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San Diego’s Stalled Lab Conversions Create Industrial Space Crunch

San Diego’s established reputation as a life sciences hub, as well as its collection of low-rise business parks, made vast stretches of the smaller industrial market ripe for life sciences conversions, which led to substantial property sales. 

The purchase of these sites by life sciences players has caused a supply shortage in the industrial market, which has a 2.7% vacancy rate and no new projects proposed. BKM, a brokerage in the city’s industrial sector, estimates that proposed life sciences conversions have displaced 500-plus industrial tenants.

Downtown San Diego

Even as life sciences development has been in a holding pattern due to rising interest rates, a dried-up venture capital pipeline and supply growth, the unfinished industrial-to-lab trend is impacting the city’s industrial sector, making light industrial and small-bay sites hot commodities. 

“We’re prime targets for infill locations next to housing or other businesses. You can buy them basically on land value, tear down and go vertical,” BKM Managing Director of Acquisitions Brett Turner said. “The demand is absolutely there from an industrial base because of the displacement.” 

Over the last few years, planned megacampus conversions, which fit well with San Diego’s more suburbanized development patterns and wealth of office parks, lost favor. Big projects like Longfellow’s Sorrento Tech project in Sorrento Mesa hit pause. The market for conversions that weren’t immediately adjacent to other megacampus projects just “dried up,” JLL senior associate Taylor DeBerry said.  

Last June, BKM purchased Pacific Coast Industrial Center in Carlsbad, California, from Alexandria Real Estate Equities, which initially had a conversion play in mind. Alexandria had lowered the tenant base to roughly 25% occupancy before changing course, Turner said. When BKM bought the property for $44M, it was more than half-occupied. After a major rehab, it has proven popular with tenants.

Turner said the demand comes from multiple sources: tenants looking for space in a supply-constrained market, growing military and defense spending, and popularity in businesses with border trade implications due to reshoring.

Some of his recent tenants include a surfboard-maker, camera company GoPro and a firm making missile guidance systems. Most need space for light manufacturing and lack the geographical flexibility of distribution firms, which can relocate farther away as long as they are near a transit line. 

Turner said he foresees this boost to the industrial market lasting more than a year, already seeing a 25% rent premium. And even if life sciences developers sit and bank their conversion buys, looking to develop when the market turns, there isn't much space for industrial development in the land-constrained market.