For the past several years, San Diego has been a growing hub for the life sciences industry, and the third quarter of 2021 proved to be no different. According to a San Diego third quarter life sciences report from Cushman & Wakefield, the sector is showing no signs of slowing down with leasing activity up and vacancies becoming increasingly difficult to find.
“The third quarter experienced roughly one million square feet of gross leasing activity, further driving down the future availability and vacancy rates across Central San Diego,” said Brian Starck, Vice Chairman with Cushman & Wakefield. “In order to keep pace with current and future demand, the market saw roughly $552 million of acquisition activity of life science product or for life science conversions in the third quarter, primarily in the Sorrento Mesa submarket in San Diego. Life Science leasing activity continues to outpace deliveries in which we continue to see speed to occupancy as the main driver for tenants in the market looking for space.”
According to the report, San Diego’s direct life sciences vacancy was 6.5 percent, which is a decrease of approximately 140 basis points from the previous quarter and 90 basis points from the third quarter of 2020. In total, life science tenants absorbed 339,521 square feet during the third quarter of 2021, marking the third consecutive quarter of positive net absorption and bringing the year-to-date total to 936,276 square feet.
With space becoming more limited, rental rates increased across the region by 5.32 percent to $4.05 per square foot. In the second quarter of 2021, rental rates were just $3.85 per square foot. According to Cushman & Wakefield, the University Towne Centre (UTC) submarket of San Diego has the highest average leasing rate at $4.50 per square foot. Torrey Pines and Sorrento Mesa follow closely behind, with landlords asking on average $4.24 per square foot per month.
“Trends are on par with the previous quarter, however near term availabilities continue to be leased quickly, which results in an increasing demand for space with very limited supply. Compared to the previous year, there has been a tremendous uptick in leasing velocity and venture capital raised which in turn has driven the price of real estate acquisitions and subsequent rental rates up at a faster pace than ever before,” Starck said.
The high rental rates correlate directly with the limited availability. According to the report, the lowest vacancies were recorded in the Torrey Pines and UTC submarkets. Torrey Pines reported a 1.8 percent availability rate, while UTC’s availability rate was just 0.1 percent, with only one suite available in the third quarter. As a result, tenants are beginning to move east to submarkets with higher availability. Sorrento Mesa, for instance, reported a 9.7 percent availability and Sorrento Valley reported a 9.8 percent availability rate. However, availability in these submarkets is also anticipated to drop in 2022, as tenants continue to take up the remaining availability.
Availability in Sorrento Mesa and Sorrento Valley are already being taken up by tenants, with both combined accounting for more than half of the new life sciences lease deals signed in the third quarter. Sorrento Mesa recorded the most leasing activity in the third quarter, with occupancy gains of more than 173,540 square feet, and Sorrento Valley reported more than 62,903 square feet leased. Torrey Pines also saw a large amount of leasing activity, with 95,416 square feet leased in the third quarter.
Large-scale leases were the main drivers behind the high levels of occupancy. For instance, in Sorrento Mesa, Sorrento Therapeutics committed to a 163,000 square-foot build-to-suit project, while simultaneously renewing a 210,744 square-foot lease for an additional Sorrento Mesa facility. In addition, Shoreline Biosciences (63,000 sf) and Biolinq leased 63,000 square feet and 39,000 square feet, respectively, at the Creekside development in Torrey Pines.
“Torrey Pines and UTC are essentially fully leased for the near term future which has pushed the majority of leasing activity to the Sorrento region as there are still developable sites in the delivery pipeline. There has been a major shift in the Del Mar Heights/56 Corridor as well as North County and Downtown, in which developers are working to deliver new life science product as quickly as possible to satisfy the current and future demand in the region,” Starck said.
While tenants push out to submarkets with more availability, developers also are racing to put more product on the market. However, inventory is going quickly with 34.8 percent of the 1.6 million square feet of under-construction life science product already pre-leased. Current demand is expected to continue outpacing supply as developers struggle to bring more developments online. Over the next several quarters, Cushman & Wakefield anticipates more developers to expand into non-traditional life-science markets with a focus on conversion projects rather than ground-up development.
“The life science market in San Diego has emerged as a national hub with Big Pharma’s continued commitment to the region, coupled with a burgeoning venture capital arm, seasoned executive leadership and UCSD’s STEM graduate success,” Starck said. “The fourth quarter is on pace for a record quarter in terms of leasing velocity and developers in the market are pushing to deliver product to satisfy the future demand from tenants in the region.”
