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More Bay Area Life-Sci Shops Expect to Freeze Hiring or Lay Off Workers in 2010

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By Alex Philippidis

SOUTH SAN FRANCISCO, Calif. — In San Francisco, one year into a severe national recession, confidence in the economy has slipped enough among many of the Bay Area’s life-sciences companies that one-third said they will either hold their workforces steady or cut them during 2010 — more than double the percentage of a year ago — according to a real estate survey whose results were released Wednesday.

The 2009 Northern California Real Estate Survey showed 22 percent of the 82 companies responding to the survey, or 18, saying they would maintain their current number of employees, while another 12 percent, or 10 companies, anticipated they would lay off workers next year.

Last year 10 percent of 92 companies anticipated no change in the size of their staffs, while only 3 percent projected eliminating jobs.

That left 69 percent of companies anticipating growth of some sort in 2010, down from 82 percent last year.

"[Companies] are definitely projecting growth that's slower and less bullish than it has been before," said Douglas Davis, a principal with AE3 Partners, which produced the survey in collaboration with three commercial real estate firms, CB Richard Ellis; Cornish & Carey Commercial; and NAI BT Commercial. "Everybody is in cash-preservation mode. Everybody wants everything cheap [and] temporary, and nobody wants to do any sort of long-term commitment."

Especially when it comes to renting new space, he added.

"We asked the question, 'Are you looking for any new long-term leases?' The major response, the answer to that, was no," Davis observed. "It's more of a reflection of a very cost-sensitive market that's basically looking for short-term, cost effective solutions in general when it comes to leasing."

Indeed 33 percent of respondents said they were planning to shed unwanted space by returning it to market — reversing three years of declining percentages. Last year only 15 percent of survey participants said they planned to shed space during 2009, compared with 20 percent in 2008 and 23 percent in 2007.

"We're not seeing anybody really looking for long-term space out there," Davis said.

He cited a factor that has served to discourage new leases in recent years, especially in the year since the economy slipped into recession — new accounting rules require companies to carry on their books the full value of their long-term leases

Although the US is believed to have exited the recession, the trend playing out in the survey doesn't bode well for the region's real estate market. While 69 companies said they plan to search for new lab and other commercial space during 2010, more than half of that number — 44 companies — said they would look to sublease below-market space vacated by downsized life-sci employers rather than traditional leased space offered at market rents.

The latest sublease surfaced on Friday. Nektar Pharmaceuticals is set to move its headquarters and 150 staffers from San Carlos, Calif., into 102,283 square feet at 455 Mission Bay Blvd., the space that Pfizer was to have leased within the Mission Bay campus. It eventually changed its plans, opting instead not to move due to shifting real estate needs sparked by its planned $68 billion acquisition of Wyeth, and the departure of a key executive who shepherded the deal [BRN, July 10].

As part of its 10-year sublease, Nektar will pay no rent in the first four years and will obtain a $15 million tenant-improvement allowance granted to Pfizer by Mission Bay's developer/owner, the publicly traded Alexandria Real Estate Equities of Pasadena, Calif., according to the San Francisco Business Times.

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Shrinking Rents

Across the region, rents for life-sci space have slipped to an average asking price of $2.22 per square foot per month, triple net, down 8 percent from last year's average asking rent of $2.42 psf per month. The busiest sub-region for life-sci leasing, the northern Peninsula region that includes South San Francisco, saw its average asking rent fall 8 percent from $3.03 psf per month to $2.78 psf per month.

While $2.78 psf marked a step backward for the northern Peninsula, the fact that the same average asking rent was being sought by owners and leasing agents of life-sci properties in neighboring San Francisco is a sign of progress for the sub-region. Thanks to several new leases at Mission Bay, well before Nektar's sublease deal, the City by the Bay saw its average asking rent rise 6 percent from the $2.62 psf per month triple net being sought last year.

San Francisco also won high marks from survey participants for its increased willingness in recent years to use tax breaks to attract biotech companies – particularly by exempting them from its payroll tax through 2014. The city scored highest, at 50 percent, when participants were asked to name a government in the region that offers economic incentives.

The Greater Silicon Valley region, which includes San Jose, placed second at 20 percent, followed by the Northern Silicon Valley subregion anchored by Menlo Park, Mountain View, and Palo Alto, at 7.7 percent, and the mid-Peninsula region, at 5 percent.

When it comes to rents in the Bay Area, the survey concluded that average asking rents in the mid-Peninsula dipped by 3 percent, from $2.16 psf per month to $2.09 psf per month. In the North Silicon Valley, average asking rents fell by 23 percent, from $2.47 psf per month, to $1.89 psf per month. The East Bay North subregion, which includes Emeryville, saw its average asking rent slip by a nickel year to year, from $2.08 psf per month, to $2.03 psf per month.

But in the East Bay South subregion, rents inched up 2 percent, or three cents, from a year earlier to $1.53 psf per month from $1.50 psf per month.

One bright spot for the Bay Area: A sizeable majority of companies searching for space (69) are looking to move within the region, while three are searching in the San Diego region, and another 10 outside of California but within the US. But the number of companies willing to consider locations overseas has grown year to year from 13 last year to 23 this year.

Of those 23, nearly half (11) are exploring sites in Europe, four are considering Asian sites outside of China and India, three are considering China, two India, and one each North America, South America, and the Middle East. As with companies weighing a domestic move within the US, businesses looking overseas are not planning to relocate their headquarters, but rather establish R&D, sales and administrative outposts.

"We're going to be asking a lot more intense questions about this next year," Davis said.

The survey's results were released during the GeneAcres 17 industry conference held here, though not the survey itself. The conference took place a year to the week when the financial markets melted down under the weight of crushing debt stemming from the collapse of the housing market.

While there is no similar financial disaster this year, life sciences business owners remain gloomy about the economy's prospects through this year and next, Davis said.

"Yes, we're going to recover at some point. We're going to get out of it. But we're not looking at a speedy recovery," Davis predicted. "I think it's going to be a couple of years before we really start to see normalization here, unfortunately."