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Wednesday, Sep 28, 2022
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Construction—Rapidly growing biotech market challenges developers

Driven by its world-renowned research centers , including UCSD and the Salk, Scripps and Burnham institutes , the number of new biotech firms entering the San Diego market each year now outpaces the growth rates of traditional markets like Boston, the New Jersey/NewYork/Connecticut tri-state area, San Francisco and Seattle.

The gene, atom and computer are keys to the future of the high-tech and biotech markets. As these industries evolve, the need for specialized buildings to accommodate their unique requirements will become greater than ever before.

With one of the biggest concentrations of leading-edge research facilities, San Diego’s biotechnology “infrastructure” exceeds that of many other markets. However, its success in the future will rely heavily on the ability of area developers to anticipate and address the changing building requirements of entrepreneurial start-ups and large established biotechnology firms.

In the late ’90s, not only did San Diego witness an influx of venture capital firms that fund young start-ups, but large pharmaceutical companies began buying larger biotech firms. As a result, San Diego now has a mature biotech representation which only adds more fuel to its already strong scientific horsepower.

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The compounds, chemicals and biological materials biotech firms work with on a daily basis must be rigorously managed.

Consequently, their facilities are complex to build due to the many regulatory agencies involved. They are also expensive: tenant improvements generally range from $125 to as much as $500 per square foot or more.

– Specialty Buildings Fill Requirements

Some of the unique requirements of these buildings include:

o Heating, ventilation and air-conditioning systems designed for one-pass air. The air is not recirculated, but scrubbed of contaminants then exhausted into the atmosphere.

o Vivariums, which are live animal rooms

o Magnetic resonance imaging rooms

o Biology and/or chemistry laboratories, the latter being the most expensive because it requires a higher degree of air handling.

Biotech facilities use a lot of air, particularly where chemical work is performed, and those which have biosafety cabinets where tissue work occurs. Their air handling systems are exceptionally large, using 18- to 14-inch ducts compared to the 6- to 8-inch ducts found in office buildings. Floor-to-floor heights are much higher as a result.

Scientific equipment is not only heavy but also sensitive to vibration, requiring floor load levels of at least 100 pounds per square foot compared to 75 pounds or less in office buildings.

– New Designs Are Often Less Costly

The combination of these stronger floors and taller floor heights adds additional cost to the development of a research and development building. Certainly, it is a lot more cost-effective to design these facilities from the ground up rather than trying to adapt an existing facility.

Often, biotech firms undertake the design and construction of their facilities on a “leap of faith” basis. If they plan to manufacture their product themselves , as opposed to contracting production out or selling manufacturing rights , they must build the facility without knowing whether they have FDA approval to proceed.

Some companies have spent upwards of $50 million on a manufacturing plan only to have their products rejected by a federal agency.

Landlords and developers also take a leap of faith. Often, the biotech firm is not generating any profits when it enters into an agreement for a manufacturing facility. Not only does the landlord have to build expensive improvements, he or she has a tenant in a negative cash flow position. This is where skilled consultants , including the broker , come in.

A knowledgeable broker can help educate the landlord and the lending institution on the tenant’s long-term viability and the depth of the market. He or she can also clarify and quantify the potential of the building for second generation usage should the tenant not receive FDA approval to proceed.

While Torrey Pines has been the preferred market for the San Diego biotech industry, low vacancy and rents upwards of $2.50 per square foot , with tenant improvements ranging from $100 to $150 per square foot , is prompting many tenants to look at nearby Sorrento Valley. Rates here are significantly lower than in Torrey Pines and the area is full of older and in many cases outdated industrial sites that are ripe for redevelopment.

– Sorrento Valley Sites Updated

One such case is a two-story, 36,000-square-foot facility on a site that previously housed one of Sorrento Valley’s first industrial buildings, built in the 1970s. The facility is brand new and incorporates a concrete second floor with a load capacity of 125 pounds per square foot; 14-foot ceiling heights; and 3,000-amp electrical capacity.

As available land for development becomes increasingly scarce, we will see the number of buy-and-start-over developments in established areas like Sorrento Valley rise sharply.

Based upon current demand for mid- and North County sites, excluding South Bay, and an 11 percent and declining countywide R & D; vacancy rate, there is just a four-year supply of developable land remaining. As a result, there are fewer options to meet the demand created by San Diego’s burgeoning biotech and high-technology industries.

If San Diego is to stay in the forefront of the national market, it must step forward to meet the changing requirements of this specialized industry and find ways to accommodate its growth.

Additionally, developers who want to be on the cutting edge of this growing market must dedicate themselves to understanding the unique needs of biotech firms and how this translates into build out and the ultimate success of the facility from both the landlord and tenant perspective.

Jacobs is vice president with the life sciences group of Burnham Real Estate Services.

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