San Diego’s Life Sciences Funding Rebounded as CRE Stats Struggle
Lab development significantly outpaces leasing
By Greg Cornfield January 25, 2024 11:00 am
reprints
The life sciences and biotech real estate market in the San Diego area — which will undoubtedly remain for the long term one of the nation’s top such hubs — experienced convoluted and conflicting results at the end of 2023.
Lab vacancy rates rose again despite positive market absorption, and asking rents declined even though there was increased leasing activity, according to JLL (JLL)’s fourth-quarter report released this week. Further, venture capital funding increased despite a challenging capital environment.
The life sciences market will continue to reset after a year facing major headwinds, which included the second-largest banking failure in U.S. history in Silicon Valley Bank, which caused owners and new investors to pause or slow transaction efforts. And rising interest rates forced life sciences transaction activity to decline precipitously.
San Diego life sciences companies raised $700 million in venture capital and seed funding in the fourth quarter, which is down from the $1 billion raised in the third quarter but higher than the $615 million in the second quarter. It’s also much higher than the $380 million-per-quarter average before the pandemic.
“While the total amount of funding is a reason for optimism, the overall sentiment from local companies is that fundraising is still extremely challenging right now,” JLL’s report read. “Larger funding rounds are going to fewer companies, substantiating the sentiment coming from the venture capital world – VCs are cautious with which companies they invest in but bullish on the ones they do.”
San Diego life sciences tenant demand appears to be rising as fourth-quarter gross leasing totaled 305,245 square feet. However, it was also the third straight quarter with declining asking rents for San Diego lab space, and the vacancy rate increased to 12.4 percent countywide even though there was 361,400 square feet of positive net absorption (as Neurocrine Biosciences moved into 230,000 square feet and Becton Dickinson moved into 220,000 square feet).
Vacancy is set to continue to rise as development significantly outpaces leasing demand, further favoring tenants. There is approximately 4.5 million square feet of lab space under construction throughout San Diego County, with only 31 percent of it pre-leased. Still, investors remain bullish on the fundamentals, and JLL expects more capital to be unlocked in 2024 and life sciences trade velocity to return due to a record amount of dry powder in venture capital and the Fed’s announcement of potential rate cuts.
Gregory Cornfield can be reached at gcornfield@commercialobserver.com.
