to be what’s available. People jockey back and forth between these areas. When we try to move outside of that area our options are limited. You can’t move into Torrey Hills; those people think we’ll poison their children.”


Attraction For Researchers

The San Diego Consortium for Regenerative Medicine’s planned $115 million research facility on Torrey Pines Mesa will also spur startups and interest among outside biotech companies looking to support the ground-breaking research, he says.

The consortium , made up of The Scripps Research Institute, The Salk Institute for Biological Studies, UCSD School of Medicine and Burnham Institute for Medical Research , will spin off more companies and likely boost demand for specialty space.

“Some small, stem cell company in North Carolina says, ‘Gee, these guys will be a powerhouse in science. I need to build a platform in stem cell therapy; I need to be in San Diego,’ ” Panetta said. “I think we’ll see that in addition to the consortium starting their own companies. We’ve got all the service resources here to make those companies happen: lawyers, folks that do facilities and laboratories. We’ve got the complete package in terms of someone over there in that facility say, ‘Here’s technology to create property’; the entrepreneur to say, ‘I’ll take that’; and the venture capitalist to say, ‘I’ll fund that.’ ”

He added, “That’s the strength of San Diego.”

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