San Diego’s economy witnessed moderate growth in 2023, with a particular emphasis on the life sciences sector, which continued to be a significant driver of the region’s prosperity despite broader economic headwinds, according to a recent Marketbeat San Diego Life Sciences Q4 2023 reports by Cushman & Wakefield.
The city’s total nonfarm employment saw an increase of 21,900 jobs or 1.4 percent year-over-year (YOY) from November 2022 to November 2023, with the private education and health services sector leading the way by adding 10,300 jobs (+4.4 percent YOY). Following closely, the leisure and hospitality sector also showed robust growth, adding 9,900 jobs (+4.9 percent YOY). However, the professional and business industry faced challenges, shrinking by 6,600 jobs (-2.3 percent YOY).
Despite these gains, the monthly unemployment rate in San Diego increased from 3.3 percent last year to 4.2 percent, currently 20 basis points above the quarterly average of 4 percent. Yet, the recovery from the substantial nonfarm job losses experienced between March and April 2020 has been notably successful, with 325,800 jobs fully recovered by November 2023.
Life Sciences: A Pillar of San Diego’s Economy
The life sciences industry remains a cornerstone of San Diego’s economic landscape, employing 77,770 direct employees across 2,080 establishments, marking an 8 percent increase YOY. Biotechnology and research and training are the largest employment sectors within life sciences, showcasing significant annual employment growth. The average wage for a life sciences worker in the county is an impressive $144,000, reflecting the high value and impact of this sector on the local economy.
In terms of funding, San Diego organizations received over $1.2 billion from the National Institutes of Health in 2022, alongside $117 million from the National Science Foundation. The overall economic impact of the life sciences sector is profound, generating $36.6 billion in Gross Regional Product (GRP) and $57.4 billion in total output.
Supply, Demand, and Tenant Trends in Life Sciences Real Estate
The real estate market for life sciences in San Diego has faced some fluctuations. The overall life sciences vacancy rate stood at 12.4 percent at the end of the fourth quarter of 2023, with a notable increase in both sublease and direct vacancy rates. Despite over 1.6 million square feet being delivered through life sciences conversions and new construction in 2023, tenant move-outs led to negative absorption in core submarkets.
Direct space availability has significantly increased, particularly in traditional life sciences submarkets, with countywide overall asking rent rising by 2.4 percent QOQ and 11.1 percent YOY to $5.94 per square foot on a monthly triple net basis in Q4 2023. However, the abundance of sublease space threatens to put downward pressure on rents.
Future Inventory and Outlook
Nearly 4.6 million square feet of new developments are under construction, with a mix of speculative and build-to-suit projects. Despite challenges such as a decline in venture capital investment and layoffs from large life sciences users, the sector continues to show resilience. The demand for chemistry space and fully built, spec spaces for occupancy are rising, which is expected to contribute positively to demand.
Venture capital investment in the life sciences sector decreased slightly in Q4 2023 but remains above early 2022 levels. The abundance of sublease space will likely influence asking rents and temper the need for new market development. However, the ongoing demand for specialized life sciences spaces hints at a cautiously optimistic outlook for the sector in San Diego.
In recent leasing activities across San Diego’s property submarkets, Sorrento Mesa witnessed a new lease with Velia occupying 31,543 square feet at 10075 Barnes Canyon Rd., representing the largest new lease among the recorded transactions. Del Mar Heights and Torrey Pines also saw new leases with Architect Therapeutics and Contineum Therapeutics securing 29,734 and 24,695 square feet, respectively, at 11202 El Camino Real and 3565 General Atomics Ct. Additionally, Mindera Health took down 19,504 square feet in Vista at 1221 Liberty, and IAVI leased 17,006 square feet in Eastgate at 4570 Executive Dr.
On the investment sales side, significant transactions were made in the Rancho Bernardo and Sorrento Valley submarkets. Montana Avenue Capital Partners sold to Dollinger Properties the properties at 16981 Via Tazon and 11501 Rancho Bernardo Road in Rancho Bernardo, totaling 87,519 square feet, for $30.8 million, translating to $352 per square foot. In Sorrento Valley, Alexandria Real Estate Equities engaged in two notable transactions; the first involved selling 43,530 square feet at 11065-11075 Roselle Street to WP Carey for $14.9 million, or $342 per square foot, and the second was the sales of 40,129 square feet at 11025-11035 Roselle Street to Phase 3 Real Estate Partners for $9.5 million, equating to $237 per square foot.
Development within San Diego’s life science sector continues with a number of notable properties underway at the moment. IQHQ has the largest property under development, RaDD, in San Diego’s Downtown, boasting 1,347,425 square feet, but it has yet to announce a tenant. In Sorrento Mesa, the Pacific Mesa property, encompassing 471,000 square feet, is under development by Harrison Street and Sterling Bay, also awaiting tenant occupancy. Campus Point is the only development with a major tenant, Bristol Myers Squibb, which plans to occupy 426,927 square feet in the project developed by Alexandria Real Estate Equities. Additionally, Stockdale Capital Partners’ The Campus at Horton, another significant Downtown property, plans to offer 371,683 square feet but is currently without a tenant.
