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How The Massive Life Sciences Bet By IQHQ, Bank OZK Became A Symbol For A Shifting Market

The fate of San Diego’s $1.6B Research and Development District has taken on new importance as a main contributor to the financial struggles of a regional bank that happens to be the nation’s largest construction lender

RaDD, a 1.7M SF multi-use life sciences project with no lab tenants months before its opening, was at one time heralded as a major economic driver for San Diego, with its developer securing $915M worth of financing from Bank OZK. Now the project is on a shortlist of reasons Citibank analysts lowered Bank OZK’s rating from “buy” to “sell.”

Developer IQHQ broke ground on the project in 2021, as life sciences real estate owners gasped for breath trying to keep up with tenant demand. RaDD’s struggles and the ripple effects of those challenges show how quickly developments can go from transformational to symbols of rapid shifts in the market.

“Real estate is inelastic,” Newmark Executive Director John Hundley said. “You can't snap your fingers and have it delivered. It takes a long process. I think we are experiencing the inelasticity of real estate in that some of these larger projects downtown are delivering, and the marketplace has changed dramatically since they were originally conceived.”

The Research and Development District under construction in downtown San Diego in February 2023.

RaDD also represents a significant chunk of the new life sciences space downtown, a new lab submarket struggling due to decreased demand. And it’s a substantial weight on IQHQ, the hometown developer that bet big on RaDD as a transformative project for downtown, the city and the region’s life sciences market. 

IQHQ, which faces substantial carry costs from its loan to build RaDD, is far from the only life sciences developer trying to fill a massive, ambitious project amid a down market. It is endemic across all three big biotech markets, although most analysts remain bullish on the long-term health of San Diego life sciences real estate. 

“Life sciences is still bigger today than it was five years ago, by a significant margin, and the downtown population is also steadily growing every year,” Downtown Community Planning Council Executive Chair Manny Rodriguez said. “I don’t think they were really in over their heads. But you know, this is a major development, and things change.”

The decision to not only bet big in a relatively untested submarket but also to develop the entire project in one go rather than in phases makes RaDD a much more difficult development to lease. There was 5.4M SF of new development in San Diego, including ample Class-A, first-generation lab space, coming to the market through 2025, according to JLL, offering lots of options for firms seeking new lab space. IQHQ is also required to maintain a public park on-site

IQHQ declined multiple requests to comment for this story, including specific questions about its opening date, leasing outlook or a list of signed leases.

A Bold Bet On Downtown

RaDD has taken shape on U.S. Navy land on the San Diego Bay that has been a development target for decades. Local developer Doug Manchester signed a 99-year lease on the site, making a deal with the Navy to obtain the development rights in exchange for the construction of a new regional Navy headquarters

Financing challenges stood in the way of an envisioned 3M SF Manchester Pacific Gateway. Manchester sold the development rights of five blocks of this site to IQHQ in late 2020 for $230M. IQHQ, which was founded in 2019 under the name Creative Science Properties with a team that included BioMed Realty Trust founder Alan Gold, was basically “flipping a property that was arguably a flop,” The San Diego Union-Tribune reported at the time.

“The goal for downtown was to become both a residential and jobs hub,” Rodriguez told Bisnow.

To this day, much of the life sciences real estate in San Diego tends to be more office park or campus-style sites that aren’t in walkable urban neighborhoods, so building a massive site downtown would attract recent college grads and talent looking for a different lifestyle. The number of downtown residents working in the life sciences industry has more than tripled over the past two decades, according to San Diego Urban Division Deputy Director Brian Schoenfisch. 

Rodriguez said the city has been pushing development downtown and along the waterfront for years via density bonuses and code changes. 

RaDD would be one of several downtown waterfront projects set to revive the city’s core.

IQHQ broke ground on the eight-football-field-sized project during a period of exceptionally high demand. In 2021, tenants in the region sought 3.5M SF of lab space, according to Colliers. By that point, IQHQ had raised $2.6B to develop lab space. Real estate analyst Gary London told the Union-Tribune that RaDD “represents a huge presence, and it will be viewed as the anchor of the west side of downtown.”

“It almost can’t be viewed as anything else,” he said.

IQHQ's move to develop the space was indicative of the company's focus on going against the grain in its decision-making.

“We talk a lot about the behavior of sheep around here. People tend to do what everyone else is doing,” IQHQ President Tracy Murphy said in an interview with the Union-Tribune shortly after construction started. “To our credit, although it’s also riskier, we’ve done something a little different.”

“Was it ambitious? Absolutely,” Hundley said. “It's a gigantic project. They, as developers, aligned with the ambitious, visionary scientists who they're trying to entice.”

To finish the project, IQHQ turned to Bank OZK in 2022 for a construction loan. The $915M loan matures in August 2026, and as of May 29, $555M has been funded, with the other $360M mostly designated for tenant improvements and leasing commissions. 

By late 2022, six of the 11 cranes in downtown San Diego sat on the RaDD site.

News of the struggles facing RaDD, which represents 2% of the bank’s total assets, has harmed Bank OZK’s reputation. Citigroup’s downgrade led to a 14% slide in the bank’s stock price later that day, a slide that has continued in recent weeks and led to further questions about the riskiness of Bank OZK’s model.

But the market has shifted since the development broke ground. The lab vacancy rate in San Diego, which was just 4% at the end of 2021, hit 16% by the end of 2023, according to Colliers data. While the first lab building downtown, Genesis, had attracted a handful of large tenants by the end of 2023, market conditions continued to deteriorate.  

A Downtown Boom Deferred

Now, with such a significant slowdown in demand and increased sublease availability — San Diego has 14% lab vacancy, according to CBRE, and the lowest absorption of any major market — getting a tenant to consider downtown becomes that much more challenging. 

There are two other downtown life sciences projects in play. Phase 3 Real Estate Partners’ Genesis project at 1155 Island Ave., a conversion of the Thomas Jefferson Law School that is half leased, signed AnaBios to 20K SF in March. But that building only measures 200K SF total. Horton Plaza is also in progress on a life sciences-focused redevelopment that has added 70K SF of speculative development to the roster of vacant space.

There are also larger challenges in the downtown market, which has a 27% office vacancy rate. According to the city, there is significant activity. More than 1.8M SF of office space is under construction, with another 300K SF in the permitting process, along with approximately 500K SF of retail space and more than 3,000 housing units under construction, with another 3,700 in the permit phase. But recent months have seen challenging signs for commercial property. 

Earlier this year, hotel developer J Street Space, which spent $56M on Tower 180, a 25-story skyscraper initially meant for office tenants, announced plans to spend $140M to convert it into a hotel and residential project.

Earlier this month, public housing developer Chelsea Investment Corp. entered exclusive negotiations for a plot on Seventh and Market that was initially going to be a Ritz-Carlton but will potentially be turned into 400 low-income housing units. The Kilroy East Village project, an 840K SF office development, remains stalled, while the Manchester group signaled in January it was slowing its own plans for a massive waterfront hotel, citing challenging financial markets

“They are making moves to get more people downtown,” said local real estate agent David Spiewak, a frequent vlogger who covers changes in the downtown neighborhood. “The hype is bigger than the reality of what’s going on. The retail spaces are filling up, but when it comes to larger office space, it’s a lot slower.” 

That said, there are positive signs for San Diego life sciences real estate. Venture capital raises totaled $1.4B in the first quarter, while demand came in at 1.7M SF, according to CBRE, proportionally much better than markets such as Boston and San Francisco. Analysts suggest it is the strongest of the big three, with lots of recent activity from Big Pharma.

“Largely speaking, the long-term legs are good. There is absorption that will be had in the marketplace. It’s just a matter of time,” Colliers Research Director Jeffrey Myers said. “There is demand to be had over time.”

According to Bank OZK, several recent retail leases at RaDD have been signed, and “management is confident in the project based on the excellent location, high quality construction, experienced sponsorship and its strong capital partners.”

Schoenfisch remains bullish on the submarket, arguing that “downtown San Diego is well situated for significant growth over the next decade, with transformational development projects under construction and in the planning stages.”

The question will ultimately be how quickly RaDD can lease up. IQHQ faces headwinds, including several other large projects entering the market in the coming months. Two are in the Boston area: the Fenway Center, a 1M SF development expected in 2026, and a 750K SF Alewife Park project coming online in early 2025.