Greater Los Angeles officials are stepping in to help increase the supply of life science real estate, trying to deal with an unusual case of demand outstripping supply while elsewhere across the United States biotech landlords face increasing vacancies.
Growing pharmaceutical and biotech firms are struggling to find suitable space for expansion in metropolitan Los Angeles, an area with a life science availability rate of 3%, the lowest among the country's 10 largest biotech markets. That's a small fraction of the rates seen in Boston and San Francisco, where oversupply has sent life science property availability to 30%.
Los Angeles County municipal leaders are streamlining the permitting process and connecting local developers and potential tenants to create top-tier biotech space, providing room for expansion while helping to maintain rental rate growth. In El Segundo, officials are revisiting the city's general plan to allow more flexible land use to accommodate bioscience labs and industrial flex spaces, Mayor Drew Boyles said. And Thousand Oaks, Pasadena and other cities have made similar moves to ensure companies that outgrow existing facilities have new space to grow into.
“We’re creating a pipeline between developers and growing companies to ensure we’re building what’s actually needed,” Boyles told CoStar News.
While the largest two biotech real estate cities, Boston and San Francisco, have seen rents drop by 8% and 2% in the past year, driven by high availability rates, there is more than twice the amount of demand for life science space than supply in Los Angeles. The imbalance has contributed to a notable 6% rent gain in Los Angeles in the first half of the year, JLL said. During the same six months, national rents have fallen 9%.
Across the country, life science landlords are facing slowing demand caused by reduced levels of venture funding and a pullback from pharmaceutical firms in the wake of COVID-19 pandemic-fueled growth. Research funding has also been shifting away from coronavirus vaccines and treatments that fueled a surge in real estate demand in the first two years of the COVID-19 pandemic.
That hasn't necessarily been the case in Los Angeles. In addition to lower supply, the local sector is bolstered by a growing roster of life science startups and a robust education hub that includes the California Institute of Technology in Pasadena, the University of California, Los Angeles and the University of Southern California.
“The number of companies that are spun out of each of those universities on an annual basis is incredible," said Patrick Church, managing director at JLL and lead of the brokerage's Los Angeles life science practice group. "When they're ready to go from point A to point B, they don't necessarily have a year or two to wait for space to get built out. They need space ready to go that they can move into and that’s what we lack significantly."
To be clear, LA's life science property sector has not been immune from the national headwinds of high interest rates and reduced funding, with tenants giving back 158,000 square feet more than they leased during the first half of the year, according to JLL. Still, tenants have leased 300,000 square feet of life science space in the region over the past six months.
Incentives
El Segundo, long a magnet for aerospace and technology companies such as Boeing and SpaceX, plans to compete for life sciences business by connecting companies and real estate stakeholders directly.
City officials hold regular roundtables with local developers like biotech billionaire Dr. Patrick Soon-Shiong, who owns 12 properties in El Segundo, as well as venture capitalists and entrepreneurs to help align city efforts with market demands, Boyles said.
Developers are "getting it," he said. "We're starting to see them take meetings with earlier stage companies that don't have as certain of a path forward."
Such collaboration recently led to the development of a jet propulsion testing lab in the city, while discussions for a neuroscience-focused corporate campus are well underway.
In Thousand Oaks, the city has streamlined the permitting process for life science projects by eliminating or combining steps — especially for office-to-lab conversions — to encourage a burgeoning tenant cluster around the campus for medicine maker Amgen, the city’s original life science juggernaut.
Such a step appears to have paid off. Alexandria Real Estate Equities is developing a 350,000-square-foot biotech campus at a former Amgen site at 1100 Rancho Conejo Blvd., while developer Cruzan is building a roughly 120,000-square-foot industrial biotech building at 1300 Lawrence and Shapell Properties is planning a 750,000-square-foot business park nearby. On the west side of town, Graymark Capital acquired the about 99,000-square-foot office building at 120 Via Merida for $17.75 million to convert into biotech lab space.
Pasadena last year revamped its own zoning regulations to streamline approvals. Life science companies like the Doheny Eye Institute, the Huntington Medical Research Institute and Zencore have clustered in the city, creating a magnet for other firms, Church said.
What's missing
Some young life sciences and biotech companies are experiencing their first growth spurts and need to jump into a larger lab space, Church said, but they’re not finding what they need.
“These companies are securing massive venture funding and need facilities like wet labs and R&D spaces that aren’t readily available in traditional office buildings," Boyles said.
Still, building new lab space comes with additional headwinds, beyond the permitting process.
Certain Los Angeles life sciences firms need manufacturing space that has been approved by the U.S. Food and Drug Administration for making pharmaceuticals, medical devices, biotechnology products, food-and-beverage and dietary supplements, according to Cushman & Wakefield Vice Chair John Minervini. There's not much of that space available larger than 10,000 square feet, he added.
Building these kinds of labs is not cheap, with FDA-approved spaces costing some $1,200 per square foot, and requires a symbiotic location near other life sciences and biotech users as well as a financially strong tenant willing to contribute capital, Minervini notes.
"This is not a government issue," Minervini said. "It’s an economic issue. You don’t build these on spec unless you have a lot of synergy."
Boyles is hoping that fewer regulations and a growing pipeline of life science development deals in El Segundo is enough to attract leases. The city does not offer economic incentives to companies to relocate, but it may soon launch a tax incentive program for companies that stay in El Segundo rather than move to a larger tech hub when they need to grow into a larger space, he said.
“Our goal is to retain these companies as they grow,” Boyles said. “We want to be their home not just for their first round of success but also for their continued expansion.”