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Bay Area Life Sciences Market Shows Signs Of Softening

Life sciences, one of the few bright spots in Bay Area real estate in the years since the pandemic began, is now dealing with rising vacancy rates, a softening venture capital market and hesitation around major capital decisions.

Real estate professionals at the Bisnow Bay Area Life Sciences Conference introduced a new level of trepidation regarding the overall health of the market during panel discussions at the Westin St. Francis Union Square Tuesday. 

“We don’t think there is a bubble burst, but there’s certainly a coming back to the equilibrium in the market,” BentallGreenOak Vice President Jon Needham said.

Allen Matkins' Tony Natsis, Blue Rise Ventures' David Farrell, Lane Partners' Nicholas Menchel, Newmark's Bill Benton, EwingCole's Sal Ceja and Presidio Bay's Kabir Seth

In the Bay Area, net negative absorption hit 500K SF in Q1, according to Transwestern, which also noted in its report that the negative number came after a “a pandemic-fueled surge” that saw positive net absorption of 2.6M SF since early 2020. 

“The last three years were absolutely a dream, and we’ve grown our business quite significantly and we’ve seen a bit of a return to normal,” EwingCole principal Sal Ceja said. 

Vacancy rates ticked up slightly in Q1, according to Transwestern, rising by 1.9% to 8.2%. But even with that increase, they are a far cry from Bay Area office vacancy rates, which continue to hover near 30%.

Still, anxiety is creeping into the life sciences market, with vacancies weighing heavily on the minds of panelists like Rubicon Point Partners Construction Management Director Chris Relf.

“We are inspecting projects that are still sitting vacant," Relf said. "Six months or a year ago, they would have been snapped up right away, and now they are sitting vacant longer than we would like.”

Paradigm Structural Engineers' Kurt Lindorfer, HOK's Rob Williamson, Rubicon Point Partners' Chris Relf, BentallGreenOak's Jon Needham, CoBuild Construction Services's Ed Wood and HLW's Bob Thomas

“If you have space today, that is concerning,” Needham said. “Is it being marketed correctly? Are you able to adjust to whatever demand comes to your door?”

A new analysis from Newmark shows landlords offering concessions such as free rent and tenant improvement packages, in effect creating discounts for life sciences space. In a few of the deals studied by Newmark, those discounts added up to savings of between 24% and 45%.

Other peripherals are causes for concern. As the event was proceeding, Illumina announced it will cut jobs while exiting at least part of its 360K SF research center in Foster City on the Peninsula. Emeryville-based Amyris announced Monday it would replace its CEO and cut some of its global workforce in an attempt to control costs. 

Approximately 5M SF of life sciences space is under construction in the Bay Area, according to Transwestern. 

Venture capital funding for life sciences, which was flush earlier in the pandemic, has been slowly drying up. Global VC funding fell 53% year-over-year in Q1, according to Crunchbase

“All of us recognize that these headwinds are mostly due to the fact that venture capital money stopped flowing,” Newmark Vice Chairman Bill Benton said. 

Mynt's Annie Otfinoski, SOM's Danielle McGuire, Paceline Investors' Jay Atkinson, the city of Berkeley's Elizabeth Redman Cleveland, Transwestern's Alex Browne, King Steel Properties' Sonia Taneja and Oxford Properties Group's Lauren Krause

But Benton also said the picture is nuanced, with some of the companies that saw a big run-up in valuations early in the pandemic now getting cut off, while other companies will benefit once capital is able to get more accurate valuations. 

“We need valuations to get fixed for money to start flowing,” he said. “Once that happens, a lot of these tenants will leave the sidelines and occupy these buildings.”

Most professionals, even those who expressed skepticism, said they remain optimistic that life sciences will persist through the natural boom and bust of the macroeconomic cycle. 

“[In the] long term, we are very bullish on the sector and very bullish on the city,” Needham said. “The major hubs of life science are here to stay.”