Effectively Investing and Developing in Life Sciences in San Diego

Without question, Boston-Cambridge and the San Francisco Bay Area are the nation’s top two life science clusters. However, the third spot belongs unequivocally to San Diego. In a recent webinar moderated by Martin Togni, a partner in the San Diego office of Allen Matkins with a practice focusing on life sciences and who is head of the firm’s life sciences practice, five panelists shared their perspectives on both the present and future life science landscape in San Diego. The panelists were Enrique Ceniceros, Science & Technology Director of Taylor Design; Mark Allen, Life Science Principal at HGA Architects; Nick Frasco, Managing Director at Longfellow Real Estate Partners; Leo Divinsky, Managing Director of Asset Management at Stockdale Capital Partners; and Derreck Barker, Senior Director and Regional Head for the Southwest Region at Nuveen Real Estate.

The panelists represented areas including real estate development, capital investments, and architecture. They discussed topics such as availability of property, ground-up vs. conversion, tenant expectations, and issues related to the life science industry expanding in downtown San Diego.

The Lack of Space in San Diego

It’s no secret that there is currently an extremely high demand for life sciences property in the San Diego area. Active life sciences demand is an estimated 3.7 million square feet. Vacancy is in the single digits, and of the 2.8 million square feet of life science space that is delivering through the end of next year – both conversion and under development – 75% is already spoken for. Likewise, more than 8 million square feet will possibly be needed by 2024-25.

What Can be Done?

With such an extreme supply/demand imbalance, is there a relief valve that will alleviate the problem? Some panelists feel that the hub could expand north into Carlsbad, Sorento, and other areas around San Diego.

Others believe there will be densification of life science companies, especially around UTC, Sorento Valley, and to a degree, Torrey Pines, with more companies occupying high-rise buildings. In the past, life sciences required low to mid-rise buildings because of the specific needs of their labs. But the science has changed; it’s less chemistry-intensive, so labs can now occupy spaces on higher floors, even up to 20 stories.

Going vertical in a downtown setting, however, is very much dependent on cost. “Building up” also means going down – for subterranean parking – and with construction costs averaging $40,000-$50,000 per stall, rents would have to be kept competitive to attract life science companies to a high-rise. If that can be done, it’s reasonable to think that life sciences will grow in downtown San Diego.

Ground-up Development vs. Conversion

One of the most critical factors in a company deciding on a purpose-built building or a conversion is speed to market. This is one of the top priorities for many companies. As such, a conversion is often the best option if it means that the long permitting and entitlement processes can be avoided.

However, if speed to market isn’t a priority, a purpose-built building will generally suit a life sciences company's needs much more than a conversion. Factors such as vibration criteria, floor loading issues, ceiling height, and column spacing can be both problematic and expensive when converting an already-existing building. For example, a typical office building is 12 or 13 feet floor-to-floor, but life sciences usually require 18 feet between slabs because of the complex mechanicals.

The area from Torrey Pines to Sorento – a space of about 4½ miles – is one of the densest life sciences clusters on the planet. Everything is being leased quickly, as soon as it comes online. So there is definitely a push toward conversion products.

The Issue of Operating in Downtown San Diego

Although developers are making great strides in changing the landscape of downtown San Diego, parking is still an issue, and suburban residents have certain long-held perceptions about security and safety in the downtown area. Additionally, the COVID-19 pandemic has exacerbated the homeless situation, and city leaders will need to address this if they wish to draw new companies to the city center.

However, the city has many qualities that make it an attractive option, not the least of which is the legendary, perfect year-round weather. Additionally, although many trophy class life sciences projects offer walking paths, surfboard & bicycle storage, fitness centers, gyms, cafes, and sports courts, today’s tenants don’t just want a suitable building; they also want an attractive “lifestyle experience,” like nearby “destination areas” with entertainment, shopping, and dining venues. Today’s scientists want such places to bond with fellow team members outside of the work environment. San Diego offers many of these desirable amenities, and city leaders are well aware of the critical role they play in bringing new companies to town.

Not to be forgotten is San Diego’s excellent public transportation system. Workers can live in the suburbs and commute easily to the downtown area. This is perhaps one of the reasons why Los Angeles isn’t experiencing the growth in life sciences that San Diego has – their lack of good public transportation.

What About the Future?

All of the panelists are quite bullish on San Diego’s future in the life sciences. They noted that rents are still lower than in Boston and the Bay Area. The recent pandemic has heightened people’s awareness of therapies, cures, and preventive health, so the industry itself will certainly continue to grow.

Also, area universities continue to grow their STEM programs, so the talent pool is already there, and many graduates would rather find work locally than move away. Because of this, life science companies in San Diego can almost certainly find the talent they need, and that isn’t likely to change anytime in the near future.

One of the main challenges facing life sciences in San Diego is the lack of space, but that need will drive a variety of solutions. The amenities are in place, high-rise occupancy is becoming more feasible, and the pool of local talent is getting deeper and deeper. All of that bodes well for the future of life sciences in San Diego.