Occupancy at Heitman’s 373,000-square-foot office complex in Foster City has fallen off, as has office use in general. The solution: Switch to life science labs.
The Chicago investment firm has won approval from the city to convert Parkside Towers to research and development at 1001 and 1051 East Hillsdale Boulevard, the San Francisco Business Times reported.
Heitman Vice President Matt White said the pivot is a result of “minimal demand” for office space on the Peninsula and in the Bay Area.
Parkside Towers, which Heitman bought in 2014, is now 80 percent leased. But White said lease expirations in the next year would drop building occupancy to 72 percent.
“Unfortunately, these tenants either exercised their right to terminate their leases early or no longer needed the space,” White told the Business Times.
He said Heitman has been “aggressively pursuing” new tenants by offering competitive rental rates and “significant” tenant improvement allowances to build out these spaces — to no avail.
The company blamed the slowdown in office leasing across the Peninsula on uncertainty in the economy and a shift in office use since the COVID-19 pandemic to remote work. The result is minimal demand for offices.
Life science leasing, on the other hand, is still “a bit of a bright spot,” said White, who serves as the firm’s asset manager.
“These innovative medicines and treatments take many years to develop, meaning the life sciences industry is less prone to the impact from market cycles,” he added. “There will always be researchers looking to cure Alzheimer’s.”
In addition, an historic amount of capital has been raised by venture funds — an all-time high of $149 billion by last year’s third quarter. And “people can’t work in a lab from home,” White said.
With the R&D approval, Heitman’s business plan is to continue to market space to traditional office tenants as well as to life science users.
Foster City has given a further incentive for life science development.
Its City Council approved zoning changes to allow R&D use in Foster City’s Town Center commercial area, between state Route 92 and East Hillsdale Boulevard.
In addition to Parkside Towers, the area includes a 100-acre development known as Metro Center and other office projects. Developers seeking to convert office space will still require discretionary review by the city on a case-by-case basis.
— Dana Bartholomew