Chan Zuckerberg Initiative is rolling out a major expansion next to the organization’s Redwood City headquarters in a boost for the Peninsula’s struggling biotech sector.

The Chan Zuckerberg Institute for Advanced Biological Imaging signed a 226,000-square-foot lease at Elco Yards, a new project on the edge of downtown along the Caltrain corridor, according to people familiar with the deal. Completed at the end of December, it was one of the single largest biosciences transactions in the Peninsula market and the largest new lease overall in San Mateo County.

The agreement could provide a positive jolt to the market, real estate observers say. Bay Area life sciences companies have been cutting jobs amid a yearslong industry slowdown.

The institute targeted an area that included Palo Alto and San Carlos but favored Elco Yards because of its resources, including an ability to provide state-of-the art microscopes, sources said.  It is one of the few expansions of biosciences lab space in a Peninsula downtown.

The Chan Zuckerberg Initiative, an umbrella entity encompassing both for-profit and nonprofit ventures with funding from Meta Platforms CEO Mark Zuckerberg and his wife, Priscilla Chan, first moved to Redwood City from Palo Alto in 2018. CZI, as it is known, subsequently expanded to other offices in Redwood City and is currently headquartered at 1180 Main St. in the city.

The value of the imaging institute’s lease is approximately $375 million, people familiar with the deal said.

The deal comes after the Chan Zuckerberg Initiative completed an 111,000-square-foot expansion at its nearby headquarters last year, according to market data. The organization did not respond to a request from the Business Times seeking more details.

In late 2021, the Initiative pledged up to $3.4 billion in funding over the next decade to study and eventually eradicate human disease, with the imaging institute announced as part of its plans. The institute assembled an initial research team in 2022. Among its research areas, it’s exploring how superior imaging methods with high-powered microscopes could be a key to understanding such things as how cancer cells influence tumor growth.

Elco Yards is a massive development in downtown Redwood City. Developed by IQHQ, it features a mix of properties with about 670,000 square feet of life sciences and office space and hundreds of planned residential units. At roughly eight acres, the project includes four buildings, each averaging just over 200,000 square feet. The Chan Zuckerberg imaging venture took one of those buildings.

Elco Yards was designed by WRNS Studio and is marketed for lease by Cushman & Wakefield’s Ben Paul. Mike Courson, with Newmark, and Matt Germino, with CBRE, represented Chan Zuckerberg in lease negotiations.

In only a few years, AI companies have extended their real estate footprint across the city by leasing millions of square feet, enough to fill a modern San Francisco skyscraper several times over.

The emerging sector, from newly formed startups to more mature companies, has collectively gobbled up 4.7 million square feet of office space, chipping away at the city’s historically high office vacancy.

AI firms could total as much as 5.5 million square feet by the end of this year, according to commercial real estate services giant JLL. By 2030, their imprint on the city may reach 12 million square feet.

Since mid-2022, AI has bolstered office leasing activity, accounting for up to 15% of deal volume, according to real estate services provider Colliers. The scope is broad and various across the urban core. Big leases since mid-2023 have included OpenAI in Mission Bay and Scale AI in SoMa. Some AI startups needed only a few thousand square feet. Some preferred older, industrial districts. Others have tapped the sublease market.

San Francisco AI companies fuel city’s recovery

Their expansion is delivering a counterpunch to the blows San Francisco has absorbed since the pandemic. This includes the highest office vacancy of any U.S. city and widespread adoption of work-from-home policies that undermined foot traffic at stores and restaurants.

Alexander Quinn, JLL’s director of economic research, Northern California, said without the AI sector San Francisco would have faced even higher vacancy. It still hovers between 33% and 35%, but the office market has likely bottomed out, according to real estate data. Before the pandemic, vacancy was closer to 4% to 5%.

Recent activity coincides with the most positive three months of net absorption San Francisco has seen since 2020. By the end of the fourth quarter, businesses occupied 200,000 to over 300,000 more square feet than they did in the prior three months, according to real estate data.

AI firms embrace old-school startup culture

If the expansion continues, it may rekindle street life that evaporated during the pandemic lockdowns and hasn’t fully returned. Chris Roeder, an executive managing director with JLL, said AI companies feature an old-school startup mentality, one that asks employees to be in the office five-plus days a week, eight hours a day.

That echoes OpenAI CEO Sam Altman’s attitude toward work-from-home policies. He called them a “mistake.”

Jeremy Harper, a senior research analyst with Colliers, said the AI companies “seem like they want people in the office.”

Venture capital is fueling the AI boom. During the first half of 2024, the Bay Area captured 76% of all U.S. AI funding, according to CBRE. In the fourth quarter alone, San Francisco landed more than $25 billion, according to Colliers.

VC firms are also signing new leases across the city. Their partners like proximity to the AI startups they are funding, in the belief that face-to-face meetings and chance encounters foster more deal flow than a calendar full of Zoom calls.

A Maryland-based investment management firm purchased nearly 56,000 square feet of property in Fremont, the company said Friday.

Realterm is now the owner of two local industrial outdoor storage maintenance facilities. Real estate investment company Lift Partners sold the properties for $25,875,000, according to Realterm.

The smaller of the two sites that Realterm purchased includes a 11,750-square-foot maintenance shop and 4,061-square-foot office, at 5120-5170 Brandin Court. Equipment rental company Herc Rentals occupies the space.

The second property, at 44533 South Grimmer Blvd., includes a 36,600-square-foot maintenance shop and 3,571-square-foot office. It is occupied by Halcon Corporation, a national transportation and operational solutions provider.

“Realterm has strategically entered the Silicon Valley industrial market with the acquisition,” the company’s Managing Director and Senior Fund Manager Stephen Panos said in prepared remarks.

Realterm is an independent, global company with a focus on the transportation industry.

“These two properties strengthen our West Coast market position, adding premium assets with top-tier tenants in a new dynamic industrial market,” Panos said.

The Bay Area’s industrial market has been growing, according to Realterm President Isaac Lau. This growth is signaled by increasing rental rates, strong demand and low vacancy, he said.

Industrial and warehouse property vacancy in Silicon Valley has rarely exceeded 3% over the last 10 years, according to a Kidder Mathews market report. The lease rate has also consistently climbed in recent years. The average asking lease rate for industrial properties, as of the third quarter report, was $1.99 – up from $1.80 in 2023’s third quarter.

JLL ‘s Ryan Sitov and Melinda Marino facilitated the transaction and represented the seller.

Lift Partners is a San Francisco-based real estate investment company focused on West Coast industrial and office property.