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How San Diego’s Homegrown Companies View Real Estate

Rendering of the proposed BioLegend campus courtesy of Delawie.

By Carrie Rossenfeld

SAN DIEGO—From start-ups to success stories, many companies that began in San Diego aren’t venture-backed and are quite rent sensitive, even though real estate isn’t their biggest expense, Hughes Marino’s EVP David Marino tells GlobeSt.com.

Hughes Marino Construction Management will be managing the design, permitting, bidding and construction of improvements, as well as coordinating with governmental agencies throughout the entitlements process for BioLegend’s future headquarters in Miramar at Terman Court, just north of the Miramar Air Station. The global manufacturer of antibodies and reagents, which has grown steadily since 2002 when it started as a local San Diego company, has purchased an 8-acre campus for this development. BioLegend now has operations in Europe, Taiwan and Japan.

The project, which will be completed in several phases, will center on a four-story building combining research lab space and executive offices, while offering employee amenities. In addition to the main building, which is expected to be built from the ground-up, three existing buildings onsite are expected to be overhauled to create additional lab and office space, plus a new order-fulfillment center. A fourth building is planned to be demolished to make room for a parking structure to be built in its place.

Currently, Phase 1 of the project, which will be completed in October, is underway. Hughes Marino CM architect Delawie and general contractor Wieland are working on the tenant improvements of an existing 40,000-square-foot, two-story building, which will house research labs and office space. Upon completion of Phase 1, BioLegend will begin moving in phases out of its current facility in Sorrento Mesa. Additional project phases are envisioned over the next three years, with the entire campus slated to be completely finished in late 2019.

While Biolegend declined to comment on its journey as a home-grown San Diego company, we spoke exclusively with Marino about what these homegrown success stories have in common, how they approach business and growth, and how they handle their real estate needs.

GlobeSt.com: What do your clients who have been homegrown success stories have in common?

Marino: San Diego companies, in contrast to the Bay Area, are not as deep with the venture-capital industry. San Diego companies are a little more capital starved earlier in their lifespan. They tend to bunk up with others or work from home or lean toward finding cheaper sublease space with furniture and cabling. This saves them from spending a lot of money on basic infrastructure stuff.

Also, a lot of San Diego companies—in fact, most of them—aren’t venture backed; they are either privately held or owned by other companies. In San Diego, these young companies tend to be more rent sensitive than in other markets. For a savings of 20 cents per square foot, they will move or pick an inferior building, which I feel is a mistake from a retention and attraction standpoint. People are more modest here and are self-funding it; the money is theirs, so they look at the rent check as being meaningful.

At the same time, for many companies, rent is generally not one of their largest-cost items. For a service company, rent can be 4% to 5% of the cost structure; for a manufacturing company, rent can be 1% to 2% of cost structure. So, for manufacturers, your transportation costs may be higher than your rent. Labor, insurance, benefits, materials, equipment—all of these can be higher than your rent. For some companies, electricity is almost as much as their rent. Everybody says rent is the largest fixed cost, but really it’s not. The IT costs for software licenses can be more than rent. I have clients whose travel and hotel costs are more than their rent; they have executives and salespeople flying all over the world, spending hundreds of thousands of dollars a month on travel, meals and entertainment—their reimbursements are as much as their rent. There’s this idea that rent is more than it is as a percentage of cost structure, but it’s not what people think it is.

Nevertheless, a lot of San Diego companies are really focused on rent, and the extra 5 cents to 10 cents vs. being focused on quality and outcome, empowerment of employees, retention and amenities. Homegrown companies are focused on rent dollars, but this has to be in balance with the other objectives of the company and other things on which the company is spending money.

Globest.com: What are these companies’ approach to business and growth?

Marino: I find that a lot of companies go really lean on real estate. They take down enough space for their initial requirements and maybe a little bit of growth, but with the rising economy, companies need to make lease commitments before their lease terms end and the market is out of space. Historically, in a soft market, you can solve for that within a building or in an adjacent building, but as the market tightens, you have to look at a couple of years’ growth. Serial sublease tenants will do one 2.5-year sublease after another in order to avoid making long-term commitments; they’re concerned about overcommitting because they hope to grow, so they don’t want a long-term lease. The sublease market is very rich for those tenants. We are trying to get clients in the best cost situation, and often that’s taking a sublease.

GlobeSt.com: What else can you tell us about how these homegrown companies handle their real estate needs?

Marino: Sometimes they’re late. Given the last five years, while the CRE market has tightened, there has not been a lot of good, quality space on the market, but a lot of junky space that takes renovation and a lot of shell space. Alexandria and BioMed have been great at repurposing buildings that require more lead time, but a lot of companies are not giving themselves enough planning horizon, which limits their options. It takes eight months to get through the engineering, design and construction of space. The process is a lot longer than people realize—and this is for tenant improvements, not ground-up construction. You need to walk in with a half-inch-thick stack of blueprints to get the permit. Also, we’re having trouble on projects with a lot of specialized requirements like special cabinetry for life-science clients. There’s a shortage of labor available to do specialized jobs, and the lead time on these jobs is longer than we’ve seen in 10 years. The construction process itself takes longer to complete than in the past, so you need more lead time than you would think.

This article originally appeared on GlobeSt.com.

David Marino is executive vice president of Hughes Marino, an award-winning commercial real estate company with offices across the nation. One of the top commercial brokers in all of Southern California, David possesses unrivaled, comprehensive market knowledge, and writes regularly about San Diego commercial real estate on his blog, Suburban Scoop. Contact David at 1-844-662-6635 or david@hughesmarino.com to learn more.

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