ECONOMIC OVERVIEW
The total nonfarm employment in San Diego grew by 83,900 or +5.9% year-over-year (YOY) between May 2021 through May 2022. During the same time, the monthly unemployment rate decreased from 6.6% last year to 2.7% and is currently 100 basis points (bps) below the quarterly average of 3.7%.1 The annual unemployment rate is forecasted to decrease from 6.6% in 2021 to 3.8% in 2022 and 3.1% in 2023. San Diego’s economy of $252.3 billion as measured by 2021 gross regional product is forecasted to grow 5.2% in 2022 and 3.3% in 2023, above its 10-year average of 3.1%.2 The life sciences industry sector accounts for over 72,000 direct employment in San Diego County. Average annual earnings equal nearly $127,000. Research and manufacturing represent 45% of life sciences direct employment, with biotechnology following at about 18% of direct employment. Medical devices and equipment represent 17% and biopharmaceuticals represent almost 14% of life sciences direct employment, with scientific research/tools making up 6% and food and agriculture making up about 0.1%. Considering all ripple and multiplier effects, life sciences in San Diego County generate $27.7 billion in GRP and $47.8 billion in total business sales. Additionally, including all multipliers, the life sciences industry was responsible for almost 178,000 jobs with total earnings of $16 billion.
SUPPLY AND DEMAND
At the end of Q2 2022, San Diego’s direct life sciences vacancy was 5.1%, a decrease of 40 bps from the previous quarter and 280 bps from a year ago. Tenants absorbed 261,000 square feet (sf) in Q2 2022, recording the sixth consecutive quarter of occupancy gains. Sorrento Mesa recorded the most occupancy gains in Q2 2022 (+229,099 sf), followed by Sorrento Valley (+35,593 sf) and UTC (+18,455 sf). Element Biosciences contributed the largest amount of absorption, occupying three floors of their build-to-suit (BTS) at Alexandria Tech Center. Other large occupancies include Encodia at the Labs at Oberlin in Sorrento Mesa, Biolinq at Creekside in Sorrento Valley and Aspen Neuroscience at Torrey Pines Science Park.
TENANT TRENDS
Direct space availability in traditional life sciences submarkets is down to record levels, with 3.9% availability in Torrey Pines and 1.0% available in UTC. As a result, tenants have pushed east to Sorrento Mesa (9.9% availability) and Sorrento Valley (7.9% availability). Vacancy and availability are anticipated to drop further in 2022 once several tenants who have signed or are in active lease negotiations occupy their new facilities. The most notable leasing activity occurred in non-traditional life sciences markets.
Phase 3 Real Estate’s 1155 Island in Downtown leased a full floor to its first tenant, Native Microbials. In Miramar, Catalent and BioLegend both expanded their facilities on Carroll Rd. Other large deals include shared-lab space provider BioLabs leasing 44,000 sf at Biovista in Sorrento Mesa, aTyr Pharma taking the remaining 24,000 sf at Creekside in Sorrento Valley and DermTech expanding by 14,500 sf in Del Mar Heights.
Countywide asking rent across all classes increased by 7.8% from $5.27 last quarter to $5.68 per square foot (psf) on a monthly triple net basis in Q2 2022. Sorrento Valley remains a more affordable option for small tenants, while North County provides options for tenants in need of production uses. Rents in Torrey Pines and UTC remain exceptionally high with historically low availability. Though Sorrento Mesa rents fit between these groups, new products and high acquisition costs for developers can drive asking rents higher. Deals for new space are frequently in the upper $4-range and can break above $5 and $6 triple net for new buildings.
FUTURE INVENTORY
Of the 21 properties, totaling nearly 3.7 million square feet (msf) currently under construction countywide, 31.8% are pre-leased and one building totaling 146,500 sf is expected to be delivered by the end of 2022. The majority or 72% of inventory is speculative, with the remaining 28% BTS. Large tenant activity is expected to fuel life sciences development over the next few years, including the 163,000-sf BTS Sorrento Therapeutics building in Sorrento Mesa and Turning Point Therapeutics’ 185,000 sf lease in Torrey Pines. With extremely low availability in Torrey Pines and UTC, tenants and landlords are required to seek opportunities outside of the traditional life sciences nucleus. Though biotech landlords continue to acquire projects in Sorrento Valley and Sorrento Mesa for life sciences conversion or redevelopment, they are also looking in surrounding submarkets such as I-15 Corridor and Downtown.
Life sciences acquisitions, conversions and redevelopment continue to try to meet the high demand in San Diego. In Q2, Breakthrough Properties acquired a 212,000-sf project in Governor and the 92,000-sf Environmental Plaza in Sorrento Valley. A joint-venture between Angelo, Gordo & Co. and 5 Ronin also bought a small building in Governor for life sciences conversion. Alexandria continues to grow its presence in the I-15 Corridor, purchasing a 45,000-sf building adjacent to a building they bought in Q1 2022. Diminishing supply in the core life sciences submarkets is causing life sciences to expand to new frontiers. Demand is expected to outpace new supply over the next 24 months in the mid-cities, which has led to a strong investor and developer appetite to move forward with proposed development sites.
OUTLOOK
• Life sciences venture capital activity increased in Q2 2022 totaling over $955 million, more than doubling the total raised in Q1 2022.4 These companies will continue to grow, fueling leasing activity over the next 18 months.
• Life sciences activity from landlords and tenants will continue to put pressure on other product types as limited inventory forces the development of new product or the conversion of existing space to suit lab uses.
• Expansion into non-traditional life sciences submarkets will be inevitable with landlords in Del Mar Heights, Carlsbad, Scripps and Downtown already seeking to convert or construct new lab buildings.
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