REAL ESTATE NEWS

San Diego’s Q3 gross life sciences leasing increased for the third consecutive quarter, totaling 703,042 square feet, driven by one of the largest lab deals ever signed in the market by Novartis, reported JLL.

In fact, the drug company struck the market’s third biggest build-to-suit lease on record, signing for 466,598 square feet at Campus Point in Alexandria.

Venture capital funding there showed an uptick in Q3, rising for the third consecutive quarter to $563 million. Post-IPO offerings reached a record quarterly high of $5.2 billion.

Touring by interested parties for space under 15,000 square feet in San Diego increased in late September, with seven companies entering the market to expand.

JLL’s report said that built-out suites are expected to remain in high demand as tenants pursue short-term deals (24 to 36 months) to maintain maximum flexibility.

Other than Novartis' massive deal, no lease exceeded 50,000 SF, with the bulk of activity concentrated in small, short-term spec-suite deals, highlighting a distinct shift toward cash preservation and flexible commitments by tenants, Michelle Westoby, JLL senior vice president, told GlobeSt.com.

And Greg Bisconti, JLL executive managing director, said that one of the most surprising takeaways from the report is that net absorption turned positive for the first time in nearly a year.

“Yet, even with three straight quarters of improved leasing, availability still climbed to a record 31.2% in the core cluster, underscoring how much space continues to return to the market,” he told GlobeSt.

A clear trend has emerged: demand is increasingly concentrated around built-out, turnkey spec suites, with seven such deals completed this quarter alone.

“Speed and flexibility are trumping cost, and a secondary wave of high-quality space is filling the market,” Bisconti said.

“With venture boards directing companies to stretch cash, hiring and real estate growth have stalled. The scarcity of capital, coupled with continued questions about NIH and public funding, is prolonging the slowdown.

However, despite the headwinds, Bisconti believes that more life science investment momentum could pick up by the middle of next year, with interest rates expected to continue declining.

Tenants are Downsizing, Says Savills

Savills also came out with a third-quarter analysis on the life science sector in San Diego. It found that new lab supply is outpacing demand and pushing vacancy higher in key markets in the city.

While rents remain steady, many tenants are cutting costs by downsizing, sharing lab space or relocating to more affordable secondary markets. Funding challenges are also emerging, with NIH budgets beginning to tighten.

Vacancy rates have nearly doubled year-over-year to 29.2% with more than a fourth of life sciences space now sitting empty.

Under-construction activity has also slowed significantly. The amount totals one million square feet, down from 4.3 million square feet a year ago, representing a 77.7% decrease.

This is partly due to recent NIH funding cuts and mRNA verticals. Funding investments are expected to face further downward pressure.

Source: GlobeSt/ALM