Alexandria Real Estate Equities, one of the nation’s largest biotech property owners, is reducing planned construction spending by $250 million this year because of lingering supply shortages and high material and labor costs.
CEO Peter Moglia told analysts Tuesday the Pasadena, California-based real estate investment trust is postponing some projects that had been classified as under construction but hadn’t moved forward because of delays in getting construction materials or cost overruns exacerbated by shortages. Alexandria didn't list delayed projects that were set to start in 2023.
Global chip shortages, along with rising worldwide demand for electrification projects, are causing significant delays in acquiring materials and equipment needed to complete specialized biotech lab projects, Moglia said. In some cases, electrical transformers provided by utility firms are taking three years to be delivered.
It's also difficult to find qualified construction workers who are well trained in specialized life science projects, executives said, with the price for that labor rising as many qualified workers have retired during the past three years.
“As you can imagine, the cost of this equipment is reflective of these shortages, and paired with labor shortages is making new laboratory office projects more expensive to build than ever before,” Moglia said during a conference call to discuss first-quarter earnings.
Moglia said these inefficiencies are likely to linger for some time, with expected fallout hitting all developers of speculative biotech projects. He said Alexandria is focusing resources on completing several projects nationwide that are well underway and totaling about 7.6 million square feet, nearly half of which has been preleased.
Surging Rent Growth
Alexandria executives reported posting rent growth of more than 48% in the first quarter compared with a year earlier, the company’s strongest growth rate in its nearly 30-year history. Its first quarter leasing totaled 1.2 million square feet, exceeding its quarterly average for the five years preceding 2021.
The company said 85% of new leasing during the first quarter came from its existing tenant base of more than 850 tenants, a large portion of which are global pharmaceutical firms.
Demand for life science space among the largest tenants has generally remained strong for Alexandria and rival biotech landlords, after venture and government funding for life science firms slid from records seen in 2020 and 2021. That funding totaled approximately $30 billion in the U.S. in 2022, down from nearly $39 billion in 2021, according to industry research firm PitchBook Data.
Hallie Kuhn, an Alexandria senior vice president who also oversees venture investments, said the company and its tenants have generally seen minimal fallout from the collapse of Silicon Valley Bank in California and disruptions created for some depositors. That’s largely because life science is less dependent than the general technology industry on private venture funding sources that might have done business with Silicon Valley Bank.
But there was some changeover required for tenant letters of credit that had initially been issued by Silicon Valley Bank. As of April 24, Alexandria reported that tenants had switched $26 million of their deposits to new banks or to new forms of lease security, $64.7 million in deposits are in the process of transitioning to new banks acceptable to Alexandria, and $17.6 million in deposits remain to be transitioned.
Alexandria oversees a nationwide biotech-focused portfolio spanning more than 70 million square feet. For the first quarter ended March 31, the company reported total revenue of $700.8 million, up from $615.1 million in the year-earlier quarter. Net income was $75.3 million, compared with a net loss of $151.7 million in the year-earlier period.
Funds from operations, an industry-recognized metric gauging changing real estate portfolios, was $375.7 million, up from $324.6 million in the year-earlier quarter.