Rental rates for life-sciences space in many areas of the San Diego market are on the rise, according to a recent report released by a representative of JLL. The report says that rents for class-A space in Torrey Pines and UTC are in the low $4 triple-net per-square-foot-per-month range and are continuing to increase; rents in Sorrento Mesa continue are in the low-to-mid $3 triple-net per-square-foot-per-month range and are expected to increase during the second half of 2018; and rents in Sorrento Valley are holding their position in the low-$3 triple-net per-square-foot-per-month, with an expected increase over the balance of 2018 as the Sorrento Valley market remains tight.
SoCal Real Estate spoke with Grant Schoneman, a managing director at JLL, about current life-science rental rates in San Diego, what’s driving them higher, and where he sees them heading.
SoCal Real Estate: How would you characterize where life-science rental rates are currently in the San Diego market?
Schoneman: Life-science rental rates in San Diego are healthy and have recorded notable increases during the past 18 months. Since the beginning of 2017, rental rates for class-A lab space have grown by around 10 percent. Driving the rent growth is the strong activity from small and mid-size biotech firms (companies with space needs under 35,000 square feet). Over 90 percent of the leases signed during the first half of 2018 were under 35,000 square feet.
Additionally, further segmenting the demand, companies under 7,000 square feet accounted for 50 percent of the total leasing activity so far in 2018. This activity among smaller companies has produced minimal vacancy for lab space under 10,000 square feet, especially class-A spaces that tenants are more attracted to, which has been a key driver for the increase in life-science rental rates. Rental rates in Torrey Pines are now comfortably in the low to mid $4 triple-net per-square-foot-per-month range, with UTC/Campus slightly behind Torrey Pines, seeing rates in the low-$4 triple-net per-square-foot-per-month range. Likewise, Sorrento Mesa and Sorrento Valley have recorded substantial rent growth since the beginning of 2017 and are securing deals in the mid-$3 triple-net per-square-foot-per-month range.
Where are these rates heading?
I think rental rates for class-A space in San Diego will continue to increase during the next six to 12 months. Venture-capital funding into the life-sciences sector has been extremely robust during the first half of 2018, with activity not looking to slow down. With a healthy investment market and companies securing funds, the demand from small-to-mid size companies should continue to drive leasing activity.
Looking forward, there are some large upcoming vacancies in the next 12 months that will have an impact on rental rate growth. The Torrey Pines submarket has over 575,000 square feet of pending vacancies, all consisting of outdated lab facilities. Landlords are actively working on redevelopment plans for these buildings (some on a speculative basis) in order to modernize and convert the space to class-A quality. The expectation is that this supply of vacant space will be occupancy-ready in the next 12 to 24 months. This new space will be class-A-quality space, and landlords will subsequently be looking to secure rental rates in the $4 triple-net per-square-foot-per-month range, so this added supply isn’t expected to have a significant downward push on rental rates but will likely soften overall rent growth.
How do life-science rental rates fit in with the total office picture in San Diego?
Rental rates in the life-science sector have outpaced San Diego’s office sector. The life-science rates among the key biotech cluster submarkets have recorded growth of around 10 percent. Comparatively, the overall office sector has seen growth in the single digits, around 6 percent. With rental-rate growth for the life-science market outpacing the office market, developers continue to look to find underperforming office buildings that they can convert to lab facilities and capitalize on the growing life-science industry and increasing rental rates.