San Diego’s world-renowned life sciences cluster broke a new record at the start of the year: the vacancy rate for labs and offices reached 14% – an all-time high.
Three years ago, companies were fighting for space in San Diego’s major life sciences centers like Sorrento Valley, La Jolla and Del Mar. But now there are more buildings on the market than local companies want to lease.
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The area’s overall vacancy rate for life sciences space jumped to 14.3% — up from 5.7% during the same period last year, first-quarter data from commercial real estate firm Jones Lang LaSalle shows.
A big driver of this trend: several companies have downsized or completely abandoned offices in recent months.
Gene therapy company Locano Bio, for example, ceased operations and vacated 39,000 square feet of space in Torrey Pines. Then there’s San Diego genetic sequencing giant Illumina, which divested its UTC office to save millions of dollars.
More local life sciences companies are subletting their unused offices to save money or accommodate a smaller staff after layoffs. There are about 1.2 million square feet of sublease space available on the market — nearly double what it was a year ago, JLL said.
“It’s been significant,” said Taylor DeBerry, senior associate in JLL’s life sciences group. “We’re tracking about a million square feet of sublease space on the market right now, and that’s a larger number than we’ve ever seen before.
“A lot of this has to do with the exuberance and excessive demand for space that happened during COVID. Companies need to step back because the venture capital market is not as easy to raise money as it was back then.”
During the first quarter of 2024, San Diego startups raised $1.57 billion in venture capital dollars – a huge win after a slow year for business. Still, venture capital deals have been few and far between since 2021’s record year.
Life sciences investors, especially, are scrutinizing their businesses and writing bigger checks to fewer companies. In turn, these companies are being picky about how they spend their money on real estate, DeBerry explained.
“Tenants are looking for better deals,” he said. “During the heyday (of 2021) and during the COVID period, there just weren’t a lot of options.”
For example, he said, back then, three tenants were often vying for the same space, so deals moved quickly.
“Renters now have a plethora of opportunities and the balance has really shifted from the landlord market to the tenant market,” DeBerry said. “And so they’re just doing their due diligence and making sure they’re getting the right deals.”
The JLL report shows that life sciences tenants here and across the United States continue to opt for newer buildings on the market. Tenants have been able to obtain premium space at cheaper prices because the supply of space in San Diego is greater than its demand.
Most of the region’s life sciences companies are concentrated in a few areas along Interstate 5 and Interstate 805, central to the county for commuters and near San Diego’s top research institutes. The JLL report defines San Diego’s “core cluster” of life sciences areas as: Del Mar Heights/Carmel Valley, La Jolla, Sorrento Mesa, Sorrento Valley, Torrey Pines and UTC.
Asking rents in San Diego’s premier life sciences cluster fell 7.2% year over year. This marks four consecutive quarters of declining rents after a solid decade of rent growth, JLL said.
Del Mar Heights and Carmel Valley commanded the highest rent ($6.74 per square foot), followed by downtown San Diego ($6.15) and Sorrento Mesa ($6.10). In the heart of San Diego’s life sciences hub, Sorrento Valley had the lowest average rent at $5.84 per square foot.
Overall, the average asking rent during the first quarter was $6.02 per square foot, down from the previous year when it was $6.40 per square foot.
While available life sciences space continues to outpace leasing, a few big deals boosted San Diego real estate activity in the first quarter.
Notably, pharmaceutical giant Pfizer in March signed San Diego’s largest lease in two years — a 15-year lease for 230,000 square feet of space at the Torrey View campus, currently under construction.
At the same time, this move for Pfizer is a move to a smaller space as the company, like so many others, tries to cut expenses in the wake of the pandemic.
The imbalance between supply and demand will not normalize anytime soon, especially as more newly constructed projects come online.
One of the most anticipated projects is the RaDD IQHQ San Diego waterfront campus that spans 1.7 million square feet. The project is centered on biological sciences laboratories and offices, but also promises retail, restaurants and green spaces.
There is also the Campus in Hortona 10-acre mixed-use development that will feature two 40-story apartment towersretail and proposed office spaces for life sciences companies.
Both Horton and IQHQ are larger mixed-use developments in downtown San Diego – outside of its traditional life sciences core. They have not yet announced any life sciences leases.
