NAIOP San Francisco Bay Area Chapter: Latest News

Recap of the Zoom-In Webinar: Life Science Panel

April 8, 2021 Filed under: Chapter

NAIOP SFBA’s March 25^th Zoom-in webinar explored the hot Bay Area Life Sciences Market with a panel of leading experts. Moderated by veteran broker Ben Paul, Executive Managing Director/Principal, Cushman & Wakefield, the discussion focused on the needs and wants of today's tenants, as well as the challenges and opportunities that this dynamic market presents.

Panelists included:
Allison Hoffmann,Principal, T3 Advisors
Tara Korlipara, Vice President, Blue Rise Ventures
Rebekah Studer, Leasing Manager, Phase3 Real Estate Partners

Here is a brief recap of key points:

Market Overview

The size of the national life science market is only about 200M square feet which is relatively small given all the press it is getting. The broader healthcare market was outpacing growth in many of the other sectors even before Covid.

The Bay Area has about 30M square feet and there is about 40M in Cambridge and about 20M in San Diego. The Bay Area’s 30M sf consists of the 9M in the East Bay and 1M under construction. Peninsula has 20-25M with 4M under construction and 1M available.

In terms of demand, the East Bay is running at about 500K – 1M sf (included all lab and food tech users), on the Peninsula there is about 3M sf of demand. Both markets had great absorption in 2020 and current demand is greater than it was pre-Covid. After being relatively non-existent in 2015-16, the venture capital and IPO market broke loose in 2017 causing an explosion in demand.

Q - What is your view on the state of the market?

Studer

Market has maintained bullish state / their conviction and that of their capital partners remains strong
There has been a bigger magnifying glass on the market worldwide
Has sparked a lot of interest from investors and the NIH
Groups are pivoting their science / starting new sciences
The evolution is driving demand for this type of real estate
Rents and costs are being driven up
Tenants need expertise to help navigate planning and building out suitable spaces

Korlipara

Signed 20 leases in Alameda from 5k – 120k sf / total of 400k sf since Covid started
Continuing to do multiple tours per week
Tenants who occupied a year ago already asking for expansion opportunities
Their team has done a really good job of listening to tenants and creating a life science ecosystem for them
In North San Jose attracting biotech interests as well as more traditional users / renewal energy and mobility tech

Hoffmann

Setting expectations is the hardest part / some tenants think Covid drove rates down
$16.8 B was spent in venture capital in 2020 on the industry
Money pumped in for growth, expansion and manufacturing
Increasing competition / lack of availability especially for space in 10k – 30k sf range
Unfortunately fundraising needs to align with lease execution and is often too late
Advises clients to start looking for space the second they have an idea about their growth / ideally a year out – can work with 9 months
The shorter the timeframe gets the more they rely on developers building spec space such as Phase3

Q - How do you capture the demand in the spec market?

Studer

Over the years doing conversions they have been able to pick and choose which features tenants need
If tenants want flexibility it’s a really big dollar sign
Smaller tenants focused on more science and have less admin staff
Larger companies are farther along in process and need more office / less lab space
Spec builds are a trigger for companies that need space in next 30 – 60 days
Quickest deal to date - lease signed in 2 weeks / space was available and ready to go

Korlipara

First tenant large company to sign in Alameda helped get them some traction with other tenants
Finding ways to fulfill their needs
Got a contract vivarium company which is an amenity for small tenants
Added an amenity center with fitness center and conference space

Q - How do you see tenants valuing amenities?

Hoffmann

Thinks the trend is here to stay
Sees space becoming more similar to the tech style
Once you tour them through they understand the difference in rates

Studer

Real estate is huge for talent attraction
For example, Genesis Marina
Right on the water front
Views
Bay trail with 500 miles of biking
Great fitness center

Korlipara

In Alameda they have an amenities center
Conference spaces
Food
Fitness Center
Thinks Alameda itself is an amenity
Parking
Walking path
Yacht club with kayaks and bikes
Programs such as Weds breakfast / Happy Hours

Q – Tell us about a newly funded company and how quickly they have grown.

Hoffmann

Allakos – started out with ten employees a few years ago / now projected to have over 200.
Put them in first space 5-6k sf
Within 18 months moved them into 25k sf
Now 18 months into their lease moving them into 100K sf space
The more funding these companies get the more money they have to support their clinical milestones
With each clinical milestone comes a different aspects of the business they need to grow

Q - Are you seeing companies doing cell gene therapy locally as opposed to internationally and looking for CGMP space (FDA regulated “Current Good Manufacturing Practice”)?

Hoffmann

Helps companies look at the best option in terms of cost, talent and proximity to their headquarters
Has a mixed response
Many groups want to stay local
Locating it in East Bay where rates are cheaper
Looking for industrial buildings that can easily be programed for these types of manufacturing spaces

Korlipara

Has tenants putting in small scale CGMP space / pilot plants
Cell and gene therapy and food tech tenants
Thinks it’s an exciting thing to get involved with

Q – Tell us about the conversion of 1900 Alameda de las Pulgas.

Studer

First lab space in the City of San Mateo
C-suite execs that live in San Mateo are drawn to it as they can bike to work
It’s a central point of access for getting to South SF and Palo Alto
Identified it as a six tenant building / Four smaller and two larger suites
Leased two of the smaller suites at the beginning of this year
Recently got TCO on top two floors
Seeing a lot of tour activity

Q - What are the key elements to converting an office building to life science use? How do you justify spending all that money with start-up companies?

Paul

Lab space is very predictable and reusable
Underwriting the repurposing of lab space at lower costs than office space
Tenants in 5k – 100k sf range need 45-50% office/lab ratio

Often a portion is biology lab / smaller portion chem lab and vivarium space

Capital markets are valuing the income without a big spread in the cap rates from start-ups to mature companies
Phase3’s Genesis Towers Project in So SF is a great example
It’s both a conversion and a spec deal
They built a new building as well
High level of amenities
Not a single credit tenant
Exited it at a massive number and low cap rate (4.7)

Q - Do tenants look at conversions differently than purpose built new construction?

Hoffmann

At the end of the day they just want a space that works for them and for their science
Given the tight market and if clients are financially able, advises clients to take on additional space if it makes sense, and sublease it

Q – What are you seeing in terms of diversity of demand?

Hoffmann