By Meghan Hall
Lab inventory size, high numbers of industry scientists and plenty of NIH and venture capital funding: Combined, these are the ingredients that produce the nation’s top life science clusters. Strong fundamentals in all of these areas has allowed the San Francisco Bay Area to rank second among CBRE’s Top-10 Leading U.S. Life Science Clusters, while Seattle ranked first among the nation’s Top Emerging Markets. Industry momentum in both regions is expected to continue, according to CBRE, as the U.S. life sciences industry is currently growing at its fastest pace since 2000.
Over the past 20 years, employment in the industry has grown by 42 percent nationwide. While all sectors of the life sciences industry from testing labs to manufacturing are growing, research and development (R&D) continues to outperform other sectors in terms of growth. According to CBRE, the Bay Area is the largest life science market when measuring by workforce; the region has about 105,000 life sciences employees. Boston-Cambridge comes in second, at around 85,000.
“The San Francisco Bay Area is home to one of the largest scientific and high-tech talent clusters in the world — this is driven in part by the world-class universities and educational institutions in the region, which are drawing in and producing new talent,” explained Dino Perazzo, executive vice president at CBRE.
Among CBRE’s Top-10 Fastest Growing Life Sciences Markets, Seattle ranked first in employment growth. Between 2014 and 2017, CBRE tracked just over a 17 percent growth in life sciences employment in Seattle, several times more than the national rate of growth at four percent. The region’s growth even outpaced both Boston-Cambridge and the San Francisco Bay Area — CBRE’s top two established markets — which grew by just under 16 percent and 13 percent, respectively.
“With the region’s top-quality educational institutions and accompanying growth of Seattle’s educated labor pool, it’s no surprise we are seeing this surge in the life sciences industry,” said Marcus Yamamoto, first vice president, CBRE in a statement. “The Puget Sound’s world-class technology industry only fuels this growth, offering opportunities for partnership and innovation that will continue to take root in the Northwest.”
Much of that talent stems from top universities in both regions. In California, the University of California San Francisco and Stanford University are some of the top institutions for life science graduates. The University of Washington in Seattle also provides the Puget Sound with new talent, and all three universities were top recipients of NIH funding in 2018, garnering $640 million, $504 million and $452 million, respectively.
However, CBRE Director of Research Ian Anderson did note that the Seattle market ranked slightly lower when it came to producing new talent. The Bay Area, by comparison, produced 293 doctorates in 2017 and placed second in the nation.
“If there is any soft spot in Seattle’s trajectory, it would be that it might be considered to lack a university that produces a significant [number of] Ph.D.s of doctorates and other graduates in Biological and Biomedical Sciences,” said Anderson. “94 Ph.D.s graduated in Seattle MSA in 2017, placing it 23rd among U.S. markets.”
Nationally, funding allocated toward the life sciences industry is also fueling growth; $15.8 billion in annual funding made its way to the industry through the end of the third quarter of 2018, an 86 percent increase over the previous year. The relationship between venture capital funding and job growth is clear, says CBRE in its report. The firm’s findings show that new venture capital funding precedes increases in an employment by about a year.
Increases in funding and employment will continue to support demand for commercial real estate in both the San Francisco Bay Area and Seattle markets. In 2018, the San Francisco Bay Area accounted for 26 percent of life sciences office demand, catching the eye of institutional investment managers, private equity and REITs alike. Lab vacancy rates in the Bay Area are below two percent in primary submarkets, pushing rents 10 percent higher over the past year. In the North Peninsula, where the highest rents are to be found, the average asking rate is $63.60 per square foot, CBRE reports. CBRE estimates that there are about 2.1 million square feet of total lab requirements in the Bay Area, and that market fundamentals will remain tight, and that growth will continue over the next couple of years.
“This growth is sustainable as these are long-term research strategies driven by some of the largest companies in the world, and the scarcity of specialized space has preserved demand,” explained Perazzo. “We are still in the midst of an inventory crisis with demand far outpacing supply. The market is fully saturated, which is driving new development, much of which [was leased] prior to completion.”
For Seattle, supply will continue to be limited, particularly for those with requirements of between 5,000 to 15,000 square feet, added Yamamoto. That growth is not only due to Seattle’s growing talent pool and high levels of funding, but also companies looking to expand outside of major markets.
“The life sciences industry growth is closely tied to the growing pool of top-quality talent in the region,” explained Yamamoto. “Additionally, strong life science hubs elsewhere in the country are supply constrained, and the rent for quality research space has continued to increase significantly.”
Class A space will continue to be leased up at a quick pace over the next 24 months, and strong demand will continue until supply catches up. For now, though, Seattle’s life sciences industry continues to grow and rents for space will rise as the region is well poised to become one of the nation’s next top markets.
“There isn’t another market with better fundamentals, positioning Seattle to become a leading cluster for life sciences,” said Anderson.