Alexandria Doubles Down On Asset Sales, Megacampus Strategy Amid Biotech Headwinds
With lab space availability increasing and economic uncertainties piling up, Alexandria Real Estate Equities is doubling down on its strategy to sell underperforming properties and plow the cash into its megacampuses, executives said during a third-quarter earnings call Tuesday.
The macro environment is a challenging one that Chairman Joel Marcus described as a “de facto recession.” Beyond general economic strife, the life sciences real estate market is in the midst of a shift that has made things trickier for landlords like ARE. An April report from CBRE indicated total lab and research and development space across the U.S. would grow by 20% over the following two years, with a record-high volume of new construction underway.
Alexandria Senior Vice President of Science and Technology Hallie Kuhn emphasized the company’s confidence in the science that drives the tenants at the core of the company’s success. The runaway success of obesity drugs, the incorporation of artificial intelligence and machine learning in drug discovery, the quickening rate of Food and Drug Administration approvals this year — 45 thus far, on track to beat the all-time record — and Big Pharma acquisitions suggest increased need for lab space.
More than $400B will be spent on biotech this year between federal funding, venture capital and private funding.
“We see demand holding steady today and believe it will trend upward,” CEO Peter Moglia said.
But the real estate reality industrywide offers less optimism. The stock market has responded with a more negative sentiment: Alexandria's share price is down by roughly a third year-to-date.
ARE also predicted supply increases in major hubs going forward, which many have fixated on as a sign of challenges for leasing. Next year, unleased competitive supply will increase market inventory by 6.1%, 8% and 6.9% in Greater Boston, San Francisco and San Diego, respectively.
In the South San Francisco submarket, ARE has 585K SF under construction that is 60% leased, whereas the rest of the market has 3M SF in the pipeline that is only 19% leased.
“That market has too much stupid supply, much of it in an area people don’t want to be in,” Marcus has said, adding that the situation isn’t nearly as bad in markets like Cambridge, Massachusetts.
ARE executives said the company is able to tap into growing scientific achievements and what Kuhn called green shoots in initial public offering markets because it offers a quality product that will be able to charge premium rent in a more tenant-favorable environment, what Moglia called “a premium that will overcome the competitive supply dynamic.”
To that end, Alexandria continues its selling spree in its own flight to quality. The REIT expects to close $774M in asset sales during the fourth quarter this year, continuing and expanding on the strategy started earlier this year of recycling noncore assets, what Marcus called a “perfect thread-the-needle self-funding plan in 2023 and 2024.” That is a big jump, especially in the current financing environment, compared to the first nine months of 2023, in which ARE disposed of $876M in assets.
ARE has seen year-over-year growth and solid results, with a 7.9% growth in net operating income over Q3 2022 to $1.8B. The past quarter saw 868K SF of leasing activity — a drop from the 1.3M SF of leases signed last quarter and below the firm’s historic average — and a 28.8% rental rate increase. ARE also delivered 450K SF across seven projects, adding to a total of 1.3M SF and $120M in incremental additional revenue for the year.
The $174M sale of 421 Park Drive in Cambridge to Boston Children’s Hospital will ideally strengthen the attractiveness of the REIT’s other adjacent properties. The firm disclosed a $91M impairment charge for a pair of Boston properties it plans to sell. It had earlier planned to turn the properties into lab space but has decided against the project due to a softening market. Early reporting suggested the properties in question might be a 6-acre site at 380 and 420 E St. in South Boston, which the REIT paid $168.5M to acquire.
The strategy remains “maintaining pricing power for highly desirable megacampuses,” Marcus said, adding that they are rare and in demand. Over the past year, ARE has generated 80% of its leasing opportunities from its existing stable of over 800 tenants and sees megacampuses as scaling opportunities.
Demand for space was described as a barbell: extensive asks for 5K SF to 30K SF for emerging firms hitting milestones or 100K SF or larger leases for big firms looking to expand, especially into new clusters to take advantage of talent and growth.
Marcus confirmed on the call that there might be acquisition opportunities in the next few quarters, but he declined to elaborate.