Alexandria Chairman Joel Marcus On Emerging Cities, Megacampuses And 'Hucksters'
When Joel Marcus, a trained accountant and biotech industry lawyer, started lab real estate giant Alexandria Real Estate Equities in the 1990s, the sure bet many see in biotech wasn’t visible to many. The company’s first leases in San Francisco charged lab tenants just $6 per SF. Now, the REIT's average tenant pays just shy of $70.
Alexandria has, through a strategy of building campuses and research clusters and rapidly expanding in a handful of key markets, become perhaps the most influential player in a booming market that only accelerated during the coronavirus pandemic. The company just came off its most successful quarter in history, having more than doubled its revenue and total square footage under ownership or development in less than five years.
Marcus spoke with Bisnow this week about the right way to evaluate conversions and biotech cities on the rise, the changing life sciences campus and avoiding the pretenders trying to enter one of the most desirable asset classes in commercial real estate. This interview has been lightly edited for clarity.
Bisnow: You've spoken about office conversions earlier during earnings calls and called them inferior to Class-A campus-type space. At the same time, Alexandria has engaged in some conversions itself. Considering the space crunch the industry faces over the next 24 months, do you still feel like conversions are second-class spaces, and overhyped in the market?
Marcus: Well, I think you have to take a step back and talk about what is lab space. We've acquired properties, we've developed a lot, and we've redeveloped a lot, which is the conversion process. And each market is totally different. So you really have to talk about the market, submarket and what are people trying to do. To give you an example, we bought Arsenal on the Charles up in Greater Boston, an existing campus. Through expensive due diligence, it became pretty clear that a number of the current buildings could easily be converted to laboratories. That's a natural conversion that makes sense.
I think if you go to New York, for example, there's a whole host of people, because their buildings either sit empty, or through dumb decisions, they're stuck with office that they can't lease. It reminds me of the Old West when someone takes a covered wagon around trying to sell this potion that's a cure-all. There's a bunch of hucksters out there. And there are some other brokers out there who are hoping every building can be converted because lab space is great. I’ve been in New York City for a long time. We’ve looked at hundreds of buildings. It’s actually very hard to convert buildings into legitimate laboratories because of how they were built.
You can't treat everything with one statement, conversions are good or conversions are bad. If I'm trying to convert an office building that has low ceilings, not very good for loading capacity, won't really work, but I'm still advertising and trying to hock it as such. Basically, that's unethical. That's being done in a lot of cases.
Bisnow: Since you mention New York City, what’s your diagnosis of what is holding that city’s life sciences market back? You have significant investment there, but it seems like, frankly, they haven't really achieved liftoff. What are the barriers to New York really hitting that top, top tier?
Marcus: Well New York is pretty unique. You have to again go back to when we started in 2001. New York really started as an academic medical center, not a biotech center. Pfizer had a headquarters there, but it did no research. And they only had one place where companies did any R&D in the lab, the Columbia incubator up in Washington Heights. So we started literally at zero.
It generally takes 25 years to really begin to build a cluster and an ecosystem, and we've always said it takes four elements. One is a great location. We think we have that in Manhattan, certainly the Alexandria Center. It takes a lot of risk capital. It takes a lot of management talent and it takes great science. And New York, up until our campus came online, it didn't have a location. It did have great science and great clinical, but didn't have translatable research because very few companies were being formed. There’s also very little risk capital, even though it was the financial capital of the world. And very few entrepreneurs who had actually formed and created successful biotech companies.
We're now in the second decade, and it's become a good small market. Most of the tenants are startups out of academic labs. There are no real big companies that have moved there. You're not moving big research units there, it's cost-prohibitive. The city has to rely on the startup. And that's a heavy lift, inches at a time.
We're dedicated to that market, so we're not going away. But you have to be tempered. And it doesn't have a lot of demand. It's one by one, and it just will take probably another decade or more to become a nice little secondary market.
Bisnow: Switching to a much more developed market, ARE recently paid over $800M for a pair of buildings in Kendall Square, a pretty big premium for what they have recently sold for. And you've made a lot of big moves and large purchases over the past year. Are you comfortable setting the price benchmark, because securing real estate is so essential at this time, especially with the growth forecast down the road?
Marcus: We have 750 or more tenants. Many have very, very significant immediate demands. Many desire a path for future growth. And a lot of that comes from Greater Boston because it's one market out there in life science. So I think that what our job is, is to be great stewards of capital, to make smart investments and to do things that enable our clients to get and sustain laboratory space. You do that through a variety of ways. And so that was one way, and I think we're very good at underwriting. And when we look at our margins and our returns over cost of capital, we feel very comfortable that we're being very, very smart stewards of our capital.
Bisnow: You started ARE at age 47 and you didn't have much management experience. Clearly the way that the operation is run is effective. When you started at that point, what was your management philosophy? What were the inspirations you drew from that sort of helped you make ARE what it is today?
Marcus: I was a partner in a major law firm. I had managed big projects. I had managed big teams. I had led a lot of strategic partnerships between big entities. So I had a lot of experience at managing big things, but I had never managed a company or run a company. But I also was a pretty great student of Jim Collins, of Good to Great fame. I read all of his books. Jim and I are pretty close friends today.
I had studied a lot of the case studies about what really made great companies versus just companies that existed and then maybe went out of existence. And so you learn a lot about egoless leadership, the best idea wins, meritocracy. What's really important is you have service leadership, and you're in service to your team. You're not just ordering them or telling them what to do. My goal was to hire people who could do that same thing. And I think that's why we were so successful.
Bisnow: When you spoke about ARE’s performance last quarter, you said you’d achieved operational tempo to a level that helped ARE be incredibly successful this past quarter. How do you define that and what does that look like in terms of an organization, and how you're able to be both very nimble and very big?
Marcus: Part of our team is working virtually, we have the highest pacing of work we've ever had. It is very intense to run carefully and properly. All of us lead very sophisticated facilities. It's no easy job. And so I think that's why I said we are operating at the highest tempo we've ever operated, especially given Covid.
There was a recent failure up in Northern California, not by us, but by some group who claimed that they were a lab developer. They leased space to pharma. The building was actually a new, beautiful complex. But they didn't know how to run it. Lost power, all the freezers lost all the scientific experiments. And probably the pharma lost something in the range of $10 to $50M of experiments. That's what can happen to people who look at this as simply a real estate transaction. They're only interested in just, 'What do I get out of it?'
Bisnow: What would you need to see to invest heavily in an emerging life sciences market? Hypothetically, let’s say Houston or Chicago or another market that’s been identified as an up-and-coming place. How would you determine when to enter and how would you strategically go about doing it?
Marcus: You have to do the analysis we did in New York. We started in 2000, which was nine years before we delivered the first building. So it took that long for the first space, which was a AAA campus.
But I think you look at, is there a location that can be world-class that can facilitate collaboration, cooperation, innovation, technology transfer. Do you have an abundance of risk capital, which is not very abundant in most cases? You have to have a pretty deep pool of talent. Both management talent, science talent, political talent, and then you have to have really great science and clinical experience.
I looked at Chicago a decade ago. There's really one institution that has some science going on, the University of Chicago. They really don't have much translational research going. There's no great location there. Some people are trying a place or two. There's virtually no risk capital to invest in companies there. There's no real formation going on. There's no deep pool of talent there, and there's no great translatable site. So, I mean, if we looked at just Chicago as an example, which we did about a decade ago, it doesn't meet any of the criteria. So we wouldn't pursue that.
Bisnow: Is there any other place that's getting close? Houston has incredible medical centers and talent. North Carolina gets talked about so much.
Marcus: Houston's a little like New York used to be. Maybe it's the closest because they have multiple institutions. They do have a location now in Texas Medical Center which they're trying to coalesce around those institutions.
The reality though is in Houston right now, there are not many scientists or academicians or political people who have any experience in translating science. And you really need that. I mean, the Bob Langers of the world out of MIT. Literally none of those exist in Houston. Houston's got world-class clinical, that's really their thing. But there are no rock star scientists in the sense of not many Nobel Prize winners or people like that. That doesn't mean there couldn't be over the next generation. And there's almost no risk capital. Even though there's oil, that industry's taking it on the chin. And there's very little management and talent that you can hire. So Houston would still be extremely early on, where New York was 20 years ago.
Bisnow: You also tout the innovation campus model, and I see a lot of examples of that obviously in your portfolio and places you're developing, like the Sequence Drive area in San Diego. How do you see it evolving? We've written a lot about things like biomanufacturing and AI and lab automation, and I'm curious if you see those making a big impact in the life sciences world soon, and if they're the kind of things you're investigating/investing in?
Marcus: I think AI is a benefit. It's still in the early days. It is aimed at trying to speed the ability to hone in on real tangible, targetable, druggable pathways and things like that. I think there are a number of companies out there that are working in that area. It's still really early days. But that would be a really good thing if that happened. It would save a huge amount of time and effort.
With biomanufacturing, I think the real question there is for the country: Do we want to control the manufacturing of the next generation of medicines? And I think the answer is yes. It's sad that the infrastructure bill didn't really allocate huge amounts of money for that, or for semiconductor manufacturing, to keep that in the U.S.
But more and more companies need to keep, especially in the cell therapy, gene therapy, advanced medicines area, to keep their proprietary manufacturing close to R&D, because they're so integral. It's not like the old pill line that you could ship off to India or whatever country, the Philippines or Puerto Rico or a place like that where you put up these factories. These are fully integrated with research. So you have to keep them nearby. So you'll see more and more manufacturing of next-gen medicines only, not the old-style synthetic pills in the clusters.
Bisnow: You really called for a 21st-century infrastructure package. If the government called you up and said, 'Hey, what should we be investing in tomorrow,’ what would you recommend?
Marcus: I would take money out of things like these crazy trains. I mean maybe the trains on the East Coast going from D.C. to Boston, which is maybe the only profitable Amtrak line, as an example, and redeploy those into national critical infrastructure. We only produce 11%-13% of our semiconductors in the U.S., but they're in everything. Why shouldn't we be producing 50%? Same thing with next-gen medicines. Why shouldn't we have most of those here in the United States? I'm here in California and they're spending $100B on a crazy rail line from Los Angeles to San Francisco. And very few people will ever take that. Whether it's Democrats or Republicans, politicians are thinking of 2020 infrastructure, not 2021 infrastructure.
Bisnow: How do you see amenities changing and evolving, both in Alexandria's spaces and otherwise, to keep up with the competition for talent, especially in some of the big markets? That's always going to be an important aspect in designing these facilities and spaces going forward.
Marcus: I think people are going to want more individualized exercise rather than where it's jammed into sweaty rooms. They're going to want more outside activities, whether it be soccer or other things. You have to keep up with the trends.
I think retail is going to be very different. It's not just going to be a kitchen that’s cafeteria-style. It's going to be much different, pre-packaged and done very selectively. So I think people for years are going to be very focused on cleanliness and organization and affordability.
I think there's a whole new generation of thought, you might say retail and activity thought, that's going on that we're trying to take advantage of in our campuses. They’ll be very different compared to what we used to do pre-Covid.