Despite a decrease in funding for life science properties across the country over the course of 2022, many of the nation’s leading life science markets have remained strong. As one of these markets, San Diego is seeing high levels of activity, with buildings continuing to be leased and increasingly low vacancies, a recent life science report from Cushman & Wakefield shows.
“The San Diego life sciences market is one of eight hub markets with a mature commercial real estate inventory and pipeline. With over 23 million square feet of institutional grade space, San Diego is the third largest market after the San Francisco Bay Area and Boston,” Sandy Romero, who authored the report, said. “A low overall vacancy rate of 5.3 percent means that demand for space has been strong. The only other hub market that has a vacancy rate lower than San Diego is Philadelphia with one percent vacancy. These qualities continue to make San Diego a very attractive market for occupiers and investors.”
According to the report, “Life Science Funding in View,” funding trends in San Diego largely matched that of the larger national life science market. Year-over-year funding in San Diego fell 55 percent, with $2.5 billion, or about seven percent, of overall venture capital funding.
This was largely due to the peak levels seen in 2021, which totaled nearly $50 billion across the nation. Funding to the sector in 2022 totaled $35.8 billion, down 28 percent from 2021, but check sizes grew in 2022. Regardless, at $20.1 million, the average deal size in 2022 was up 12 percent from 2021.
However, funding overall continues to be directed toward the largest life science markets, which includes San Diego. In fact, 66 percent of all venture capital funding in 2022 went to the San Francisco Bay Area with $12.6 billion in funding, Boston with $8.5 billion in funding and San Diego.
The second largest deal in the United States during 2022 was also recorded in San Diego, according to the report, with Resilience’s $625 million series D funding. Overall, funding for the top 30 deals in 2022 was higher than in 2021, totaling $10.4 billion compared to $10.2 billion during 2021.
“Capital will continue to be attracted to San Diego due to its deep talent pool and world class research institutions. However, in a more restrained funding environment, companies seeking capital will need to show more clinical trials success,” Romero said.
These levels of funding have boded well for the San Diego market with Cushman & Wakefield reporting a growing development pipeline which has more than doubled in the last three years and currently stands at nearly 32 million square feet as of the end of the fourth quarter of 2022.
However, the market does have its own challenges. Most of the space currently under construction is speculative, meaning a significant amount of space could enter the market vacant. Sublease space has also ticked up, rising 60 basis points year-over-year but still remaining relatively constrained at just 1.6 percent. Of the total 25.2 million square feet expected to be completed in San Diego over the next two years, only 28 percent has been pre-leased, Romero said.
Looking ahead, the market is expected to see similar trends continue, with a steady decline compared to the peak levels of activity in 2021. Over the next year, Romero predicts funding will continue to be funneled into higher performing companies and the markets they are located in.
“Funding in 2022 was primarily focused on later stage companies with 61 percent of total funding, $1.6 million, directed at this group of companies. With these additional funds, mature life sciences companies in San Diego will continue to move into later stages of planning. There will likely be an increase in M&A activity, some asset sales and some IPOs. We will likely also see some additional layoff announcements and companies closing as capital focuses on performing companies,” Romero said.