Tepid Life-Sciences Sector Gives Way to Booming Tech
Submitted December 12, 2011, 11:31 PM
Rapidly growing information-technology companies are competing and winning against the less-robust biotech and life-science sectors for premium real estate in the Bay Area and elsewhere.
The trend is epitomized by the Salesforce.com decision last year to buy 14 acres in San Francisco’s Mission Bay for its new headquarters. But tech companies’ push into life science’s domain in no way stops there.
But executives with Alexandria Real Estate Equities Inc. told analysts on their most recent conference call that the competition between life-science companies and tech companies for the best space remains in full swing. The driver is the search for talent.
A not-quite 212,000 square-foot empty building at 499 Illinois St. in Mission Bay that Alexandria acquired this spring is now being eyeballed by a “very strong technology company,” Alexandria’s Stephen Richardson told analysts. “They’re closely evaluating 499 as an alternative. We do expect fuller tours with their teams and advisers during the next month or so.”
Alexandria is also getting interest in the space from another “emerging-stage technology company,” he said, as well as two institutional quality life-science organizations.
Richardson is Alexandria’s chief operating officer and regional market director in San Francisco.
Meanwhile, in Seattle, another life-sciences hub where Alexandria does business, the University of Washington has begun development of 450,000 square feet of life-science space in the same neighborhood where Amazon.com is expanding, Richardson said. “As we have seen in our other core cluster markets, the life-science and technology companies are converging with one another in the absolute best locations to attract the highest-quality talent possible,” he said.
Alexandria acquired 409 Illinois St. and 499 Illinois St. in Mission Bay for $293 million in April. 409 Illinois, which has roughly 242,000 square feet, was 97 percent leased to a life-science company through November 2023.
Other examples in the Bay Area where tech companies have taken life-science space in this cycle include VMware Inc.’s decision to take the former Roche campus in Stanford Research Park. That campus is approximately a million square feet. Google Inc. also considered the site.
These dynamics are one reason that the East Bay’s Wareham Development has undertaken the speculative construction of 99,000 square feet of research and development space geared for the biotech and clean-tech industries in Emeryville, a spokesperson for the company said in an email message.
The impacts of the global recession, increased competition and price pressures as well as skinny new-product pipelines are restructuring the biotech, life sciences and biopharmaceutical industries, observers said. James Bennett, a partner and senior vice president for brokerage Kidder Mathews in San Francisco who specializes in the life-science sector, says the current relationship between technology companies and life sciences is akin to the tortoise and the hare.
“The biotech industry is not in an explosive growth mode like the tech industry is now, so it is only natural that as space is in shorter supply, the tech industry will present itself,” he said.
In past cycles, he notes, space originally conceived for use by information technology companies has been taken for life-science purposes. He notes PDL Bio-Pharma Inc.‘s decision to move its corporate headquarters from Fremont to Redwood City’s Pacific Shores Center in the mid-2000s and Stanford University’s decision to acquire the former Excite@Home campus on U.S. 101. That four-building campus was remade by Stanford Hospital & Clinic into an academic medical outpatient center.
In 2012, the most interesting market to watch will be South San Francisco, Bennett said. The community boasts one of the region’s most established life-science hubs, but leasing by life-science companies in the market has not been robust. Alexandria said that at the end of the third quarter, it had a 14 percent vacancy rate in its South San Francisco properties compared to a 1 percent direct vacancy rate in Mission Bay, excluding a couple of small retail suites it has available.
BioMed Realty Trust, another major life-science property landlord in the Bay Area, said in its third quarter that it had signed a 10-year lease extension with Federal Express on 50,000 square feet it has in South San Francisco, suggesting the company does not expect demand from life-science firms to ramp up substantially anytime soon. Executives noted no rent growth in South San Francisco.
Tech companies have never liked South San Francisco, Bennett said. It is too far from Silicon Valley to recruit the talent that lives there, and tech companies that really want to be in San Francisco consider South San Francisco an unattractive stepchild. The question will be whether the rent pressures from the north and south become so intense that tech will overcome those barriers.
Right now, he said, he does not expect there to be much fallout in the life-sciences sector from the current state of affairs. He notes that the region has many times the square footage of real estate intended for information technology users as that intended for life-science users. Still, he said, if “rents continue to ramp up across the board including in pockets of space intended for biotech, and the space becomes so competitive that biotech has to pay higher rent, it has the potential for significant impact.”
So far, more than 35 life-science companies have landed in Mission Bay, Todd Rufo, director of business development in the San Francisco Office of Economic and Workforce Development, said in an email message. He and others also note that Mission Bay was never intended to house only life-science companies and that information-technology and other cutting-edge companies were also expected to locate there. Moreover, he said, there are lots of places in San Francisco outside of Mission Bay but nearby where life-sciences companies can still go.
