Half-Empty: San Diego County’s Life Sciences Market Feels National Slowdown

The Trump administration’s proposed budget would slash basic federal research funding by 34 percent — threatening the early-stage innovation pipelines that typically drive demand for lab space. This adds to already elevated construction and borrowing costs, forcing many developers and landlords to recalibrate — or to pivot more aggressively toward private capital.

At the same time, lab leasing across the country continues to slow. JLL reports the U.S. lab market needs 20 million to 25 million square feet of net absorption — or a similar cut in supply — to reach equilibrium. 

For a life sciences hub like San Diego County — where lab users anchor a large part of the economy — these seismic shifts are leaving major developments empty and creating ripple effects across the region. The San Diego market contributed more than $54.1 billion in economic output in 2024 — less than but similar to in 2023 — and employed 167,000 people, according to Biocom California, the state’s life sciences industry association. That hub is one of the country’s three biggest, too, along with the San Francisco Bay Area and Greater Boston.

“It would take three times the uptake of space seen per year during the peak of the last cycle to reach equilibrium,” Maddie Holmes, senior research analyst for life sciences at JLL, said of the national picture. “The reduction in tenant demand across the U.S. suggests muted leasing volume growth for the rest of the year as the sector grapples with uncertain economic conditions.”

Speculative development has all but ground to a halt as developers scramble for tenants.

“Life sciences companies are taking a guarded approach to real estate decisions due to uncertainties in the economy, policies and the funding environment,” said Travis McCready, chair of JLL’s global life sciences advisory board. “While the pullback in public funding is great cause for concern and a supply shake-up is on the horizon, the desire to strengthen the supply chain, geopolitical factors, and concerns around patent and data security have all sparked strong interest in domestic pharma manufacturing.”

Greater San Diego’s availability rate for lab space nearly doubled in the past 12 months, climbing to 27.4 percent in the second quarter, according to a JLL report released July 9. More than 9.4 million square feet of life sciences space is now available.

“In 2021, we were at sub-5 percent overall [lab] availability,” said Tim Olson, managing director at JLL. “Now we’re approaching 20 percent and climbing. … We’re in a situation where we just have excess supply for a period of time, and it’s probably going to take a few years to work out of that. … You’re probably looking at three to five years before we get back down into that single-digit vacancy range.”

In other words, new lab development in San Diego is likely on pause for the foreseeable future.

“We won’t see any new lab development for quite a while,” Olson added. “Even if you had a strong market fundamentally, it’d be hard to finance new construction in today’s market.”

One key example: Stockdale Capital’s conversion of the former Westfield Horton Plaza mall — dubbed the Campus at Horton — is nearing completion with 770,000 square feet of newly redeveloped lab and tech space, and no tenant signed. 

A similar scenario played out last year when IQHQ opened its waterfront Research and Development District without a tenant. But, since then, the firm has secured two midsize leases, including one with the J. Craig Venter Institute, which will relocate its genomics team and advanced genome sequencing facility to the site. And leaders of the development firm told Commercial Observer IQHQ remains bullish on San Diego and its ability to attract talent.

“We have either signed or are at advanced negotiations with several additional retail leases that we plan to announce soon,” Ryan Shannon, executive vice president of finance for IQHQ, said in an email. “We have also seen an uptick in activity for both life science and office users at RaDD, and we are cautiously optimistic based on early data that suggests this trend should continue through the back half of 2025.

“Long-term, biotech will remain a highly important pillar of the San Diego economy and community, and also a key strategic market for IQHQ.”

Meanwhile, Alexandria Real Estate Equities — the largest lab landlord in the U.S. — has spent the past two years shedding billions of dollars in non-core assets to refocus on its mega-campuses. That included offloading the Costa Verde Center in San Diego’s UTC area, where it once planned to develop a biotech-focused mixed-use campus. (Alexandria’s executives declined to comment.)

Capital is clearly harder to come by. Venture funding for life sciences in San Diego dropped 56 percent over the past 12 months, as rising interest rates and geopolitical instability cooled investor confidence. The expected federal cuts could further chill capital flows.

“We peaked at $5.8 billion in [VC] funding — now we’re down to about $600 million year-to-date,” Olson said. “But, even if funding had stayed healthy, we still would’ve been oversupplied just because of how much new product was built.”

He added: “Historically, every million dollars raised results in about 224 square feet of leasing demand. So, if you’re raising that kind of capital, that’s going to result in tenants taking down space or expanding. It’s a huge contributor to the imbalance of supply we have now.”

Despite the financial squeeze, IQHQ’s Shannon said VC’s continue to invest in large check sizes with private companies that have proven data.

“Our core strategy remains intact (amid larger economic headwinds), but we are being disciplined and deliberate in our capital allocation decisions to ensure that we are building long-term value in our portfolio,” Shannon said.

The overabundance of life sciences space in San Diego hasn’t hamstrung the city’s office market, however. Compared to other California markets, San Diego’s office sector is smaller and healthier, with a 14.5 percent vacancy rate — among the lowest in the country. Downtown, however, is a different story, with vacancy north of 27 percent.

Still, only 168,000 square feet of office space is under construction, and it’s already fully pre-leased.

“Our office vacancy rate has been kept somewhat stable through COVID because of the influx of big tech,” Olson said.

Office investment has also surged — investment sales volume jumped 563 percent year-over-year to $730 million in the second quarter.

David McCullough, principal at McCullough Landscape Architecture, said Downtown San Diego has an opportunity to evolve amid the turbulence.

“I think downtown is finally growing up. We had a juvenile downtown for many years. It just went through its teens and it’s going into its maturity. We’re going to see our city turn into what I would call a 24-hour city, which is what really needs to happen.”

He pointed to the six-block Civic Center area — including Golden Hall arena — as a prime redevelopment opportunity. Initial plans for the area include new housing, stores, child care centers and entertainment venues.

“It’s a huge opportunity to create something that engages the community, whether that’s a cultural hub, housing or a mix of uses. We can’t leave it as a lifeless void in the heart of downtown.”

Though the market is under pressure, most stakeholders agree the life sciences sector will recover.

“We know it’s a cyclical industry. We’ve overbuilt. You work your way out of it. That’s just the normal pain that comes from a cycle,” Olson said. “There’ll be some other event that happens over the next three or five years that’s going to cause demand to pop back up. We don’t know what that is — but it’s just the cyclical nature of our economy.”

IQHQ’s Shannon agreed. “This is very much a correction period following one of the most significant biotech pullbacks in recent history. We are optimistic as the outlook for the life science sector remains incredibly strong, which will benefit long-term, fundamental investors in the space like IQHQ.”

Despite today’s headwinds, Olson remains optimistic about San Diego’s long-term position.

“This is not a market in distress,” he said. “It’s kind of a steady Eddie market. We don’t have the big swings you see in places like San Francisco or New York. Our recovery will take time, but the fundamentals are strong.”

Greg Cornfield can be reached at gcornfield@commercialobserver.com.