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Bay Area Life Science Startups Are Hungry For Real Estate, But Need The Right Size

Truebeck Construction Vice President of Operations Mike Jackson, Kilroy Realty Life Sciences Executive Vice President Tracy Murphy, Seavest Healthcare Properties Vice President David Braunstein, Woodstock Development President Kirk Syme, Wareham Development's Geoffrey Sears and JLL's Lisa Strope

Several of the Bay Area's biggest life science leaders agreed: The market's record amount of venture capital funding has fueled a sky-high demand for small to midsized lab and research space.

From Phase 3 Real Estate Partners CEO Neil Fox (developer of Genesis, South San Francisco's 21-story life science tower) to Kilroy Realty's Tracy Murphy, whose firm is in Phase 1 of its 3M SF Oyster Point life science development, an array of commercial real estate experts at Bisnow's Bay Area Life Sciences & CRE event are seeing a seemingly insatiable demand from life science startups.

In 2018, life science in the San Francisco area attracted $5B in venture capital, topping Boston's market for the first time ever, according to JLL Vice President and Director of Research Lisa Strope. The region's life science market has had 25% job growth over the last five years, or more than double the nationwide figure (10%), Strope said, adding that there is currently over 3M SF of life science real estate under development.

For the Bay Area's life science and biotech companies, especially its startups, it can't come soon enough. Vacancy rates in San Mateo County dipped to 3.54% in the first quarter, according to Kidder Mathews, which also measured steadily rising rent and a regional demand for 3.8M SF of life science space. 

"The demand for space under 10K SF is extremely high," Kidder Mathews Executive Vice President and Managing Director Gregg Domanico said. "It is profitable for real estate developers getting into that business."

DPR Construction's Gavin Keith, Kidder Mathews Executive Vice President and Managing Director Gregg Domanico, AlfaTech's Terry Stelter, CBRE Managing Director for Life Sciences David Bendet, Phase 3 Properties CEO Neil Fox, South San Francisco CIty Manager Mike Futrell and JLL's Lisa Strope

Of the $7.3B of venture capital that went to Bay Area life sciences, almost $800M went to companies in seed capital or Series A or B funding, according to Kidder Mathews. The scale of early-stage money has caught the attention of big and small developers alike. 

"If you look at the size and volume of venture deals, every single deal is like three times what it used to be," Murphy said. "There's a lot more of them growing a lot faster."

The north tower of Phase 3's Genesis project, which became the West Coast's tallest life science lab building when completed earlier this year, is also accommodating smaller tenants, with floor plates of around 20K SF. Fox even says Phase 3 is in talks for the tower to host companies in smaller space than that. He said Phase 3 is working with a partner on including a four- to five-floor incubator in the tower.

"They could take what they need," said Fox, adding that he is pushing for two- to three-year leases rather than the standard 10-year structures. "One of the challenges that we're seeing today is there's just not an availability of space for this specific industry. Tenants are really having to take much more than they need. Some of them do it to protect their expected growth, but some of them do it because there's no alternative."

Phase 3's 21-story north tower when under construction along US-101 in South San Francisco

Fox said one of his earliest projects was the redevelopment of an old hospital, where his team provided a large facility for tenants to share a lot of space and amenities, and that it found success even in a contracting economy. 

"There's quite a bit of coworking space out there, but one nice thing you see across the spectrum — whether it's in Boston, San Diego or San Francisco — is that they're all full," said Fox, who said another early deal of his was for 6,400 SF for the now $50B biotech behemoth Illumina.

The Bay Area already has a number of life science incubators, including CoLaborator in San Francisco, Janssen Labs in South San Francisco, Menlo Park Labs and the University of California's QB3, which partnered with Wareham Development for its East Bay Innovation Center location in Berkeley. 

Still, experts had different ideas about the best ways to satiate demand for smaller space. 

"Without the small spaces where these companies can incubate and grow, we wouldn't have the infrastructure and ecosystem that we have today," Domanico said. "Up and down the Peninsula, there are landlords that will build small spaces. It may not be the most economical for the big guys to do it, but there are small landlords for which it is profitable."

Other panelists stressed the value in often having these smaller spaces within large campuses, given the quick growth of companies in the life science sector.

"If you have [one small company] in a warehouse that's been converted and as a landlord you say, 'When you outgrow this I've got ... nothing,' it doesn't go very far," Murphy said.