Supply of wet lab space expected to remain tight in greater L.A.

The Los Angeles Basin, defined as the counties of Los Angeles, Orange, Riverside, San Bernardino, Santa Barbara, and Ventura has a significant life science presence, although not as large as its potential given the sheer size of the local economy, the number of premier universities and hospitals, and the large concentration of college graduates in the area. There is a general emphasis on medical device firms, several major biotech companies including the world's largest (Amgen), and a relative absence of large pharmaceutical operations. There are however, a large number of small start-up firms associated with the major universities, research institutions, and hospitals in the area. These firms are rapidly expanding, and the outlook is for strong growth and increased diversification, particularly considering the infusion of research funding that will come from the recent passage of Proposition 71, the California Stem-Cell Bond Initiative.

Industry Drivers

The Los Angeles Basin has an exceptionally large pool of highly educated workers (2.5 million individuals) that include 95,000 holding PhDs., 2,500 of which are in the life science field. The Basin boasts of numerous premier educational and medical facilities; a large number of start-up companies; an infusion of money from the recent passage of the Stem-Cell Bond Initiative; and a superior quality of life. The passage of Proposition 71 in the Fall of 2004 will generate an average of $295 million per year over the next 10 years to support stem-cell research at California universities, medical schools, and research facilities.

Two of the five University of California campuses with medical schools are located in the Basin--UC Los Angeles (UCLA) and UC Irvine (UCI). In addition, the region is home to three major research universities: UC Santa Barbara, Cal Tech and the University of Southern California (USC). Its seven major universities graduate approximately 220 life science PhDs annually. Major private research institutions are also located in the Los Angeles Basin, including Cedars Sinai Medical Center, the City of Hope National Medical Center, Huntington Medical Research Institute, the Children's Hospital of Los Angeles, and Kaiser Foundation Hospital.

Institutions in the Los Angeles Basin received $970 million in National Institutes of Health (NIH) grants in 2004. This is a positive trend for the area, since NIH spending on research is a good predictor of where new bio-commerce focused firms will be created in the future.

Lab Market Snapshot

The Los Angeles Basin lab market is comprised of 5.2 million square feet, dispersed across 120 buildings. Growth in supply has been relatively restrained; the base has increased by only 15% since 1996. Nearly half (47%) of the space is located within Los Angeles County, primarily in the San Fernando, Conejo, Santa Clarita and San Gabriel Valleys, all situated north of Los Angeles' CBD market. An additional 10% of space is located in the immediately adjacent Thousand Oaks portion of Ventura County. The remaining 43% of space is in Orange County, primarily in the South County submarket, near UC Irvine.

Demand was strong from 1999 through 2002, with average annual net absorption of 149,000 square feet reflecting an annual growth in occupied space of 3.4%. In 2003, however, demand dropped due to industry consolidations and net absorption fell to a negative 39,500 square feet. 2004 witnessed a slight increase in demand, with net absorption reaching positive 8,500 square feet. Construction activity also picked up as evidenced in the delivery of 202,000 square feet of new inventory. The total vacancy rate, including sublet space, was 8.8% at year-end 2004, the highest level recorded in recent years, but still generally healthy. The lab space market in the Los Angeles Basin has historically shown healthy vacancy rates, due to a general lack of construction activity and lack of existing product. This product type is not well understood by developers in the area, and there has been a general dearth of activity. Within a number of submarkets, modern lab space has been difficult to find. Most firms have been forced to build- out and/or renovate facilities in order to create lab space that meets their needs.

Demand for future lab space is expected to increase sharply in coming years, particularly from researchers conducting stem-cell research. Under existing policies, scientists may not use equipment paid for with Federal funding to perform research on new stem-cell lines. According to California's recently created stem-cell agency, the California Institute of Regenerative Medicine (CIRM), this means that new labs will have to be built to allow researchers to work without worrying about violating Federal rules. Demand will also be driven by a strengthening economy. The number of employed residents in the Los Angeles Basin grew by 147,000 or 2.1% in the 12-month period ending February 2005, outpacing the nation, and the outlook is for even stronger growth over the next two years. Many of the small start-up firms that exist in the area will be expanding, and the focus will be on modern mid-sized space in the 10,000 to 50,000 square-foot range.

Current construction of lab space is minimal, suggesting that the supply of wet lab space should remain tight in the Los Angeles area.

Market Outlook

Given the strong market fundamentals, the outlook for the life science market is very optimistic for the Los Angeles Basin. The Basin offers premier educational and medical facilities, large numbers of early stage companies, a large pool of highly educated workers, major biotech firms, and major research institutions. These factors combined with the new Stem-Cell Initiative, will create an environment where the life science industry should continue to thrive. Given these dynamics and the general lack of existing lab space and/or lab developments, we believe the market will continue to evolve into a larger life science market.

Shaun Stiles is senior vice president with Colliers International, one of the top three commercial real estate firms worldwide, with 248 offices in 51 countries; $1.2 billion in annual revenue; and over 660 million square feet under management. For more information, please visit www.colliers-seeley.com.