Mid-Year Lab Market Update, San Diego

As the summer unfolds, I wanted to share with you all an update on the current lab market landscape and some insights and predictions as we navigate these dynamic times. A common question I often hear is, “How is the market?” While it remains soft with low demand and high inventory, there’s significant activity behind the scenes. Our team at JLL alone is set to close over 500,000 sf of tenant rep lab transactions, possibly nearing 1 million based on deals in progress. This solidifies our position as the most active tenant rep life sciences team in San Diego. Why This Matters: Think of it like our frequent buyer card and VIP status with landlords and brokers. This means we can secure the best deals, offer superior data points, and gain early access to potential or upcoming off-market availabilities.?

What’s the Deal with All of this Space?

In almost every space category, there is about 5-10 times more supply than demand. For example, there might be 7 tenants looking for 10-15,000 sf, while there are 30-50 options available. However, options thin out significantly when seeking spaces over 100k sf. In a recent deal we just closed, we were representing a company looking for about 60,000 sf. The initial survey had over 30 options, which we meticulously narrowed down to a top 3, including 2 off-market deals. So, while there's tons of options, creating or unearthing off-market options can still generate some of the most compelling solutions.?

Impact of Construction Costs:?

Pre-pandemic, looking at lease comps from 2018, the cost to build lab space from shell ranged from $175-240/sf. Fast forward to mid-2024, those same improvements now cost about $250-400/sf to build—a 40-60% increase! Assuming landlords aim for returns of 7+% (and who would invest in lab real estate for less?), every $100/sf in TIs adds roughly $0.60/sf/mo NNN. The overall costs for buildings, from acquisition to build-out and re-tenanting, have surged. With today’s $300-400/sf in TIs on top of high construction and/or acquisition costs, landlords are typically into these buildings for $1000-1200/sf, translating to expected rents of $6-7/sf/mo NNN. Even with a soft market and landlords eager to make deals, they’re operating on thin margins at mid $6 rents- AND we’re closing deals below that! When you factor in the free rent, lease-up time/carry, and marketing and leasing costs, they really need north of $7 to achieve good returns. Point being there’s higher rents lurking when the market turns the corner- but when?

Where from Here?

With all of this as a backdrop, we're navigating through several years' worth of inventory. The market usually absorbs about 1 million sf annually, but with over 4 million sf available, we have a multi-year supply. In such a market, there's a flight to quality—premium spaces lease at relatively high rates with lots of deal incentives, while the less attractive spaces remain vacant. Landlords, driven by investor committees and loan covenants, must meet specific financial targets, making strategic negotiation crucial. Knowing the motivations and decision makers for every option, and knowing when and where to push, can generate huge variances from one deal to another. This is what enables us to get our clients the best space at the best possible terms and economics.

Predictions for the next 6 months:

With the upcoming election and global turmoil, investors and decision-makers are growingly cautious. I predict a slowdown of activity post-September as we approach the elections, with most players awaiting more certainty. Looking ahead, after the dust hopefully settles, late 2024 and early 2025 could see a flurry of activity and a significant upswing in investment and expansion. Despite the current market state, opportunities abound for those who are strategic and proactive. If and when demand returns to the market, expect landlords to push for the $7+ rents they need to achieve reasonable returns. If interest rates drop and regulations become more favorable, this shift could happen quickly. Even with such stimulation, the ample inventory out there will likely keep it a tenant-favorable market for quite some time. I feel good about the future deal making for our tenant clients, but just be aware there’s a clock running.?

A Reminder:

Given that the market is tenant friendly, don’t squander this opportunity. If you have a lease expiring before 2027 or a real estate need for 2025, this is an exceptional time to start your strategy. We recently did an early recast for a client with a 2026 expiration, locking in a low $5’s rent in a building that was doing $6 deals last year. You can lock in today’s rates and/or leverage today’s environment for future leases. Use your future lease expiration or a long construction timeline to your advantage. It’s never too early to start framing things out, and the best deals are done with a 12-18 month runway. Duress leads to overpaying, and careful planning leads to winning. Let’s do the latter!

?Summer Reflections:?

Rolling into the middle of summer, I hope you get to spend quality time with your kids, family, and friends. While we’re all busy and things never truly stop, it’s crucial to take a step back and recharge, reflect on what’s gone well or badly, and re-engage with intention. The July/August timeframe is typically slow for the life sciences sector and investors and decision-makers take time to recharge (and some Europeans disappear entirely!). If you can take a breather, now is an excellent time to reconnect with loved ones and engage with the world around you. Despite the current market lull, exciting developments and promising research are on the horizon in the life sciences arena. Lean into these opportunities to recharge and prepare for a busy fall and winter. I believe we will see a surge in activity late in the fall with deals flowing and significant advancements. Take stock of your priorities, lay out a path, and you’ll be well equipped for the opportunities and challenges ahead.

Help Us, Help YOU!

If my team and I can ever be a sounding board, provide data points, or help you develop a mid to long term strategy, please do not hesitate in dropping a line. And do?please consider following me on linkedin for the latest trends and updates: www.4labspace.com

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