Life Sciences 2.0: How San Francisco Could Bounce Back With a Biotech Boost
It can seem like there’s not much going right for San Francisco Bay Area real estate these days, but with major companies investing billions of dollars in new lab developments, the life sciences industry remains a bright spot.
And as tech layoffs continue, the possibility of refreshing the city’s employment base with more investments from a buzzy, high-profile industry like life sciences is an attractive one.
“The Bay Area would love to see, say, 5% of the employment base switch from tech to life sciences,” Northmarq Senior Vice President and Managing Director BJ Feller told Bisnow.
As life sciences evolve toward new therapies, technologies and types of lab developments, the Bay Area — with a rapidly expanding pipeline — appears poised to ride out recent economic turbulence. Despite the region’s many tech woes, and its corresponding impacts on the city and commercial property value, biotech is still showing its strength, capturing one-third of national life sciences VC funding last year.
“Start in South City and look at the big glass towers, like what you’d see in Kendall Square, then move down the peninsula towards San Carlos, and more of those flex, one-story warehouses perfect for biomanufacturing,” said BentallGreenOak Vice President Jon Needham, an investor in area life sciences real estate. “It really speaks to the vibrancy of the market.”
Even though funding has tightened, VC has played more cautiously, and startups have weathered the typical, volatile whiplash that comes from purse-tightening in the nation’s tech epicenter, the Bay Area can boast a strong fourth-quarter finish to the year and a significant pipeline for the future. According to Cresa figures, the region delivered 109K SF and absorbed 802K SF, the latter an increase from the previous quarter, with a 7.2% vacancy rate. There are 5.4M SF under construction including 2.1M SF under redevelopment.
“We expect a bevy of exciting new projects and continued growth throughout 2023,” JLL Life Sciences Research Analyst Emmanuel Enabulele said.
It’s a sharp contrast to San Francisco’s office market. Mid-Peninsula lab leasing activity alone hit 536K SF last quarter, overshadowing the 362K SF of office space leased during the same period, according to JLL. Life sciences in the region posted seven straight quarters of positive net absorption.
“There’s an uptick in lab sublease availability, but it’s just not worrying like it is in, say, the downtown San Francisco office market,” Cresa Director of Life Science Research & Analytics Andrew McShea said.
Needham calls this current phase “life science 2.0.” The building stock of the last five years was mostly pushed with a “build-it-and-they’ll-come mentality” thanks to the region’s, and industry’s, accelerated growth, a sharp contrast with current sentiment that moderating growth will mediate the imbalance between supply and demand. Today, with rising rates, more conservative funding and demands for more bespoke, and biomanufacturing-enabled, lab space to meet the needs of cell-and-gene therapy and mRNA research, the Bay Area’s tech expertise and booming market will help it meet changing demand.
“There’s a shift in the types of buildings being developed,” he said. “Things are becoming more efficient, and technology is allowing for people to do more with limited space. The future is about how many components can you fit under one roof? Can you do biological-based R&D, chemistry, maybe some pilot scale manufacturing? How many different pieces of the puzzle fit in the same building?
A number of marquee projects are taking shape around South San Francisco, which continues to be the nexus for the region’s lab development, with clusters of waterfront, Class-A, amenity-rich product coming online or in development. One of the nation’s largest life sciences transactions last year was private equity firm GI Partners’ $388M pickup of a portfolio from Alexandria Real Estate Equities heavy on South San Francisco, and pharma giant Eli Lilly announced its intentions to lease significant space in the city last fall.
San Diego-based IQHQ announced plans to build 900K SF of lab space near a Caltrain station, on land it purchased for $215M in 2021; Lane Partners broke ground on Southline Phase 1, a two-building, 670K SF project; DivcoWest continues to push its Shoreline Boulevard South San Francisco conversion pickup; and Kilroy’s gigantic Kilroy Oyster Point Phase 2, an 865K SF, $940M project should finish next year, with roughly 2M more square feet planned for future phases.
Up the coast from Oyster Point, Genesis Marina, the Phase 3/Bain Capital project in Brisbane, which is mostly pre-leased by Freenome, is expected to open this year, while Baylands Development Inc. announced plans last September for an $800M, 1M SF mixed-use development called 9000 Marina, planned to include 657K SF of office and lab space on a man-made peninsula.
Opening dates across the board may be particularly optimistic, according to McShea, as challenges in construction financing as well as materials, will likely push projects back to the end of the year or early 2024. Generators alone now have a one-year lead time.
But that delay will likely help moderate the Bay Area life sciences supply, according to Needham.
“Tenants getting a little bit more optionality is not, it's not necessarily a bad thing,” he said. “I think it will allow us to continue to have a healthy market over the next five years.”
There’s also been significant development in regions farther south on the Peninsula, as well as Alameda County in the East Bay (1M SF under construction) and in Berkeley, especially warehouse and industrial space being transformed into labs and biomanufacturing facilities. Spur Capital recently assembled a 10-acre parcel in former manufacturing space in Berkeley seeking to build out a megacampus, the latest in an area seeing roughly 1M-plus SF of massive life sciences redevelopment projects underway.
Unlike the Boston region, for instance, which has significant biomanufacturing capacity in development, the Bay Area is slightly lagging in the crucial part of the life sciences ecosystem. McShea sees a future where more such developments take place along the Hayward-to-Fremont corridor in the East Bay.
In San Carlos, where BentallGreenOak is partnering on a biomanufacturing-focused redevelopment with Greymark, picking up a $190M property last year, the city’s industrial past makes it a good candidate for this kind of adaptive reuse. Needham said the site, like many in the region seeing increased interest as biomanufacturing sites, was wired for development, and provides the size, scale and flexibility to appeal to lots of clients, from contract manufacturers looking to enter the region to small firms and startups looking to bolster their own production and bring it in-house.
The fallout over the tech slump and soft downtown office market has created chatter around more San Francisco-based developments and renovations. Mayor London Breed has even spoken of bringing more life sciences projects to the city to help with the slumping CRE market. That’s easier said than done, especially with the high cost of development in the city, quality-of-life challenges and the reality that other submarkets are closer to talent centers like Stanford and Berkeley.
”It'll be interesting to see if the city can land some big anchor tenants,” McShea said. “But until there’s a strong case for it, it’s going to be a bit of a tough sell.”
But there are signs of a shift. In neighborhoods like Mission Bay and near the University of California San Francisco, flexible PDR zoning has convinced some developers to take a chance on more life sciences projects. DivcoWest spent $356M on the former Old Navy HQ in Mission Bay last year, reportedly in pursuit of a life sciences renovation opportunity and tenants like incubator operator SmartLabs. Paceline’s 1155 Bryant development has found foodtech tenants like Mission Barns, and Vir Biotechnology signed a 134K SF lease at the 1800 Owens project last January.
Alexandria Real Estate Equities has a presence in Mission Bay as well, at the 88 Bluxome St. site, which it may part with soon due to renovation challenges, but developing in the city instead of down the peninsula presents a challenge, according to Chairman Joel Marcus, who pointed to the pullout by Salesforce as another sign of a troubling downtown development market.
“It has issues,” he told Bisnow. “We wouldn’t be investing in the city, generally, in commercial space.”
Ultimately, cities will need to work harder to attract development, Cresa Managing Partner Scott Stone said. He cited the example of Vacaville, which has worked to speed up the approval process for life sciences projects to attract some of the growing market for biomanufacturing space, and Berkeley, which passed a planned series of zoning and regulatory reforms dubbed the Keep Innovation in Berkeley initiative.
While the market may present significant funding challenges, its growth suggests another boom may take place once conditions improve.
“There's gonna be a significant amount of dry powder from investor capital,” McShea said. “That dry powder from biotech-friendly investors should translate well once things start to take off.”