Life science space is becoming a premium commodity in some U.S. commercial property markets. Nowhere in the country has the tightening supply of this specialized commercial office space been more evident than in the supply-constrained San Francisco Bay Area -- especially in South San Francisco and the San Francisco CBD, where few commercial listings for lab space are available and leading life science owners and developers such as Alexandria Real Estate Equities Inc. (NYSE: ARE) and HCP Inc. (NYSE: HCP) are competing with technology and Internet companies for some of the last available land parcels.

In recent months, tech companies have scooped up land in the Bay Area that effectively eliminates millions of square feet previously earmarked for lab and biotech buildings in one of the nation's tightest land markets. In response, Alexandria and HCP have acted recently to lock up available properties and fill the demand at increasingly healthy return profiles on new development, including assets within the Mission Bay redevelopment in San Francisco's CBD, one of the most desirable biotech addresses in the country.

However, observers say they don't expect another speculative boom like the one during the mid-2000s upcycle that fueled construction of millions of square feet of life science space in clusters like the Bay Area, Boston/Cambridge, San Diego, Raleigh and Durham, NC; New York, Seattle and suburban Maryland. Even in the tightest markets like Boston and San Francisco, companies are still mainly interested in less risky build-to-suit or solid pre-leased projects.

"To build true, specialized life science space on spec is a challenge given both the above-average cost per square foot and the unique needs of each user," noted Chris Macke, senior real estate strategist for CoStar.

Just 10 months ago, ARE sold most of its undeveloped Mission Bay land to cloud computing company Salesforce.com for construction of a global headquarters -- a loss of up to 2 million square feet of potential new lab space development. In April, ARE jumped back into the Mission Bay market, acquiring a newly developed two-building property at 409-499 Illinois St. developed by Shorenstein Properties and SKS Investments.

Large tech companies such as HP, Motorola, Google and others have been expanding within Silicon Valley in recent quarters. Firms are now pushing from Mountain View and Sunnyvale northward into San Francisco, sometimes into land and space previously earmarked for life science development.

With lab vacancy now at about 5% in the San Francisco area, development may become an attractive option, with existing buildings for sale likely to be priced in the mid to high $600-per-square-foot range, according to HCP. And the company has jumped right in, announcing the purchase April 15 of the largest undeveloped site in the city, a 20-acre parcel called The Cove at the former U.S. Steel site in South San Francisco.

HCP acquired the land, next to the REIT's 900,000-square-foot Oyster Point campus anchored by Amgen, from Genentech Inc. for $65 million and began development of The Cove at Oyster Point late last month. The project will deliver up to 800,000 square feet of new lab and office space at an estimated 8.5% return on cost.