The Bay Area life science market has maintained its resilience as other real estate sectors have experienced distress, according to a new report by CBRE.
There were 1.3 million square feet of leases of life science space in 2022, which was second only to Boston at 3.1 million, and ahead of San Diego at 1.2 million, the report found. Going into this year, the Bay Area had the second-largest development pipeline of the top markets, with 9.3 million square feet under construction, more than one-third of which (3.9 million square feet) is expected for delivery in 2023.
The new lab construction will likely increase the market’s vacancy rate, which was 6.4 percent in the fourth quarter of 2022, slightly higher than the national lab vacancy of 5.7 percent.
“Despite market headwinds, life science companies continue to grow,” James Bennett from CBRE said. “The top leases in the Bay Area were new leases and expansions, signs pointing to resilience of the sector.”
One of the reasons the life science market has remained buoyant is the employment growth the sector has experienced in recent years. Among the top 13 U.S. life science markets from 2019 to second-quarter 2022, the Bay Area had the largest life sciences employment growth at 27 percent, outpacing Boston. Of the total life sciences jobs in the San Francisco Bay Area, 40 percent were in research and development.
“Industry fundamentals in the San Francisco Bay Area remain strong, supporting the employment growth in life sciences,” Gregg Domanico from CBRE said. “Record-high investment over the past several years has also pushed more science into the clinical stage, signaling the potential for even further rapid growth in the coming years.”
In contrast, the Bay Area’s office market remains stagnant and shows signs of distress. A recent crop of office reports point to just how severely the work-from-home trend has upended the office market nearly three years after the pandemic started, with vacancy levels at new highs and trade volume and rents at their lowest levels in a decade or more.
Direct office vacancy rose to 18.4 percent in the fourth quarter, according to Kidder Mathews data, a figure Gary Baragona from Kidder said has not been reached since the 1990s, when the direct vacancy rate was 19 percent. On top of that, sublease vacancy rose again in the fourth quarter and is now 5.3 percent. Transwestern fourth-quarter figures pinned the sublease number even higher, at 9.5 percent, or about 8.6 million square feet, for an overall vacancy rate of 23.7 percent.
“The prevailing expectation is that the SF market will continue to struggle during 2023 and that the market has not yet hit bottom as signs of recovery are not anticipated until early 2024,” said Baragona.
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