Tenants are searching for about 900K SF of life sciences space in San Diego, the No. 3 market in the country for the biotech industry. That number might sound high, but it represents just half of where things were a year ago, when firms sought 1.8M SF. In 2021, there was a scramble for 3.5M SF, according to Colliers Senior Vice President Steve Holland.

The recent stats on San Diego life sciences tell a somewhat sad story for landlords and developers. Leasing during the fourth quarter of 2022 and first quarter of 2023 was the slowest it has been in the region since 2013, said Chad Urie, JLL’s San Diego executive managing director.

Just a few years ago, lab demand in the city and region was “insatiable.” San Diego’s life sciences sector, built around a constellation of top research centers and pharma R&D centers, many with long-term expansion plans, was flooded with funding for early stage innovations.

Now, during a period of belt-tightening, startups are cost-conscious and worried about their runways, and cutting their space commitments. Holland predicts the market will see $2.2B in venture capital money and $1.2B in NIH funding; respectable numbers, but a fall from the 2021 peak.

But there’s widespread sentiment that San Diego’s positioned well. JLL’s Urie said the recent “freeze” in leasing is ending, and he’s expecting demand to increase. The challenge may be filling up all the space set to hit the market; 4.8M SF is in the pipeline right now, Urie added, and even rising demand may not quite make up the difference.

As Holland pointed out, rents rose 35% between 2020 and 2021, a level that simply wasn’t sustainable. While decreasing activity has been tough on landlords and developers, it is giving new and young startups more opportunities to be in San Diego.

“We're still seeing pretty good tenant activity, approaching pre-Covid levels,” Sterling Bay Managing Principal Rodney Richerson said. “As a life science developer, of course you wish it was 12 months ago. But we’re seeing a lot of companies sidelined nine months ago going back to their board and getting their runways extended.”

Recently, Alexandria Life Science Equities sold its 11119 North Torrey Pines Road property, a relatively small development located amid competitor’s properties. Richerson said that the sale, which netted Alexandria $86M and a hefty profit, was a healthy sign for the overall market, with property changing hands at a price near the top of the market.

With new supply and the recent trend toward subleasing, the velocity may shift back to the core markets, as opposed to pioneering developments downtown. IQHQ’s waterfront Research and Development District, or RaDD, offering 1.7M SF, as well Stockdale Partner’s adaptive reuse of the Horton Plaza Mall, are both large-scale downtown lab and life sciences projects, aiming to take advantage of growing need and a new trolley line connecting researchers with downtown. In today’s environment, these projects may take longer than expected to lease out.

“There’s a lot of comfort with the core markets, like Torrey Pines, Sorrento Mesa and UTC,” Urie said. “There are people who are going to say, here’s my opportunity to be in the core markets again.”

Sterling Bay plans to deliver Pacific Center, a 500K SF project in Sorrento Mesa, in the fourth quarter of 2024. Richerson believes that will be optimal timing, hitting the market just as he projects the recent slowdown has reversed itself.

Holland feels the market will still see sagging demand for the next year, but 2023 will remain a challenging market. But if market leaders like San Diego are having a rougher time, he feels growing second-tier life sciences markets will face challenges growing and gaining momentum.

“San Diego is the darling life science cluster,” Holland said. “Long-term, it’s a dynamic ecosystem.”