In a year of upheaval, the Bay Area’s biotech industry remains a growth engine for the economy and real estate market.
As office workers stay home, researchers are allowed to continue to go to medical labs. And unlike most industries, the coronavirus pandemic has directly created business opportunities for local companies.
Strong business is translating to more planned investment. Genentech, which is working on 10 potential COVID-19 treatments, won local approval last week for a 15-year expansion plan to nearly double the size of its headquarters campus in South San Francisco. It currently has around 700 open positions and could add 4.3 million square feet in the city.
The plans had been in the works for three years, but it’s a reminder that the biotech industry remains heavily dependent on in-person facilities, a positive sign for landlords and small businesses that cater to large employers’ workforces. In contrast, the tech sector is embracing widespread, sometimes permanent work-from-home policies that could slash its Bay Area numbers.
“In life science, everything happens in a lab, so you need real estate. In tech there’s less reliance on it,” said David Crean, managing director at investment bank Objective Capital Partners and a board member of the California Life Sciences Association. Biotech companies “want to be in the right area of town, near human capital, near venture capital.”
The life-sciences vacancy rate, which spans research and development, office and industrial properties, is 8.4% across San Francisco, the Oakland-Berkeley-Emeryville area, San Mateo County and Santa Clara County, according to real estate brokerage Cushman Wakefield. That’s lower than the 10.1% vacancy rate for offices in those areas.
“We’ve had many tenants grow, and grow during COVID,” said Geoffrey Sears, a partner at Wareham Development, which owns labs around the region. One tenant is Lucira in Emeryville, which had been working on testing kits for the flu before the pandemic. This month, it won FDA emergency authorization for the first at-home coronavirus test.
“There’s just a lot of money going into the industry,” said Rich Croghan, national practice leader of life sciences at accounting firm Moss Adams. “There’s an ecosystem around all those companies.”
The Bay Area and Boston remain top destinations for the venture capital flowing into biotech and pharmaceutical companies — $19.5 billion this year through September in the U.S., according to research firm Pitchbook and the National Venture Capital Association. There is also a cluster of biotech companies in San Diego.
The Bay Area’s advantages include a flood of well-educated graduates and research opportunities from UC Berkeley, Stanford and UCSF, large-scale lab space and an abundance of large companies — as well as the proximity of venture firms clustered in San Francisco and Menlo Park.
“I think we’ll stay competitive. Having that research space here, having that history and entrepreneurial spirit is somewhat unique,” Croghan said.
Genentech had both a challenge and opportunity with the pandemic. “Our whole approach to the pandemic was one of problem solving,” CEO Alexander Hardy said.
Its 10 potential COVID-19 treatments include six existing drugs, two being investigated for effectiveness, and two partnerships. Genentech is working with Regeneron to manufacture the antibody cocktail that was given to President Trump.
Around half of Genentech’s 10,000 Bay Area employees are remote, while the other half continue to come in. Still, the company is focused on modernizing and expanding its real estate, including both offices and labs.
“Though there’s been a growth in remote working, the campus will remain a really important part of Genentech’s future,” Hardy said.
The coronavirus has been a key focus of many Bay Area biotech firms this year — among them Gilead Sciences, which is headquartered in Foster City and won approval for the first COVID-19 treatment, remdesivir. But biotech firms not involved in coronavirus work have also been thriving.
Natera, headquartered in San Carlos, provides testing for women’s health, organ health and oncology. In the third quarter, the company processed 262,000 tests, a 31% increase compared with the previous year, and revenue was up 26% from the previous year to $98.1 million.
Part of the company’s growth came because patients can take the tests without going to the doctor’s office, lessening the risk of coronavirus exposure.
“We’ve actually been seeing explosive growth,” said Natera CEO Steve Chapman. “We’ve been hiring at a very rapid clip.”
The company has grown from 1,000 employees in 2019 to 1,800 today, with 250 open positions. Around 60% are in the Bay Area, and the rest are in Austin, Texas. The company is expanding from 100,000 square feet to 150,000 square feet in San Carlos and South San Francisco.
Only about 500 workers are currently going into Natera’s facilities, and the company plans to allow some workers to stay home, and come into work in the future only for periodic meetings. That could help Natera hire from a broader geographic area, though a significant portion of workers will continue commuting in.
“The competition for hires in the Bay Area is very extreme. It’s very challenging to recruit engineers and to recruit top talent,” Chapman said.
South San Francisco is the regional epicenter for biotech, and it remains one of the Bay Area’s hottest real estate markets — and not just because of Genentech.
In October, investment firm Ventas bought three biotech buildings in South San Francisco for $1 billion, the biggest local real estate deal of the year.
Major developers including Alexandria Real Estate Equities, Boston Properties and Kilroy Realty Corp. have major biotech projects planned or under construction in South San Francisco.
To the north, Kilroy and Alexandria said separately on earnings calls this year that their huge projects approved in San Francisco’s Central South of Market neighborhood — the Flower Mart redevelopment and 88 Bluxome — could be built as labs rather than tech offices. Tech company Pinterest canceled a 490,000-square-foot lease at 88 Bluxome earlier this year, citing a shift to working from home.
Other developers are converting existing office space into labs; one example is Longfellow Real Estate Partners, which owns 1.3 million square feet in Redwood City and Palo Alto that is being turned into labs.
“The pandemic has shed light on the need for science and the need for innovation and cures,” said Adam Sichol, co-founder of Longfellow. Biotech is “definitely a bright spot,” he said.
Not all buildings are suitable for labs because they don’t have high enough ceilings or infrastructure like adequate air filtration systems. Building out lab space can also cost two to three times as much as traditional offices, Sichol said.
The life science industry is one of the largest sectors in the local economy, but it’s still dwarfed by tech. It had around 481,000 jobs in California as of 2019, including 145,235 in the Bay Area with an average salary of $172,116, according to a report from industry group Biocom. The tech industry had 835,600 jobs as of last year, based on state data.
This year, the biotech industry has largely avoided the mass layoffs that have pummeled other industries. Genentech cut 474 jobs in July in a move it said was unrelated to the pandemic. Croghan was unaware of any other major layoffs at Bay Area biotech firms.
Hiring biotech workers remains challenging.
“The labor market is always tough for the industry, they’re recruiting Ph.D.s and research scientists,” said Croghan, of Moss Adams.
There are risks that more companies could relocate to lower-cost states. Last week, Revance Therapeutics, which makes a botox alternative, said it is moving its headquarters from Newark to Nashville, which is also a major biotech hub.
“Other states are actively courting life science companies, so there are some concerns that legislative or regulatory changes in California could drive some companies out,” Croghan said.
President-elect Joe Biden’s administration could also take action to limit drug prices, which could hurt biotech companies. But with a closely divided Congress and potential Republican control of the Senate, it’s unclear whether anything will move forward.
California voters passed a ballot measure authorizing $5.5 billion in additional stem cell research bonds, which should boost the industry, said Crean of Objective Capital Partners, who is also chairman of Histogen, a company that works with stem cells.
“California’s not really business-friendly when it comes to taxes,” said Crean, though there are some research tax credits available. For now, the access to talent outweighs the Bay Area’s high costs, he said.
“The human capital is in the Bay Area. The human capital is in Southern California. If you’re starting a company up, you really have to consider those two areas,” he said.
Roland Li is a an Francisco Chronicle staff writer. Email: roland.li@sfchronicle.com Twitter: @rolandlisf
