Layoffs And The Supply Glut Push Bay Area Life Sciences Vacancy Rate Above 20%

More than one-fifth of the Bay Area's life sciences facilities are vacant, according to new data from CBRE.

In the five submarkets that comprise the region’s once-booming life sciences sector, Oakland, the I-680 Corridor, Silicon Valley, the San Francisco Peninsula and the city of San Francisco, vacancy increased to 20.4% in Q1, according to CBRE Research.

The regionwide vacancy rate stood at 8.3% in the first quarter of 2023.

But at the region's occupancy peak in 2017, Bay Area life sciences properties were only 5% vacant, according to CBRE. 

The San Francisco Peninsula, the area’s biggest life sciences submarket, took the hardest hit in Q1. With a total of 19.2M SF of vacant space, vacancy jumped 4.6% on a quarterly basis to 22.2% in Q1. Rents, however, remained somewhat resilient, as the Peninsula posted the second-highest direct asking rents in the region at approximately $7 per SF on a triple-net basis.

A few factors are causing occupancy issues for owners of life sciences facilities, according to James Bennett, vice chairman at CBRE. Over the past two years, a handful of local biotech companies have laid off employees and are also subleasing space. This happened after a number of new large biotech projects already started construction. A total of nine projects added more than 7M SF to the life sciences market, and another 7.3M SF are under construction. 

“Increased demand during the pandemic dramatically raised land, construction and tenant improvement costs, so newer developers who entered the market in that time frame have a much higher cost basis, which makes it harder to lower rents,” Bennett told Bisnow. 

The cost basis for established developers is a lot lower, so they are better positioned in the long run to compete for tenants, Bennett said. Wareham Development and Alexandria Real Estate Equities, along with Biomed Realty, HealthPeak and Phase 3 Real Estate Partners, are among the longest-standing developers specializing in life sciences and biotech in the Bay Area. When they first started in the Bay Area, the cost to buy and develop properties was substantially lower than it is today.

An Alexandria property was the location of the largest lease signed on the Peninsula in Q1, a 143K SF renewal with drug company Insitro at its South San Francisco campus at 279 E. Grand Ave.

Joel Marcus, executive chairman and founder of Alexandria Real Estate Equities, expects the Bay Area life sciences sector to stabilize within the next two years. 

“Stabilization in the weakest submarket of South San Francisco happens over the next 24 months but some foolish developers who have no clue about life science will be negatively impacted for years to come,” Marcus told Bisnow via email. 

CBRE’s research team said promising employment numbers should help stabilize occupancy losses over the next nine months. “Life sciences employment has remained elevated which should help stabilize further occupancy losses through the balance of the year,” the CBRE Research report said. 

To learn more about the Bay Area's life sciences market, attend Bisnow's Bay Area Life Sciences Conference on June 20.