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With Moves Toward Urban Center, Life Sciences Aims To Become Downtown San Diego’s Lifeblood

San Diego has spent well over a decade as one of the nation’s top three hubs for the life sciences industry, but the sector — and the money that fuels it — has mostly been focused in submarkets to the north like La Jolla, University Towne Center and Torrey Pines.

“The lab inventory in San Diego is dwindling quickly and there’s a supply gap around the corner,” IQHQ President Tracy A. Murphy said in an email.

The tension between high demand and scarce supply has caused a few developers in the field to look at an area that has previously been untested: downtown San Diego. How that will affect the area is yet unknown, but it will only be a few short years before the first projects come online and the city finds out. 

A rendering of the life sciences campus IQHQ is building in downtown San Diego.

“You can’t put billions of dollars to work in a downtown and not have it change the environment,” Stockdale Capital Partners Managing Director Daniel Michaels said.

Stockdale is one of several companies with major investments planned for the downtown area that are “naturally going to bring more product, more amenities, and that’s going to draw more jobs,” Michaels said. 

Stockdale is redeveloping the Horton Plaza mall, a onetime centerpiece of downtown San Diego, into 700K SF of office that would be suited to life sciences and tech tenants and 300K SF of restaurants, retail and entertainment uses. Costs for the adaptive reuse project, Campus at Horton, including the $175M spent to buy the mall, are at $500M so far.

Stockdale is not the only one seeking to cater to life sciences tenants. Life sciences real estate investment firm IQHQ spent $230M to purchase Manchester Financial Group’s 99-year lease of roughly 8 acres of a waterfront site previously slated for a multi-use complex. IQHQ is already at work building a campus with life sciences space, offices and retail. When complete, it will take up 1.6M SF, spread out over five buildings. Project development costs for the San Diego Research and Development District, or RaDD, are expected to reach $1.5B, IQHQ has said

All that new professional space planned for one neighborhood might cause some residents to worry about traffic or rising rents, but some residents are happy to see more office workers in downtown because it signifies that many of the conveniences of downtown life would stick around.

A concern of downtown residents has been that, post-pandemic, office workers would not totally return to their downtown spots, and that “hollowing out” would lead downtown draws like restaurants and other amenities to close, Downtown San Diego Residents Association President Gary Smith said. 

Workers help downtown businesses stay afloat, and their absence due to the coronavirus pandemic has been felt. Overall office vacancy in downtown was 19% in Q4 2020, according to JLL. CBRE put downtown vacancy at 20% for the same period. 

“If people aren’t coming to work, that variety [among downtown businesses] is going to go away,” Smith said. 

A rendering of Stockdale Capital Partners' Campus at Horton reuse project.

Unlike most office work, the biotech work that happens in life sciences buildings has been deemed essential amid the coronavirus pandemic, and the work that is done in a lab can’t be done remotely, JLL Managing Director Grant Schoneman said. And unlike office projects that have fallen by the wayside or fallen through altogether, the IQHQ project, the Campus at Horton and other life sciences projects planned for downtown are moving forward after a banner year for the sector.

Ninety-two lease transactions for a total of over 2.2M SF were signed in the San Diego market during 2020, besting the previous record of 1.7M SF set in 2015, according to JLL’s Q4 report for San Diego life sciences. Rental rates across the San Diego market rose, with Q4 rents showing a year-over-year increase of 9%. Direct vacancy across the sector at the end of 2020 was 5.4%, the report’s authors wrote. 

These conditions are butting up against a number of factors that indicate a period of significant growth on the horizon both for the life sciences industry in San Diego and for the space they will need to accommodate that expansion.  

Some established companies are growing, others are moving into San Diego and setting up shop there, and “all of the activity is pushing on the supply of vacant lab space and is creating a tightening of available options in the market,” said Schoneman, who has worked in life sciences real estate in San Diego for more than a decade. The spillover of this use into the uncharted territory of downtown San Diego is a sign of that imbalance, he said. 

Schoeneman pointed to the amount of venture capital funding — “the engine that runs the life science market here,” as he put it — that companies with operations in San Diego secured in 2020 as an indicator that there is much more runway for companies to grow. San Diego companies locked down $1.9B in Q4 2020 alone, and VC funding for the area in 2020 equaled 2018's and 2019’s funding combined by JLL’s count. 

While that money is not explicitly tied to real estate-related spending, Schoneman said that, in the past, the trend has been that influxes of venture capital translate into more research programs, more employees, and more research and development, which often ends up meaning companies need more space.

Companies considering life sciences space in downtown won’t have to wait too long to find it. Stockdale’s reboot of Horton Plaza is expected to deliver in mid-2022. IQHQ’s waterfront campus was already entitled when the company purchased it. IQHQ broke ground not long after the sale was complete and expects its first phase, which will include four mid-rise buildings along Harbor Drive and all of the parking planned for the project, by summer 2023.