Owners of biotechnology property are focusing on higher end real estate to increase their chances of signing life science companies to leases during a time of weakened demand for the industry.
Alexandria Real Estate Equities, one of the largest biotech property owners, is ramping up sales of older single-tenant properties to invest more into large, self-contained multitenant campuses with added on-site services — a property type that accounts for about 70% of the company's annual rental revenue. The campuses are favored by the company's most loyal tenants, and they say on-site services help in their recruiting, Alexandria founder and Executive Chairman Joel Marcus said in discussing its most recent earnings.
Among biotech property landlords, tenant retention is top of mind, perhaps more than ever, as vacancies continue to increase well above historical standards, reaching 24% in San Francisco, 27% in Boston and 17% in San Diego — the three largest life science hubs based on research and lab inventory — according to a life science report from brokerage Cushman & Wakefield.
“Softer demand and an increase in vacant sublease space has translated to lower asking rents in some markets. However, the strong appetite for highly amenitized, newly constructed Class A space is expected to push asking rents higher as a significant amount of new space delivers in the sector through 2025,” Sandy Romero, Cushman & Wakefield's global research manager, said in the report.
Aided by its inventory of Class A space and its large roster of global pharmaceutical tenants such as Eli Lilly, Novartis and Moderna, Alexandria has fared better than some of its rival biotech landlords during the past three years.
Executives said Alexandria’s leasing and preleasing remains steady at several campus locations, with its nationwide leasing totaling nearly 1.5 million square feet during the third quarter. That was up 48% from the company’s prior four-quarter average of 1 million square feet, as 80% of leasing activity during the last 12 months was generated from its existing tenant base.
Competitive campuses
Life science landlords face slowing demand for space, especially as small and mid-sized tenants react to reduced levels of venture funding by cutting back on future square footage requirements and putting existing space back on the market for subleasing, CoStar News reported. Research funding has also been shifting away from coronavirus vaccines and treatments that fueled a surge in real estate demand in the first two years of the pandemic.
Developer IQHQ has yet to land life science tenants for its $1.5 billion biotech campus nearing completion in downtown San Diego, a headwind caused by the project's location outside of the city's more popular biotech base, and as nearly all types of users are scaling back space needs.
"The uptake for office and lab tenants has still not surfaced,” Joshua Ohl, senior director of market analytics for CoStar Group in San Diego, has said. “It has been difficult to attract life science tenants to a new biotech node downtown during a period of leaner demand.”
Alexandria executives have said rising biotech vacancies in some regions are a reflection of rival operators converting general-office properties for biotech use but having difficulties filling spaces.
The company says its "unique and highly competitive mega campuses" make the landlord's portfolio a standout during a time of weak demand.
“By the end of this decade, our revenues will overwhelmingly be driven by" such mega campuses, Marcus said during a quarterly earnings call Tuesday, noting those projects also provide the best prospects for financing and rent growth.
The company said newly built projects delivered to market during the third quarter, spanning more than 316,000 square feet nationwide, were fully leased by the end of the quarter.
Those factors helped Alexandria post total revenue of $791.6 million for the quarter, up nearly 11% from a year earlier. Funds from operations, a real estate investment trust industry-recognized metric gauging performance of changing portfolios, reached $407.9 million, growing 6% from the year-earlier period.
'Value harvesting'
Based in Pasadena, California, 30-year-old Alexandria oversees a portfolio spanning more than 47 million square feet of biotech properties in key U.S. hubs.
Company executives said the real estate investment trust this month entered into agreements to sell five operating properties totaling more than 200,000 square feet in San Diego, along with land parcels totaling 1.5 million square feet. A company statement prior to the earnings call said the unspecified properties were sold to undisclosed buyers “that are expected to develop residential properties on these sites” for a total of approximately $314 million.
“Our decision to dispose of these assets, which are not integral to our mega campus strategy, is primarily based on the substantial capital that the sales proceeds will provide for immediate reinvestment into our development and redevelopment pipeline,” the company said in the statement.
The company said it also agreed this month to sell four properties in the Boston area for $369.4 million “to the current tenant of the properties with whom we have a long-established relationship.” Details were not being released pending closings on the San Diego and Boston deals, executives said.
Some recent dispositions do not involve older properties. Alexandria last month announced the $150 million sale of a single-tenant Seattle building, which it completed in 2021, to longstanding tenant Fred Hutch Cancer Center. Alexandria officials said that was also part of an ongoing strategy to invest property sale proceeds into new large-campus developments nationwide.
Alexandria Co-CEO Peter Moglia told analysts that the company’s building and land dispositions, which he described as “value harvesting,” will be carried out incrementally in coming years, after the REIT sold off nearly $300 million in properties during the third quarter ended Sept. 30. “It’s not our intent to sell core assets,” Moglia said.