Vacancy at Bay Area Life Science Offices and Labs Hits 20%

Owners of life science offices and research laboratories are seeing a spike in vacancies across the Bay Area.

Developments for a once-booming biotech sector have created a glut, with vacancy now more than 20 percent and subleases at discounts from 30 to 40 percent, the San Francisco Business Times reported, citing a report from CBRE.

The upside is that tenant demand in the first quarter rose to 2.3 million square feet, up from 500,000 square feet during the previous period.

The downside is the demand can’t match the flow of new projects hitting the market, according to the Business Journal. The glut is expected to continue through 2025, real estate experts say.

Nine projects, including new projects and conversions, were completed between January and last month, adding nearly 1 million square feet to the market’s inventory, while 7.3 million square feet were under construction.

At the same time, biotech firms pressed by a nearly three-year pullback by investors have responded by cutting jobs, shelving programs and subleasing space, adding to the glut of labs and offices.

Vacancy that only a few years ago stood at 5 percent — or even zero in submarkets such as San Francisco’s Mission Bay — have soared.

The Peninsula, which accounts for nearly half of the Bay Area’s rentable life science labs and offices, hit a first-quarter vacancy rate of 22.2 percent. From January through March, more than half of the 1.4 million square feet of rentable space in San Francisco was empty.

“What we’re dealing with is a post-pandemic hangover,” James Bennett, vice president of the life science practice at CBRE, told the Business Times. “It’s a convergence of that sublease space with new deliveries over the past 18 to 24 months. That will continue into the rest of 2024 and 2025 with an unprecedented wave of development.”

That could lead to stormy weather for office developers who leaped to life sciences as tech and other sectors wobbled.

Such crossover developers spent millions on land or existing buildings, plus more for complex biotech conversions or costly construction, Bennett said.

And those developers don’t have the deep portfolios of Pasadena-based Alexandria Real Estate Equities or San Francisco-based Wareham Development, longtime life science developers in the Bay Area.

“I don’t think everyone’s going to make it,” Bennett said. “Some projects are just going to struggle and need to be recapitalized.”

Some 33 projects still are in development, totalling 7.4 million square feet, according to the CBRE report.

Five projects totaling nearly 2.9 million square feet are expected to cross the finish line over the next 12 months. They include the 900,000-square-foot second phase of Kilroy Realty’s Kilroy Oyster Point in South San Francisco, and IQHQ’s 592,000-square-foot Elco Yards lab-office-retail project in Redwood City. All five projects had no pre-leased tenants by the end of March.

Meanwhile, life science rents have fallen, especially for subleases, according to CBRE. Offices and labs that commanded close to $90 per square foot only a couple years ago are trading in the sublease market for $57, Bennett said.

Last month, Boston-based SmartLabs announced it would shut the doors on 225,000 square feet of biotech labs in South San Francisco and take its marbles back to the East Coast.

The CBRE report contrasted a Colliers report in January last year, 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.”

By April, a year ago, CBRE was still maintaining the Bay Area life science market had maintained its resilience, as other real estate sectors suffered distress.

— Dana Bartholomew