In South S.F., Bay Area’s Biotech Boomtown Snagged On Oversupply
Known as “the birthplace of biotechnology,” South San Francisco is coping with a worsening life sciences real estate market compared to last year’s already sluggish numbers.
Supply pinches that plagued biotech markets across the country are a thing of the past, with even South San Francisco struggling with inflated inventories and increased vacancies.
That led to a striking 27.4% vacancy rate for South San Francisco in the fourth quarter, up from 15.7% just a year ago, in an area that has been compared to Cambridge, Massachusetts, for its desirability. Today, biotech on the Peninsula remains one-third vacant, according to CBRE data.
The submarket is filled with brand-new trophy assets that will struggle to find tenants this year as the existing supply glut slowly gets filled amid a challenging time for landlords.
Phase 2 of Kilroy’s Oyster Point, which consists of 288K SF of new life sciences space, opened spec spaces in the fall, while additional buildings in the megaproject remain under construction.
Spur, a 335K SF IQHQ project at 580 Dubuque Ave., is set to open in Q2, with CBRE reporting no preleasing as of mid-January. Southline, a 3M SF mixed-use project by Lane Partners with ample life sciences space, is under development. Major projects that have been entitled are on standby as developers try to wait out the downturn.
“South San Francisco remains slow, as we have predicted for a long time,” Alexandria Real Estate Equities Chairmen Joel Marcus said during the REIT’s January earnings call. “Kind of a reckless oversupply there by people who really didn't know what they were doing.”
This is a sharp turn for one of the most prestigious places on the Peninsula. In 2022, the submarket recorded a sub-3% vacancy, said Andrew McShea, Cresa director of life sciences research and analytics. Developers took any opportunity they could to build in South San Francisco and capture that demand.
That led to several new projects, planned and financed at the height of the life sciences boom, delivering during a lean time for leasing activity. McShea is tracking 1.25M SF of newly delivered product in South San Francisco last year, with another 1.2M SF under construction right now.
It doesn’t help that sublease space in the area, which is already built out and ready for startups, offers big cost and delivery speed benefits compared to a new building that requires tenant fit-outs. Savills found that sublease volume under 15K SF surged in Q4 as new companies sought cheaper options to expand their footprints.
“[South San Francisco] developers thought they could match the demand to fill their new product and purchased land at a premium, but with the timing in the market, suddenly there’s all these buildings under construction at the same time, and construction costs are rising substantially,” McShea said. “They’ve been putting a lot of money into them.”
Cresa’s rundown of Q4’s largest transactions in the San Francisco region found five of the top 10 signed leases were for properties in South San Francisco, notably a 205K SF lease by Cellares. But that deal backfilled Amgen’s facilities at 1100 and 1120 Veterans Blvd. and represented a relocation within Healthpeak’s portfolio. Tenants took only 178K SF more than they vacated in the submarket, which also recorded no sales transactions.
“These landlords have built these high-valuation projects and promised certain returns, so they can’t afford to reduce the base rental rate, because what if they want to sell 10 years down the road?” McShea said. “Revenues come from base rental rates. So they are extremely willing to stretch things like free rent and tenant allowances.”
