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News Release: JLL Life Sciences Industry Insight, San Diego Q2 2022

Market uncertainty causes a slowdown in tenant demand and deal velocity

VC investment remains active, boosted by new mega- funds raised by prominent VC’s

The local life sciences sector secured over $1.1B in VC funding during Q2, led by Resilience securing a $625M Series D round, bringing the company’s total raised capital to over $2B. Since Q2 2021, total life science VC funding has decreased by 5%, but funding has increased by 39% from Q1 2022. Despite a modest start for life science VC compared to 2021’s record high, 2022 is still on pace for a strong year and may surpass 2020, which was the second highest year on record. Additionally, VC firms have raised an astonishing amount of record capital during the first half of 2022, which they will look to deploy in the second half of 2022 and into 2023. A few of the top life science VC’s raising mega-funds are 5AM Ventures with $750M, Third Rock with $1.1B and Arch Ventures with $3B.

NBI hits with two-year low while San Diego lab leasing calms

Q2 leasing cools, Downtown gets first lab tenant

On the heels of two consecutive record quarters oflab leasing, each amassing over 1.1 million s.f. of total leasing, Q2 leasing activity was the slowest since Q3 2019. The overall market secured 406,379 s.f. of total gross leasing activity across 16 completed leases. Sorrento Mesa led the market in lease transactions posting 188,690 s.f. and followed by UTC with 88,103 s.f. Downtown secured its first everlab tenant for 27,154 s.f. at 1155 Island Ave. Market- wide lab demand at the close of Q2 (including both GMP cleanroom and R&D space) saw a modest 5% 2012 increase from Q1 and now totals 1.9 million s.f., still down from the historic peak of 3.9 million s.f. during Q1 Q4 2021. Demand was most robust among small to
mid-size companies, who have space needs under 35,000 s.f., a trend we expect to continue as VC’s look to invest into startup and early-stage companies.

New sublease space causes total vacancy to rise quarter-over-quarter, but remains tight

Despite cooling of lab demand, fundamentals remain on solid footing in Q2. Within the core biotech cluster, direct vacancy is at 1.4%, having risen by only 10 basis points since Q1. Several small to mid-size sublease spaces added during the quarter caused total vacancy to rise 70 basis points over the same stretch to 2.1%. With vacancy stabilized at record lows, the demand for existing built-out space continued to put upward pressure on asking rents, increasing by 1.4% from Q1 and 24% year-over-year. This was a notable slowdown in annual rent growth that had averaged over 30%. This is the result of the uptick in availability of 2nd- generation space, especially when compared to the prevalence of 1st-generation development and conversion space mostly available in previous quarters.

Rent growth moderates but remains at record highs

Limited options in UTC causes market high rents
Asking rents (Class A + B) within the core cluster submarkets grew 1.4% from Q1, a notably slower pace compared to previous quarters. Rents in Torrey Pines, historically the highest among the cluster, fell behind UTC due to the increase in availability of 2nd generation Class B space within the submarket. Sorrento Mesa and Sorrento Valley have also seen rent growth ease during the quarter, as Class A space has been leased and the submarkets are left with additional availability in class B space. Despite modest growth from Q1, both Sorrento Valley and Sorrento Mesa led the way in-year-over-year rent growth, increasing about 28% and 26%, respectively. While the pull back in tenant demand may provide temporary relief on rent growth, the unprecedented inflation and rising construction costs maintain upward pressure on rental rates and overall costs.

Capital Market Update

Heading into the second half of 2022, demand from life sciences capital remains strong as both equity and debt sources continue to seek opportunities. The prevailing theme from life sciences capital can be summarized in two words: strategic and cautious. Investors are still aggressively pursuing opportunities deemed strategic to their existing portfolios and, if an opportunity provides scale, new entrants are also aggressive in attempt to gain presence and market share. Caution translates to more scrutiny on how deals are being underwritten. The“leversofvalue”(startingrentalrates,TI allowances, future rent growth, and exit cap rates) are being examined very thoughtfully and, along with the increased cost of debt, have resulted in a drop in valuations. Overall, from a capital market perspective the San Diego life sciences market is alive, healthy, and still in great demand.

2nd Half 2022 Outlook

The life sciences sector continued to be in a wait- and-see mode at the close of the 2nd quarter, with a large amount of investment capital waiting on the sidelines. However, it appears the tides could be changing as we enter the second half of 2022. The NBI is showing signs of a rebound as life sciences looks to regain its appeal to investors – both VC’s and Big Pharma alike. With a bulk of the investment capital targeted at small and scaling biotech startups, we anticipate tenant demand will be most robust among companies with space needs in the 10,000-30,000 s.f. size range. Availability of space in the core markets will remain tight for the remainder of 2022 as new developments are slower to deliver due to permit and market delays.

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