SOUTH SAN FRANCISCO, Calif. — Roughly the same number of Bay Area life-sciences companies said they were planning to seek additional lab and office space this year compared with last, according to a real-estate survey conducted several months before the current national financial turmoil had erupted.
The annual survey also reported a 33-percent decline in the percentage of companies that said they would shop for new space this year — from 65 percent to 44 percent — but that slide was the result of a nearly one-third increase in the number of companies completing this year’s study.
The number of companies contacted for the survey rose by 15 percent, to more than 400 companies this year, versus 354 asked to fill last year’s survey. It found that 40 of the survey companies, or 10 percent, said they are inclined to search for space this year, compared with 41 shops, or 12 percent of respondents last year.
Companies were surveyed, and data accumulated, between April and August, before the near-meltdown of the financial markets that prompted the Bush Administration to architect a $700 billion bailout to ailing Wall Street firms,— a crisis whose ripples may spill over into the life-sciences industry.
“A lot of companies, especially in this market — I think we all know how the debt markets are acting as of late — are a little scared about embarking on aggressive expansion right now,” Douglas Davis, a principal with AE3 Partners, which joined with the commercial real-estate firm CB Richard Ellis to prepare the 2008 Northern California Life Sciences Real Estate Survey. “So they’d rather basically pack more people into filling their current space as opposed to acquiring more space.”
The survey was released at the GeneAcres 16 conference on Sept. 24 at the South San Francisco Conference Center by BayBio, the life-sci industry group representing the San Francisco Bay Area and northern California.
Davis said 81 companies in the region had expanded over the past year, 23 of which relocated from other sub-markets, mostly within the Bay Area. As of the spring, only 16 Bay Area companies, or 20 percent of their total, were looking to grow outside the US, with two-thirds of them seeking to build new manufacturing sites. The remainder were seeking additional R&D presence in other markets.
“Companies that are born here like it here, and it seems like they’re going to stay here,” he said.
Despite the near-flat demand for life-sci space, the survey found that 82 percent of respondents plan to add employees this year, with 46 percent planning to grow their workforces up to 19.9 percent and 36 percent plan to increase payroll by 20 percent or more. Ten percent of respondents said they planned no change, and 3 percent expected to shrink their staffs.
Davis and Brad Werner, a senior vice president with CB Richard Ellis, said that most companies will squeeze their growing staffs into their existing labs and offices, rather than expand or pursue new space elsewhere. That’s because according to the survey, Bay Area life-sci companies are using only 70 percent of available space. Another 17 percent is under sublease to other companies, while the remaining 13 percent goes unused.
“That’s the primary reason for the discrepancy between 80 percent of companies increasing their head count and only 44 percent basically looking for space,” Davis.
While demand for space remains flat, the survey also found that asking rents have increased 9.5 percent year-to-year for the overall Bay Area, and 4 percent over the past year in the largest sub-market, the northern Peninsula region that includes South San Francisco. Overall asking rent in the Bay Area climbed to $2.42 per square foot per month triple net from $2.21 per square foot.
By comparison, the northern Peninsula saw asking rents rise to $3.03 psf from $2.91 psf, reflecting several new lab and R&D buildings coming onto the market. Buildings in the northern Peninsula, especially South San Francisco, are newer and therefore costlier to rent, Werner said.
“The demand is a little bit higher, although the supply also is quite a bit higher,” he said.
The northern Peninsula has the highest asking rent of any sub-market despite experiencing the largest jump in the vacancy rate of any section of the Bay Area, to 13 percent from 8 percent a year ago.
“Partially that has been because there was a rush by the developers to come in and build new space,” Werner said. “Partially it’s because we’re seeing a number of companies that are advancing in their clinical trials and failing, so they’re pulling back and subleasing out space.”
Davis said the northern Peninsula rate reflects slowdowns in special growth by two biotech giants:
- Amgen placed on the sublease market three South San Francisco properties totaling 365,000 square feet it had initially agreed to occupy a few months earlier.
- Genentech completed three buildings totaling 226,868 square feet within its new South Campus in South San Francisco, formerly called the Britannia East Grand development; as well as a 53,000-square-foot childcare campus on its West Campus. While the biotech pioneer last year completed a 10-year master plan detailing future projects it will undertake, it expects to revise that plan if Roche follows through on its plan to acquire the stake in Genentech it does not already own. Genentech rejected Roche’s earlier bid of $89 per share, or $43.7 billion.
Roche’s acquisition could also hurt the northern Silicon Valley sub-market since the Swiss drug giant has said it will shut down its Palo Alto research campus and move the inflammation group based there to Roche’s Nutley, NJ, campus, which would be transformed into the company’s East Coast R&D center.
The Palo Alto center’s 1,000 employees will be split between Nutley and South San Francisco, where Roche would base its US pharma commercial operations, to be rebranded as Genentech; as well as its virology R&D activities.
The future of the northern Peninsula as a top biotech cluster was depicted by the survey as mostly bright, with a few emerging challenges. Though the region earns an overall B-plus grade from survey respondents, its ratings have dipped since last year in three qualitative measures: community and government support fell to a B-minus from a B; access to workforce housing declined to a D-plus from a C-minus; and commuting fell to a C-plus from a B.
Though the northern Peninsula was “once the clear leader in the survey, other markets are becoming equal or more competitive,” the survey concluded.
One is San Francisco, where survey participants gave the city a B-plus for access to business services and an A-minus in access to academic services.
“It’s shaping up to be a very viable market,” Davis said.
“If you build it, they will come. There’s a demand for new building stock.”
The city only drew a C for its project review or “entitlement” process — same as last year — and a B-minus for community and government support of the industry, down from a B in 2007. But San Francisco should fare better over time as its life-sci industry grows, Werner said.
San Francisco commands the second-highest lab-R&D rents in the Bay Area: Asking rents are $2.62 psf in large part due to the completion of one lab building and the marketing of two others over the past year at the Mission Bay campus being developed by Alexandria Real Estate Equities.
“The long-term outlook is very favorable, because you’ve got the ability to add quite a bit of supply with Alexandria’s Mission Bay project [and its] 2 million square feet of space,” Werner said.
Another reason for optimism about San Francisco, he and Davis said: The proximity to UCSF has drawn to Mission Bay not only institutions like the J. David Gladstone Institutes, but also pharma giants like Merck, which moved in by acquiring tenant Sirna Therapeutics; and Pfizer, which signed a 15-year lease over the summer for 100,000 square feet, plus an option for an additional 50,000 square feet, at Mission Bay’s third building.
Pfizer will relocate there its Biotherapeutics and Bioinnovation Center, now based in a 106,000-square-foot space in South San Francisco within the HCP-owned Britannia Pointe Grand Business Park.
Other markets becoming more competitive include the north Silicon Valley and the mid-Peninsula, where asking rents have slid over last year and remain low enough to draw companies seeking lower space costs than in and near San Francisco.
The northern Silicon Valley, which covers Menlo Park, Mountain View, and Palo Alto, saw asking rents dip 14 percent to $2.47 psf from $2.86 psf a year ago. Meantime, average asking rents in mid-Peninsula, which includes Foster City, Redwood City, and San Mateo, have declined 15 percent to $2.16 psf from $2.55 psf in ’07.
“We’re not exactly sure why that occurred, but we think it’s because the building stock is a little bit older [than other sub-markets], and there was a large amount of supply that was converted recently,” Werner said.
The mid-Peninsula has seen the largest influx of life-sciences companies from out of the sub-market over the past year, Davis said — with 10 of the 20 companies that expanded in the sub-market arriving from elsewhere.
“People are beginning to realize that this is kind of a big spillover market, a good alternative to the [northern] Peninsula,” he said.
The northern Silicon Valley is home to Stanford University, which along with the University of California’s Berkeley and San Francisco campuses account for most of the Bay Area’s startups. The market had the highest percentage of mezzanine companies than other Bay Area submarkets.
Stanford is a national leader in spinning out companies that retain affiliations with the university. According to an Association of University Technology Managers report released last year, Stanford finished the year ending June 30, 2006, with 109 executed licenses and options, 1,293 cumulative active licenses for technologies, seven startups, 518 invention disclosures, 118 US patents issued for technologies developed within the university, 541 new patent applications, and a total $61.3 million in license income.
Because of the percentage of companies tied to Stanford through research affiliations in each sub-market, the university is a dominant Bay Area real-estate player. While a 32-percent plurality of life-sci companies in the city of San Francisco are tied to UC San Francisco, Stanford accounted for pluralities of affiliates in three other sub-markets, ranging from 31 percent in the mid-Peninsula to 48 percent in the northern Silicon Valley.
Stanford tied UC Berkeley with 22 percent in East Bay North, which covers Berkeley, Emeryville, and Oakland. However, UC Berkeley accounted for a 29-percent plurality of affiliates in East Bay South, which takes in Fremont and Hayward.
“We always assumed that the companies that located in South San Francisco or San Francisco were affiliated with UCSF, and those in the Peninsula with Berkeley, and those in the East Bay with [UC] Berkeley. What we’re finding is that’s not really true,” Werner said during the presentation.
The stream of mostly Stanford-linked companies has helped contain the past-year increase in the sub-market’s vacancy rate, which crept up from 8 to the most recent 9 percent. Over the coming year, however, the vacancy rate for the sub-market should rise if Roche vacates its 1 million square feet at the Stanford Research Park in Palo Alto, Calif., as part of a deal to buy Genentech, Davis said during a Q&A session following his presentation.
Vacancy rates in the mid-Peninsula remained at 18 percent, the same as in 2007, and plunged in the two East Bay sub-markets: East Bay North fell to 5 percent from 12, while East Bay South has fallen by half to 23 percent from 46 in the past year.
East Bay South’s high vacancy rate reflects in part the arrival on the market of the 1.4-million-square-foot, 10-building Sun Microsystems campus in Newark. BioMed Realty Trust of San Diego acquired the campus for about $214 million in 2006 and has renamed it Pacific Research Center as it moves to reposition the property for a mix of life-sci and other high-tech uses.
A key reason for the falling vacancy rates in both East Bay sub-markets, Davis and Werner said, is the bargains they offer tenant companies compared with the western Bay Area sub-markets. East Bay North offers an average asking rent of $2.08 psf, down from $2.50 psf in the previous survey; while East Bay South largely held its own with an average asking rent of $1.50 psf, down three cents from a year ago.
The two regions are dominated by older industrial buildings converted to life-sci uses years ago at cheap rents. But the East Bay North also has new lab space completed, with more potentially to be developed.
Wareham Development, for example, last year completed the $150 million, approximately 245,000-square-foot EmeryStation East in Emeryville. The building is 90-percent leased to tenants that include the Joint BioEnergy Institute, a six-institution partnership led by Lawrence Berkeley National Laboratory that occupies 65,000 square feet; and Amyris Biotechnologies, a producer of biofuels and the malaria drug artemisinin. Amyris took another 21,000 square feet in August, adding to its original lease of 70,000 square feet there.
“If you build it, they will come. There’s a demand for new building stock,” Werner said.
But with rents of more than $3 psf, Werner said, the demand for new space being addressed by Wareham carries with it another consequence: “There were a lot of companies that have left Emeryville and Berkeley, and moved to Alameda, and it was primarily pricing driven.”
Wareham, which owns some 4 million square feet of life-sci space on the East Bay, half of it R&D and lab space, is now pursuing approvals for two additional projects: A $50 million, 85,000-square-foot building and a $150 million, 150,000-square-foot building.
One factor that continues to dampen demand for space in the East Bay North, Werner said, is the presence of incubator space for startups at the University of California, Berkeley. Companies spinning out of UC Berkeley are more likely to stay on campus before pursuing lease deals for space in the region than startups from Stanford or UCSF, he said.
The survey covered 289 properties totaling 13.2 million square feet of life-sci space, occupied by companies with a combined 24,588 employees.