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Small Biotechs Add Up To Demand for Space

As big global pharmaceutical companies reduce their San Diego real estate footprints, plenty of smaller firms are moving to take up spaces in various configurations in markets like Torrey Pines.

Those include biotechnology research and development companies seeking highly amenitized campus spaces, along with early-stage firms finding slots in repurposed “incubator” facilities well-suited to their startup budgets, said experts at a recent real estate forum in La Jolla.

The forum, hosted by the San Diego chapter of Commercial Real Estate Women at Estancia La Jolla Hotel & Spa, was held just prior to the nationwide BIO International Convention, which brought an estimated 16,500 biotech industry professionals to San Diego Convention Center June 23-26.

Smaller firms during the past decade helped to double the number of life science-related companies operating in San Diego, going from 290 in 2004 to about 600 in today’s market, said Ryan Egli, first vice president in the local office of CBRE Group Inc. The square footage occupied by life science entities rose more than 50 percent from 10 years ago, to its current 13.6 million square feet.

The promise of one day being acquired by a major pharma or biotech player is spawning a continued churn of startup companies, which Egli noted are occupying space and helping to counter the tendency of the big pharmaceutical firms in recent years to reduce their own local footprints, in favor of increasing their presence on the East Coast.

The major pharmaceutical companies, however, continue to acquire small local firms in order to get more products into their development pipelines.

East Coast Is Land of Giants

Many of the larger pharmaceutical players — such as Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK) — have been shifting facilities more toward East Coast markets in recent years, especially in Massachusetts’ Boston-Cambridge area.

Increased research and development happening in Asia, however, could benefit West Coast markets like San Diego in the long run, said Nancy Hong, a senior associate with BioMed Ventures, the strategic investment arm of locally based BioMed Realty Trust Inc. (NYSE: BMR).

The continued rise in perceived value of specialized life science facilities, concentrated in just a few U.S. markets, has spurred a significant shift in who owns life science real estate in San Diego. A decade ago, about 5 percent of available space was owned by landlords, with 95 percent owned by the companies occupying the buildings, local architect Kennon Baldwin said.

In today’s market, the landlord-owned portion is at 25 percent, and the majority of that space — nearly 6 million square feet — is controlled collectively by three large real estate investment trusts.

The REITs and other landlords are actively working to turn their facilities into “plug and play” laboratories and related spaces, making extensive renovations of older buildings in order to maintain tenants and lure new ones, said Baldwin, vice president of Ferguson Pape Baldwin Architects in San Diego.

“We’re expecting the market to grow for a long time,” said Michael Dorris, a vice president with Long Beach-based HCP Life Science Estates Inc.

The Necessity of Amenities

HCP, with about 1.3 million square feet of life science property in San Diego, is the local region’s third-largest biotech landlord, after Alexandria Real Estate Equities Inc. of Pasadena with 2.9 million square feet and Biomed Realty Trust with 1.4 million square feet.

“These companies are extremely well-capitalized,” said Egli, noting that the REITs in particular are in a good position to invest in necessary updates and amenities needed to attract life science firms.

Increasingly, those amenities include on-site gyms, bars and restaurants, outdoor eating areas, collaborative gathering spaces and other elements geared to boosting the quality of life for those who put in long work hours beyond 9-to-5 schedules.

“The line between personal life and work life is becoming very blurred,” Egli said, noting that the move to make office campuses more self-contained often helps increase worker productivity.

The emergence of multitenant “incubator accelerators,” where several startup firms can be housed under one roof, makes sense for many cost-conscious, early-stage companies and their venture capital backers. They have also proven to be a viable alternative for landlords looking to repurpose older buildings that have become vacated and otherwise hard to lease to a single tenant.

However, their appeal may be limited, depending on the balance that potential tenants are seeking between openness and the need to keep certain operations private. Also, certain maintenance and security issues could prove tough to moderate in an incubator setting,

Baldwin said.

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