David Odmark of real estate brokerage BRE Commercial/NAI says Torrey Pines, by the end of 2004, could have over half a million square feet of office and biotech lab space available for lease. photo/alandeckerphoto.com)

Mergers, new property acquisitions, the hunt for funding sources, a potential real estate glut — 2004 could prove to be a challenging year for San Diego’s otherwise robust biosciences industry. Despite gloomy forecasts, cities are looking at different facets of the industry to attract companies to their industrial centers, and startup firms are continuing to eye the county as a place to put down roots.

“One thing that is very interesting is that Torrey Pines, by the end of 2004, could have over half a million square feet of office and biotech lab space available for lease,” says David Odmark of real estate brokerage BRE Commercial/NAI. “That’s largely due to Idec actually moving out to their UTC campus that’s supposed to be finished at the end of the year.”

Shifts in biotech real estate are changing the industry landscape.

More than 350,000 square feet of office and lab space is available at Torrey Pines, with an additional 200,000 square feet available by the end of the year, reports Odmark. An additional 150,000 square feet is available in the University Town Center area, and more than 200,000 square feet in Sorrento Valley and Sorrento Mesa, with 250,000 square feet coming on the market there by year’s end. The glut of biotech space in San Diego is perhaps the biggest issue to track this year, local experts say. Recent statistics for lease rates underscore that concern.

At the end of 2003, 1.3 million square feet of biotech space was vacant out of nearly 6 million square feet (136 properties) total, reports CoStar Group Inc., a commercial real estate tracking firm. That translates to a 22.6 percent vacancy rate.

Those numbers are in contrast to the second quarter of 2001, when the vacancy rate was 6 percent, with 339,004 vacant square feet out of nearly 5.6 million square feet (128 properties) total.

“We have a vacancy factor that we didn’t have before,” says Brent Jacobs, senior vice president of the Life Sciences Group at Burnham Real Estate Services. Jacobs pegs the region’s vacancy rate lower at 8 percent to 10 percent, “which is really not that high a number if you compare that to office buildings or commercial sites,” he says. “However, we’ve never had this before. We’ve never had this overhang of space. So it is a concern.”

Brent Jacobs, senior vice president of the Life Sciences Group at Burnham Real Estate Service, says the high vacancy rate is a concern. (photo/alandeckerphoto.com)

The numbers, however, don’t diminish biotech’s powerful presence.

When commercial, education and government operations are combined, San Diego has about 17 million square feet of wet laboratory space, compared with about 12 million square feet of space at the county’s regional shopping centers, Jacobs says. “This is phenomenal because this is an industry that’s essentially only about (here in San Diego) 25 or 30 years old.”

A lack of fresh venture capital is one reason smaller biotech firms have either left or are having a hard time getting started, says Shaun Burnett, a senior vice president with tenant representative Irving Hughes. “Venture capitalists have been more reluctant recently to hand out funding,” Burnett says.

“Money has been difficult for the last couple of years for these young companies to raise,” says Tom Mercer, a senior vice president at Colliers International. “There’s an awful lot of space available right now for the first time ever.”

Others say funding issues might be improving. Both Jacobs and Odmark expressed optimism that smaller startup biotech firms could make their way to San Diego, and the space is waiting for them. “The venture capital money is coming back into the smaller biotechs,” Odmark says. “You’re going to have a lot more smaller startups out in the market looking for space, but they’re not established companies and will be looking for short term and economically attractive facilities. They will help lease up some of the existing smaller vacancies.” Despite that potential, Odmark doesn’t see any real positive change for this year. “I see 2004 being as bad or worse than 2002 or 2003,” he says. By the end of 2004 vacancy rates for Biotech space could reach all time highs.

Jacobs is more optimistic. “There’s a lot of conservative optimism in the marketplace right now,” Jacobs says. “And it’s going to translate to funding for a lot of companies that we have not seen. So 2004 will be better, I’m sure, than 2003. Definitely the window is starting to open. Companies will get funded — the money would go into research — and they will need to expand into most likely larger or more specialized facilities. So the marketplace will be churning.”

Manufacturing Focus

Given the biotech hub at Torrey Pines and the glut of space for research and development, cities are targeting another segment of the industry — manufacturing.

Other cities in the county can offer incentives and space that San Diego can’t or won’t provide, says Odmark, whose clients at BRE include the 52,000-square-foot Sidney Kimmel Cancer Center.

“I think it’s completely prohibitive for anybody to do manufacturing in the main areas of UTC, Torrey Pines and Sorrento Mesa. The land prices are way too high,” Odmark says.

The City of San Diego hasn’t chosen to really pursue biotech manufacturing, he says. Lucrative tax credits and other incentives would be needed, “and they can’t compete with Oceanside or potentially Chula Vista land prices.”

Oceanside recently welcomed Biogen Idec’s new manufacturing facility, something seen as a biotech coup and perhaps the sign of a new trend. “Oceanside did it exactly right,” Odmark says, “helped coordinate the acquisition of very inexpensive land, provided huge tax incentives and assisted with waste lines which greatly helped alleviate costs for Idec to do their manufacturing up there.”

The biotech industry is entering adulthood, Jacobs notes. Companies are entering their late phases of clinical testing and will soon require manufacturing plants. “We have a lot of companies that are in the third phase of their clinical trials,” which means their products are close to being approved, Jacobs explains. “Some of them are going to have drugs that are going to be large blockbusters. It makes a lot of sense for them to keep that manufacturing close to their R&D.”

It’s very likely that manufacturing centers could develop in cities such as Poway, San Marcos and Chula Vista within five to 10 years, “and we already have Idec making a big splash in Oceanside,” says Jacobs, who represented Biogen Idec in that move.

“As far as land prices, Chula Vista and Otay Mesa could match what Oceanside did,” Odmark says. “When some of these companies start manufacturing, they’ll definitely look down there.”

That’s exactly what Chula Vista officials hope. In 2000, Chula Vista designated a high-tech and biotech zone in its EastLake business area, says Laurie Madigan, the city’s director of community development. The zone was designed to encourage biotechs by offering expedited permit and development processes and financing.

The results, however, weren’t exactly what the city expected. “The success we had was primarily not in the biotech area but in high-tech,” Madigan says. Based on the success of Biogen Idec in Oceanside, Chula Vista is redirecting its efforts toward biotech manufacturing rather than research and development.

“These plans include anything from 200 acres to 400 acres of a new technology park,” Madigan says. The area would be called the Regional Technology Park, established using the same types of incentive programs that were used for EastLake. Sites under consideration are adjacent to or near a site for a new university, which the city is working to attract, or near the new Highway 125 access, expected to be complete in three years.

“We obviously would love to have the research component move here,” says Gustavo Perez, community development specialist for Chula Vista. However, the city recognizes that most of the biotech industry is distributed in clusters already established in the county, he notes. The primary cluster is at Torrey Pines, surrounded by key research facilities such as UCSD, Scripps and Salk Institute.

Chula Vista found success in attracting its first biotech firm, but not where city officials expected. “It’s interesting. We have our first biotech firm in Chula Vista, but it didn’t come into the biotech zone,” Madigan says. Profil Institute for Metabolic Research, a German-based company, moved into the west side of the city, the older side, in July. The firm specializes in clinical trials for biopharmaceutical companies.

Profil moved to Chula Vista because of its close proximity to its U.S. clients, “many of the companies doing research work in the UTC area,” Madigan says. “So Profil is really our first true biotech firm.”

Looking Ahead

Larger, established biotechs entering the manufacturing phase and startup companies looking for their first breakthroughs could find 2004’s market advantageous. With the efforts of cities such as Chula Vista and Oceanside, manufacturers might find more reasons to call San Diego County home. “We’re strategically positioning ourselves for the manufacturing component” — more importantly, the manufacturing that has already gone through the research phase — says Perez about Chula Vista’s efforts.

For newer companies, the amount of available space at lower cost could be of great economic advantage to them, but at the expense of property owners.

“I think rates are definitely going to come down,” Odmark says. “A good thing for the biotech companies looking for space, but not for landlords and tenants trying to sublet lab space.”

“It makes it a tenants market, and it’s a very advantageous time to be out there,” Jacobs says. “Because it will turn.”