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Genomic Settlements in California March to the Beat of a Different Market

This is the second in a three-part series examining the interplay between genomic hotspots and the real estate markets that serve them. This installment covers the novel real estate trends experienced by the genomics sector in northern and southern California.

The series, which runs through Wednesday, has already reported the real-estate market for genomics firms seeking land in Montgomery County, Md., and will wrap up with an in-depth look at what companies in the sector are up to in the hotbeds of Cambridge and London, UK; and Munich, Germany.  

SAN FRANCISCO, Nov. 6 - It may be the best of times and the worst of times for real-estate developers in California and the genomic companies looking to set up shop in the state. 

On the one hand, the US economic downturn in general and the burst tech bubble in particular have cooled the once white-hot commercial real-estate markets both here and in San Diego, experts tell GenomeWeb. The cost of space, as the rules of supply and demand see it, should therefore dip.

But the real-estate sector—normally an accurate barometer of a state’s general industrial health—has found itself being pulled in different directions throughout California by competing market forces and being driven to ignore traditional market rules. At least that’s the case where genomics companies are concerned.

A Seller's Market in the South ...

To genomics companies, whose cash-burn rates mean they are more likely to rent than to buy lab and office space, a cooling real-estate market in biotech hotspots should be a blessing: increasing supply and falling demand means lower rents.

But throw into the mix the paucity of firms willing to develop biotech-ready space—slim pickings even before the economic downturn—and the scale starts to tip in the opposite direction.

“Very few landlords understand how to underwrite the big tenant improvements” that most biotech facilities demand, according to Neil Fox, a developer with Phase 3 Properties, of San Diego. These investments—specialized air-handling systems, lab benches, lab plumbing, gas conduits—add to a developer’s risk, he said: Once the investment is made, owners must continue attracting biotech firms if they hope to recover fully those investments. 

“It is tough for a landlord to get financing, so you have never seen a big supply of standing biotech available,” Fox said in an interview. So while general commercial real estate prices fall in San Diego, biotech space appears to remain at a relative premium, and thus rentals remain high, he explained. 

Since last year, rental prices have remained stable or even increased, according to real estate brokers interviewed for this article: biotech office and lab space in the area hover between $2.00 and $3.50 per square foot per month. 

... Meets a Renter's Market in the North

“The bottom has fallen out of commercial real estate in San Francisco,” said Chris Scott, assistant vice chancellor for research at the University of California, San Francisco. Scott oversees UCSF’s technology transfers between the academic and private sectors and is also working to develop what could be San Francisco’s largest genomics/post genomics industrial park. 

The real estate market “is the lowest in 12 years” here, Scott said. “With the fall of the dot-coms, [the market] has completely flattened. Even though lab space is a little more difficult to build, you’ve got a glut” of space.

“The dot-coms took too much space and they gave it back,” observed Ken Housley, a senior vice president at Colliers International, a real-estate brokerage firm in San Mateo, Calif. “The fact that there are so many surplus buildings is having a downward affect on rents for the first time in several years.”

But experts tell GenomeWeb that although the severe decline of the technology sector in Bay Area has spilled over into biotechnology, the industry remains relatively strong. There also is a silver lining to the decline in real-estate rental prices: It’s “great for young companies looking for a deal,” said Housley.

Indeed, the cost to rent biotech space in the Bay Area has fallen from a year ago, industry observers say. Today, rentals here go for between $2.00 and $4.00 per square foot per month depending on the quality of the building and its location.  

The change in the real estate environment may mean a few more questions over expected completion dates and tenancy rates for UCSF and its partners, who are building the 303-acre mixed-use development in southern San Francisco. The university will occupy 43 acres of the development, and will provide offices, labs, teaching facilities, and living space for some 9,000 university scientists and staff engaged in genomic, proteomic, and structural biology research. 

The development, which broke ground in Mission Bay here in 1999, is designed to use university-led research to attract and anchor biotech start-up tenants who in time might sidle up to the myriad labs and offices that have settled in South San Francisco and nearby communities. 

“These small- to mid-tier biotech companies [that the UCSF industrial park hopes to attract] are the ones that we deal with most often,” said Scott. “That’s where IP is being generated.”

Just when the IP will sound to venture capitalists to be a good idea, and how that might affect availability of lab and office space, is anyone’s guess, Scott says. But he claims to be optimistic.

“There is quite a lot of debate right now from the capital and investment side, and the entrepreneurial side, that biotech will be the next tech push,” Scott says. “People are beginning to place their bets with life sciences. It will take off and carry everything along with it, including real estate.”

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