Things aren’t going well for IQHQ, a 1.7 million-square-foot research and development district downtown, a development by San Diego-based life sciences real estate developer.
In a research note to OZK Bank, the project’s listed lender, Citi analysts believe the area has a zero percent leasing rate, which is why the pharmaceutical giant rejected the project and its downtown location.
IQHQ made a big bet on attracting life sciences companies to downtown, and while the project appears to be nearly complete, there are no signs of activity. IQHQ declined to comment on a recent San Diego Union-Tribune article about the company’s leasing issues.
Some experts have suggested that plans for a “biotech downtown” never materialized and that IQHQ should reorient itself toward regular office space rather than life sciences.
Q: Should IQHQ switch to general office space instead of life sciences?
economist
Norm Miller, University of San Diego
Yes: Life sciences office rents will be high and market timing is poor, but some space may need to be leased as premium office. Many large space users will eventually outgrow California and leave the state. Therefore, the most likely tenants will be the defense industry or blue economy. Plus, the Navy will need swing space once NAVWAR redevelopment begins. The life sciences dream is not over, it’s just delayed.
David Ely, San Diego State University
Yes: This development may have looked promising during the planning stages when demand for lab space from life science companies was strong. If demand for lab space in the area falls short of expectations and there is space in the existing life sciences footprint, alternative uses for IQHQ will need to be considered. However, this will likely mean higher office space vacancy rates in other parts of the city.
Ray Major, SANDAG
Yes: Downtown is currently woefully oversupplied in terms of office space. If IQHQ cannot secure the life sciences business it needs, it will need to pivot to markets where it can generate tenants. However, with high vacancy rates in many buildings, more companies with expiring leases, and remote work likely resulting in less square footage to acquire upon renewal, a move into the general office space market may not be to IQHQ’s advantage.
Kelly Cunningham, San Diego Institute of Economic Research
Yes: Current market conditions suggest that IQHQ will need to tailor its approach to market demand for the property rather than limiting itself to a specific industry. This premium project is in a very good location and may compete with other speculative uses. However, life sciences continues to have a large presence in San Diego, recently reporting one of its largest fundraising quarters ever and seeing increased national interest from large pharmaceutical companies, which could lead to favorable supply and demand trends.
Lynn Reaser, Economist
Yes: The fact that not a single one 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 peaked during the COVID-19 crisis. Future expansion in San Diego will likely take place around existing clusters in the north, such as the Torrey Pines neighborhood. IQHQ will have to pivot to the general office market downtown, where the overall vacancy rate is 36.5%.
Alan Zinn, University of San Diego
Yes. There is a concept of agglomeration economies in urban economics, where companies in the same industry have advantages in locating near each other. This includes knowledge sharing and leveraging a common workforce, both of which are important in life sciences. The problem downtown is that it’s far from the life science cluster near UCSD. No one is going to locate there first and expect others to follow.
James Hamilton, University of California, San Diego
Yes. Clusters that bring together related researchers are extremely valuable, both to the researchers and to the surrounding community. But you can’t create a cluster by simply designating a space and hoping someone will come. Successful research clusters across the U.S. have grown around strong academic research cores, as we’ve seen at UCSD, MIT, and Stanford. At this point, plans for IQHQ should be based on generating maximum benefit, not wishful thinking about a new downtown.
Executive
Jamie Moraga, Franklin Revere
Yes: If IQHQ is not successful in leasing space, it should consider pivoting while continuing to pursue its target market. Unfortunately, IQHQ is entering the market at a time when downtown retail vacancy rates are at their highest in decades. Additionally, the biotech/life sciences cluster is located in or around Torrey Pines, so it’s unlikely that companies will want to locate far from that established hub. It’s time to broaden its scope of potential tenants.
Phil Blair, Manpower
Yes: We clearly need to have a wide range of options. A major initiative needs to be made to explain why life sciences companies, or local or new businesses, should consider Downtown instead of Torrey Bluff or Sorrento Valley. We may need to consider subsidizing workforce housing downtown. When life sciences was first considered for Downtown, the impression was that there were a lot of young people who wanted to live Downtown and were unhappy about driving an hour each way to Mesa. IQHQ needs to use that to their advantage, whether it be business or life sciences.
Gary London, London Moder Advisors
Yes: There are two key points: 1) This is not for us to decide. Ultimately the owners will do what’s best for their projects. Establishing a new business cluster has proven to be very difficult, especially in a declining market. But they might still get it done. 2) As the newest and best-located commercial office space on the downtown waterfront, they will attract top-tier tenants. This translates into major survival issues for much of the older inventory downtown.
Bob Rauch, R.A. Rauch & Associates
Yes. Bioscience and related technology are integrated into the Torrey Pines/Torrey Hills submarket. It would be great to have a large company anchor the IQHQ project downtown, but it could take five years or more to fill with planned uses. As the newest and shiniest space in town, a five-year office lease would do two things: it gives them time to get their science ready and helps them pay off debt when it comes due.
Chris Van Gorder, Scripps Health
YES: It would be a good idea for IQHQ to convert to more conventional office space to allow for more lease flexibility. Our biotech hub has been and continues to be located near several hospitals and research facilities in the La Jolla, Torrey Pines and Sorrento Valley areas, with more currently under construction in these areas. Converting to conventional office space would result in a much lower lease rate, but would still be better than unleased space.
Not participating this week:
Haney Hong, San Diego County Taxpayers Association
Caroline Freund, School of Global Policy and Strategy, University of California, San Diego
Austin Neudecker, Weave Growth
Have an idea for an Econometer question? Email me at phillip.molnar@sduniontribune.com. Follow me on the thread: @phillip020
