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As Rents Rise in the SF Suburbs, Survey Finds Bay Area Biotechs Are Migrating South

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SOUTH SAN FRANCISCO, CALIF. – Rising rents in the suburbs closest to San Francisco are prompting a growing number of life sciences companies to search for space in cheaper outlying areas further south, according to a just-released real estate survey of Bay Area biopharmaceutical professionals.
 
The northern Peninsula region — which includes communities such as South San Francisco — saw the highest rents in the region as of this past summer, and the southern East Bay section the lowest rents, according to results of the 2007 Bay Area Biotechnology Real Estate Survey released by BayBio, the region’s life sciences industry group, and Hitech Construction Management and Design of South San Francisco.
 
BayBio and Hitech released results from the survey Sept. 25 at the industry group’s GeneAcres 15 conference, held at the South San Francisco Conference Center. The study questioned 60 respondents on rents, workforce issues such as traffic and affordable housing, perceived community support for biotech, and their interest in searching for space.
 
The northern Silicon Valley, which includes San Jose, Calif., and nearby communities, showed the highest one-year increase in rent from last year, with survey respondents reporting a more than $1 per square foot or 56 percent jump in rent, to $2.86 per square foot from $1.83 per square foot. Biotech and other R&D users typically pay “triple net” rents in which tenants pay for utilities, taxes, and maintenance.
 
“Silicon Valley, when we first started, nobody liked it. We had no response down there. It was dead. And the fact that companies are trying to secure space down there, that’s something kind of novel,” said Douglas Davis, principal with Hitech.
 
“A lot of building stock that was down there was an older, 1970s, 1980s vintage, which was cheap but not very practical to convert over to biotechnology space. It was good for manufacturing, but wasn’t near the rest of biotech, near the Peninsula, so a lot of companies avoided it,” Davis said. “Now, with lease rates climbing along the Peninsula, a lot of companies seem to see they can get a lot for their money, and they can save a lot on rent.”
Also showing a significant increase was the mid-Peninsula section, which includes Foster City, Redwood City, San Carlos, San Mateo, and Stanford University and its home town of Palo Alto. The mid-Peninsula saw rents climb to $2.55 per square foot from $2.22 per square foot last year, a nearly 15 percent gain, according to the survey.
 
“Mid-Peninsula seems to be a new hot market,” Davis said.
 
The northern East Bay section, which includes Oakland and Alameda, also saw a double-digit rent gain, 11 percent, as rents increased to an average $2.50 from $2.25 per square foot, the report showed.
 
Those rents remain bargains compared with the $2.91 per square foot reported for the northern Peninsula, which includes South San Francisco. That rent actually dipped 4 percent from the $3.04 per square foot reported a year ago.
 
Davis said the northern Peninsula’s rent slide appears to reflect the arrival on the market of 1.5 million new square feet of biotech space now under construction. That space may take longer than anticipated to fill up: The neighboring city of San Francisco has 1.3 million square feet of its own new biotech space coming to market.
 
And in the northern Peninsula itself, a half-million additional square feet of space has hit the market in recent weeks, paced by the 365,000 square feet that Amgen placed on the sublease market for three South San Francisco properties [BioRegion News, Aug. 20] just days before announcing plans for cost-cutting and layoffs that the company detailed last week [See “Around the Regions” in this issue].
 
Yet the survey was conducted in July and early August, before Amgen announced its cutbacks. “We might be two months behind the curve,” Davis acknowledged, before adding the news would not likely have dramatically changed the survey results.
 
The overall suburban Bay Area rent calculated by the survey stayed all but flat this year compared to last, dipping by a penny to $2.21 per square foot. Dragging the overall regional rent down was the continued below-market average rents for properties in the southern East Bay section, even though it rose 4 percent to $1.53 per square foot from $1.47.
 
The rising rent trend jibes with the quarterly reports of the largest real estate brokerage doing deals in the Bay Area, CB Richard Ellis — though the firm has published generally higher “asking” rents sought by landlords for those areas.
 
For example, CBRE measured average asking rents of $2.61 per square foot for the entire Peninsula, based on a range from $1.35 per square foot in Belmont and San Carlos to $3.50 in South San Francisco. A year ago the Peninsula’s average asking rent was $2.18 per square foot with rents ranging from $1 per square foot in San Mateo to $3.25 per square foot in South San Francisco, according to CBRE.
 
Across San Francisco Bay, CBRE said, the East Bay (Oakland, Alameda) area inched up over the past year to 79 cents per square foot from 77 cents, with individual submarkets ranging from 60 cents per square foot in Newark to $1.40 per square foot in Emeryville.
                    
One leasing challenge in the East Bay is the 152,000 square feet in Newark vacated by Sun Microsystems. That space is being marketed to biotech users by owner BioMed Realty Trust, a San Diego real estate investment trust specializing in lab space.
 

“Silicon Valley, when we first started, nobody liked it. We had no response down there. It was dead. And the fact that companies are trying to secure space down there, that’s something kind of novel.”

Some audience members listening to Davis deliver the survey results expressed surprise at another result concerning rent: Startup companies reported paying only a penny less in rent per square foot than mature companies, $2.78 versus $2.79 per square foot, while mezzanine-financed companies deemed in between shelled out only $2.23 per square foot. He said mature companies were likelier to take newer and thus costlier space, while startups are charged about as high since they had yet to establish the strong credit background sought by landlords.
 
The northern Peninsula and mid-Peninsula tied for the highest number of companies relocating into sections of the Bay Area, with eight companies each. Six of the eight companies moving to the mid-Peninsula migrated there from northern Peninsula communities, the report showed.
 
Overall, 65 percent of respondents said they were searching for space, almost double the 38 percent reported in the 2006 survey. Twenty percent said their companies would dispose of their space in 2007, down from 23 percent last year.
 
“A lot of companies are looking for space. That was the biggest surprise. We got more response to that question this year than any other time in the survey’s three-year history,” Davis said.
 
More prospective tenants seeking space and more relocations were two of three indications that survey respondents, at least, are optimistic about their companies’ futures. Forty-seven percent of respondents said they expected their companies to grow up to 20 percent, followed by 35 percent who saw even higher growth, nine percent who foresaw no growth, and six percent who predicted negative growth.
 
“There is no doubt in my mind that all of the space coming online will get absorbed in the near term,” said Matthew Gardner, president of BayBio, addressing reporters minutes after the survey results were released. He said the survey itself was to be posted this week on his organization’s website.
 
Gardner said he expected most relocations to take place within the Bay Area region: “The next round of investments includes more signs that we’re seeing a massive concentrated effort [by biotechs] on furthering the current product pipeline. That depends on a certain amount of continuity, which means you won’t see radical shifts, at least in this next round of investments made.”
 
The northern East Bay section finished next highest with five relocating companies, followed by east Silicon Valley with four; San Francisco and north Silicon Valley with three apiece; and west Silicon Valley with two.
 
The 60 survey respondents were among 300 companies BayBio and Hitech contacted — 180 BayBio members and 120 non-members.
 
After his presentation, Davis told BioRegion News survey organizers are open to adding questions to the survey in future years — such as asking companies considering relocations to discuss why they wish to leave, and what contact if any have they had with area economic development professionals.
 
“That actually might be kind of a good question to ask in terms of, is there any influence that has come in from an [economic development agency],” Davis said in an interview. Nevertheless, he said, for now, “I think what we’re doing [is] to get a general ballpark picture of the market, in terms of measuring the overall health of the market — is it growing? Is it contracting? — or in terms of broad shifts. I think we’re good for that, and that’s really what we’re trying to present.”

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