Should downtown’s brand new life science office building change strategy?

Things aren’t looking great for downtown’s 1.7 million-square-foot Research and Development District from San Diego-based life science real estate developer IQHQ.

A Citi analyst, writing in a research note to the project’s publicly traded lender Bank OZK, believes the district is 0 percent leased and that pharmaceutical giants have rejected the project and downtown location.

IQHQ bet big on getting life science companies downtown. The project looks nearly complete but with no signs of life. IQHQ declined to comment on a recent San Diego Union-Tribune article on its lease woes.

Some experts have suggested the whole “biotech downtown” thing isn’t happening and IQHQ should pivot to regular office space, not life sciences.

Q: Should IQHQ switch to general office space, not life sciences?

Economists

Norm Miller, University of San Diego

YES: While office rents would be higher for life science, and the timing of the market is not favorable, it might be necessary to lease some of the space as higher-end offices. Many large space users eventually outgrow California and leave the state; thus, the most likely occupants would be defense industries or the blue economy. Additionally, if redevelopment of NAVWAR begins, the Navy will require swing space. The life science dream is not dead; it’s merely delayed.

David Ely, San Diego State University

YES: The development may have looked promising during the planning stages when demand for lab space for life sciences companies was stronger. To the extent that the demand for lab space in the region has fallen short of expectations and capacity exists in established life sciences hubs, alternative uses for IQHQ need to be considered. However, this will probably mean vacancy rates for office space will rise in other parts of the city.

Ray Major, SANDAG

YES: Downtown is woefully overbuilt in terms of office space right now. If IQHQ cannot secure the life science businesses they need, then they should pivot to a market that could generate tenants. However, moving into the general office space market may not favor them because many buildings have high vacancy rates and more businesses with expiring leases will most likely take fewer square feet in their renewals due to telecommuting.

Kelly Cunningham, San Diego Institute for Economic Research

YES: Current market conditions suggest IQHQ should not be limited to one specific industry and adjust to market demand for the property. The premium project has an exceptionally prime location and potentially compete for other speculative uses. However, life sciences continue to have a strong presence in San Diego, which recently reported one of the largest fundraising quarters on record while seeing increasing national interest from major pharmaceutical companies and may lead to favorable supply-demand dynamics.

Lynn Reaser, economist

YES: The fact that none of the 1.7 million square feet of office space has yet been leased is an ominous sign. The biotech boom is likely over, having crested during the COVID-19 crisis. Future expansion in San Diego will probably occur around the existing cluster to the north, such as around Torrey Pines. IQHQ will have to pivot to the general office market in downtown competing with a 36.5 percent overall vacancy rate.

Alan Gin, University of San Diego

YES: There is an urban economic concept called agglomerative economies, which says that there are advantages to companies in the same industry locating near one another. These include sharing knowledge and tapping into a common pool of labor, both of which are important in life sciences. The problem with downtown is that it is far away from the life sciences cluster near UCSD, and no one wants to be the first to locate there with the hope that others will follow.

James Hamilton, UC San Diego

YES: Clusters that bring together related researchers are extremely valuable for both the researchers and the surrounding community. But you don’t create that just by designating some space and hoping somebody comes. Successful research clusters across the country have grown up around a nucleus of strong academic research, such as we’ve witnessed around UCSD, MIT and Stanford. At this point, plans for IQHQ should be based on generating the most profit rather than wishful thinking about a new downtown.

Executives

Jamie Moraga, Franklin Revere

YES: If IQHQ is unable to successfully lease the space, then they should consider pivoting while continuing to pursue their target market. Unfortunately, IQHQ is coming to market when downtown commercial vacancies are at the highest in decades. Additionally, the biotech/life sciences cluster is situated in or around Torrey Pines and it’s unlikely that companies will want to locate away from that established hub. Time to broaden the scope of potential tenants.

Phil Blair, Manpower

YES: They clearly need to keep their options open. A key initiative needs to be why a life sciences business, or a local or new business should consider downtown over Torrey Bluff, or Sorrento Valley. It may necessitate considering subsidizing employee housing downtown. When life sciences was initially considered for downtown the feeling was there were large numbers of young people who wanted to live downtown and resented driving an hour each way to the Mesa. IQHQ needs to use it to its advantage. Business or life sciences.

Gary London, London Moeder Advisors

YES: Two key takeaways: 1) This is not for us to decide. The owners will ultimately do what is best for their project. Establishing a new business cluster has proven to be exceptionally difficult, particularly in a declining market. But they may yet pull it off. 2) As the newest and best located commercial office space at its downtown waterfront, they will attract the premier tenants. This will lead to big survival problems for much of downtown’s older inventory.

Bob Rauch, R.A. Rauch & Associates

YES: Biosciences and related technologies are embedded in the Torrey Pines/Torrey Hills submarkets. While it would be great if a large company anchors the IQHQ project downtown, it could be more than five years before it fills up with the planned use. As the newest shiny space in town, a five-year office lease would do two things — give them time until the sciences are ready and help pay the debt when it comes due.

Chris Van Gorder, Scripps Health

YES: It’s probably a good idea for IQHQ to change to more general office space to have more leasing flexibility. Our biotech hub has been and will remain in the La Jolla, Torrey Pines and Sorrento Valley areas near several hospitals and research facilities, with more being constructed in those areas right now. A switch to general office space would result in significantly lower lease rates, but that would still be better than unleased space.

Not participating this week: 

Haney Hong, San Diego County Taxpayers Association

Caroline Freund, UC San Diego School of Global Policy and Strategy

Austin Neudecker, Weave Growth

Have an idea for an Econometer question? Email me at phillip.molnar@sduniontribune.com. Follow me on Threads: @phillip020