Tiny Emeryville Becomes One Of The Hottest U.S. Life Sciences Clusters
Of the San Francisco Bay Area’s life sciences submarkets, the East Bay may be poised for the highest growth trajectory over the next several years.
Overall, the Bay Area’s life sciences sector has been booming throughout the coronavirus pandemic, with a positive net absorption of 1.73M SF in 2020 and a vacancy rate of 3.46% in Q4 2020, according to a report from Kidder Mathews.
In Alameda County, which includes the primary East Bay life sciences clusters in Emeryville and West Berkeley, Q4 vacancy was 3.32%. Leasing activity was the highest in the region at 384K SF, with rents ranging from $1.75 to $6 per SF. The county’s absorption led the Bay Area at 329K SF.
Soaring demand and extremely tight space availability have driven vacancy rates in the East Bay city of Emeryville close to zero, according to Newmark Vice Chairman and Head of Capital Markets Steven Golubchik. He predicts that the city is about nine to 12 months away from having a life sciences leasing market as hot as Kendall Square in East Cambridge, Massachusetts, in terms of rent growth, low vacancy and tenant demand as a percentage of overall inventory.
“Based on the existing stock of space, it's a 5-to-1 tenant demand-to-supply ratio,” Golubchick said. “Rents have grown from high-$4 net to mid-$6 net over the course of 18 months.”
The reasons for this trajectory are manifold. However, the foundation is based on Emeryville’s proximity to the University of California Berkeley and Lawrence Berkeley National Labs, allowing academic research to expand over the years into the private sector, primarily in the East Bay cities of Berkeley and Emeryville, Kidder Mathews Executive Vice President James Bennett said.
It is a similar story to the development of the S.F. Peninsula’s life sciences sector that evolved from research conducted at the University of California San Francisco and Stanford University. However, a significant difference between the East Bay and the Peninsula is the scale of the markets.
While the Emeryville-West Berkeley life sciences cluster has at most 2.7M SF, the Peninsula has about 11M SF, Golubchick estimated. There is also a stark difference in the proportion of tenant demand, he said, with East Bay demand at about 1M SF for a much smaller share of space. Meanwhile, the Peninsula demand at about 2M SF makes for a much healthier ratio, Golubchick said.
“The challenge with the Emeryville market has been that it doesn't have the available space to allow tenants to grow north of 150K-200K SF,” Golubchik said. “So as tenants get to that larger block in size, it's a challenge for them to find a home. So in theory, as a tenant grows and they go into clinical trials, they don't really have space to grow in the Emeryville-West Berkeley market.”
One of the East Bay life sciences submarket's unique characteristics is that the bioengineered food industry has taken root there in a fashion not seen in other places. Perfect Day, which invented nonanimal milk proteins, just upgraded from a 25K SF location to 115K SF. Eat Just, which develops plant-based alternatives to egg products, just took 100K SF in Alameda. Memphis Meats has also expanded its Berkeley footprint, according to Bennett.
“The bioengineered food is very much a part of the sector,” Bennett said. “The space needs of these companies is remarkably similar to traditional biotech when they are doing cell lines, and the discovery process requires the same type of laboratory. So for us, it's part and parcel of the life sciences industry.”
An influx of square footage is coming, led by BioMed Realty’s plan for an 800K SF life sciences campus in Emeryville, which Golubchick said is part of a robust pipeline of new construction over the next couple of years that should help the market mature.
“Right now, the market suffers from more demand than supply, and real estate can't snap [its] fingers and summon it up,” Wareham Development partner Geoffrey Sears said. “It takes years to produce, and so we welcome people to put more oars in the water to make the whole market grow more actively.”
The East Bay market's two attractive features are the greater availability of public transit and affordable housing compared to the Peninsula, which Sears said helps companies recruit and retain employees.
Wareham Development recently delivered two small life sciences projects in West Berkeley and has another planned for Emeryville, Sears said. He said that biotech tenants especially depend on landlords to help companies grow and support lab operations more than other commercial real estate uses. With the coronavirus pandemic rendering other sectors like office, retail and hospitality relatively weak, Sears said he has seen many in the industry take an interest in entering the life sciences development arena.
Linesight Project Director Gul Dusi has also seen increased interest in CRE companies entering the life sciences sector by repositioning older office buildings into lab or R&D spaces. However, the sector is overwhelmingly led by bio real estate specialists, she said.
“I see a very high success rate with the bio real estate companies because they go into targeted areas around these clusters,” Dusi said. “They know how to build an incubator space to attract new research and development. But a lot of these newcomers that are trying to do it, they're trying to mimic something that was done or they're trying to implement the square footage renovations costs that they used to do for an office repositioning. I don't see that they're going to be successful at all.”
In general, about 90% of buildings used for other purposes aren't suitable for lab conversions, Bennett said, whether it is because of structural limitations, a given building isn’t located near an existing life sciences cluster or the zoning won’t allow for it. Yet there still are many examples of conversions to life sciences product in the East Bay, he said, including a current conversion of three old industrial buildings in West Berkeley by SteelWave.
“We're seeing big institutional landlords, but we're also seeing smaller or undercapitalized landlords where they're hoping that if they slap a life science label on their building, it's going to get leased up very quickly,” Kidder Mathews Executive Vice President Rico Cheung said. “What makes a life science building a life science building is a landlord who has the ability to fund the capital improvements that the companies need. These other landlords that are just slapping life science labels on their buildings, they don't really have the capital to put into those buildings, and they're just hoping to capitalize on the market activity.”