Blog

San Diego’s Wunderkind

Introduction
As the world focuses on medical and biological innovation during the COVID 19 pandemic, San Diego commercial real estate investors and developers will find it hard to ignore what is happening in Life Science today. There are landscape-changing projects in motion, office spaces are being reimagined to accommodate this use, and the residual impact on land values and jobs occurring right now is increasing as a result.

The pandemic has generated a gale force wind behind Life Science investment and development in our own back yard.

San Diego, an emerging Life Science Mecca
R&D and innovation, are words that San Diego has focused on for a long time. It’s now the real estate footprint. At a time when the future of the traditional office asset class is uncertain, life science lab and office space is going through a transformation.

In Q1 2020, the public REIT Healthpeak Properties broke ground on their $164MM 195,000 sf Class A life science campus, “The Boardwalk” in Torrey Pines. The large healthcare REIT has a portfolio of over 700 properties across the nation and operates ~2MM sf of life science sf in San Diego alone. In addition to the rentable space, the one-acre park will have fitness facilities, spa style locker rooms, a full-service restaurant, and many collaborative outdoor spaces.

Stockdale Capital Partners acquired the distressed Horton Plaza mall in downtown San Diego in 2018. Current plans suggest the completed project will have 700,000sf of office space and 300,000sf of restaurants, entertainment, wellness, and retail. However, a recently administered a feasibility study done by SmithGroup showed that the Campus at Horton project location has all the right attributes for life science development and investment to prosper. The Horton plaza mall redevelopment is projected to add 3,000+ high-paying jobs.

Perhaps the most notable San Diego life science news comes from IQHQ, a REIT specifically focused on life science real estate. IQHQ recently purchased 5 blocks on 8-acres of waterfront land at Manchester Pacific Gateway. The first phase of RaDD (the San Diego Research and Development District), is expected to deliver in 2023. Development costs for the entire project are expected to be $1.6B, or $1,000 per square foot.

Life Science vs Traditional Office
A few important differences include costs, length of leases, and rental rates.

The cost to build life science buildings is much higher than traditional office buildings. HVAC and power systems must be retrofitted to accommodate a variety of different tenants. Developer TI’s can be as high as 2 or 3 times the cost of a traditional office buildout at ~$300-$400 per sf. This does not include the additional tenant spend for their interior space which can be just as much as the developer’s TI cost.

Landlords will often require longer term leases and higher rental rates for life science tenants to achieve an acceptable return on their up-front costs. This also gives tenants time to work through the lengthy FDA approval process.
Land with a planned use for life science are typically purchased at premiums as well. With per square foot costs ranging from $200-$600, investors might expect land residuals across San Diego to also increase.

Economy and Jobs
Though investment in this sector is extremely expensive, private equity and venture capital funding in Life Science is at an all-time high.

California’s life sciences industry provides approximately 481,000 jobs in over 15,000 establishments, with ~1,700 of these establishments based in San Diego county. Investment and development in Life Science has both direct and indirect implications on jobs in the economy. The ~68,000 life science (~22% of the total life science jobs in CA) jobs in San Diego County have an average wage of $130,000 per year and job count is expected to grow by 7.4% in the next 4 years.

San Diego has long been a place where people love to live, but its historically service-oriented workforce has seen ~50% of STEM grads leave the metro for better opportunities. The rise of San Diego Life Science in the last few years is an indication that this is changing. The amenity rich developments taking place today coupled with San Diego’s less expensive cost of living signals the effort being made to increase San Diego’s ability to attract and retain top talent for the foreseeable future.

Life Science in San Diego is highly competitive. As competition in the industry increases, talented employees will be more incentivized to live and work here. The trickle-down effect of having top talent with high paying jobs in a competitive industry suggests a healthy environment for job growth, income growth and investment for years to come.

Conclusion
Positive effects on job growth, wages, economic output, and investment performance will likely result from the increased presence of Life Science in San Diego. Multifamily tenants moving to the area employed by this sector will have more buying power while retail and office developers will want to be near the action. Hospitality owners and operators will benefit from increased convention center events and attendance. San Diego is primed to be a hotbed for real estate investment for the long term.

As a capital advisory investment firm to many local operators in San Diego, Fident Capital is here to assist our client’s capital stack financing efforts so that they too can take advantage of the positive residual effects of life science trends in San Diego