Life science leases continue as a bright spot in the otherwise gloomy Bay Area office market, according to a year-end report from Colliers, which called the sector “a top performer” in 2022 and described the Peninsula in particular as ”one of the most highly concentrated and sought-after life science space markets in the nation.”
The report states: “With the Peninsula recording some of the lowest vacancies in the Bay Area, the highest rates, over 2.25 million square feet of demand, and over 6 million square feet under development, the submarket remains one of the most active life science regions in the country.”
Yet even in this high-demand market, landlords are still paying upwards of $250 in tenant improvements and up to $450 per square foot in total fit-out costs on new leases, some of the highest among all asset classes, according to Colliers. Updated buildings are able to command top-tier rents, getting close to $100 per square foot for triple-net leases in 2022, compared with around $65 for older products.
While office upgrades and conversions were popular in 2022, developers see the value in creating ground-up Class A properties. Of the 6 million square feet under construction on the Peninsula, three-quarters is going in north of Redwood City, including phase two of Kilroy Realty’s 50-acre Kilroy Oyster Point, which will add 865,000 square feet in South San Francisco by the end of the year.
The East Bay is the second-largest life sciences market in the region after the Peninsula, with asking rents that range from around $40 NNN in the outer markets such as Livermore to $65 in hot spots such as Oakland and Emeryville. Some of Silicon Valley’s biggest trades in 2022 happened in the East Bay-adjacent city of Fremont, which accounted for all the top sales activity in the South Bay in the second half of the year, according to the report.
In San Francisco, where average asking rents for life science buildings are about $80 NNN per square foot, only 365,000 square feet of space is under construction, which does not include an entire building nearing completion in phase one of Tishman Speyer and the Giants’ Mission Rock development. The 270,000-square-foot building pivoted to life science as the developers sought to capitalize on the popular Mission Bay submarket, which has the majority of life science spaces in San Francisco and is anchored by University of California — San Francisco and Kaiser Permanente.
The developers are planning another 300,000 square feet of life science space in phase two, according to the report, to be delivered in late 2025. The previous headquarters for both Old Navy and Dropbox, both in Mission Bay, will be repositioned as life science buildings to take advantage of the demand.
“San Francisco is positioned well for long-term growth in life science due to its highly educated workforce, close proximity to research institutions and its position as a global leader [in] venture funding,” according to the report.
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