'Signs Of Rebound' Emerging In Biotech, $11B In VC Funds To Kick-Start Recovery, Alexandria Says
One of life sciences real estate’s biggest players sees a clear road to recovery, predicting that momentum, in the form of the increased investment dollars seen in early 2024, will hit its stride as the current glut of new supply tapers off in 2025.
During Alexandria Real Estate Equities’ first-quarter earnings call, Chairman Joel Marcus cited “positive signs of rebound” in investment and financing for biotech, as well as strong performance from the REIT, which saw total revenues grow 9.7% to $769M.
Investments in the sector showed strength not seen since the high point of 2021. Nearly $11B in venture capital deployment in biotech was announced in Q1, according to a sector overview from Alexandria Senior Vice President of Science and Technology Hallie Kuhn, who said increased investment was a “robust sign of the health of the industry.”
In the first quarter, there were 34 venture capital rounds that raised $100M or more, the most since 2021, and $40B in announced merger and acquisition deals, a substantial sum continuing the strong, record-setting M&A pace of 2023. Follow-on capital totaled $15.5B for the quarter, 25% of which flowed to ARE tenants.
To underscore this renewed capital flow, Kuhn highlighted one ARE tenant, Intra-Cellular Therapies, a firm that saw its depression treatment pass Phase 3 clinical testing in April and announced intentions to raise $500M in a forthcoming IPO.
“Demand is milestone-based,” Kuhn said. “They got the right clinical data and they had access to meaningful capital to expand.”
This uptick in funding will grow, according to ARE’s larger market thesis, filtering through the market and leading to tenant expansion and new demand in coming quarters. So far in 2024, to the disappointment of many in lab real estate, these green shoots haven’t immediately impacted leasing and sales activity.
While Marcus and other executives see significant supply coming to major markets this year, a hindrance to better real estate performance, the firm is “laser-focused” on leasing in 2025. This tempered enthusiasm represents a shift from last quarter’s call when CEO and Chief Investment Officer Peter Moglia said the industry was facing a “polycrisis” due to oversupply and lagging funding.
“We're pushing forward our pipeline because of the need for Alexandria's lab space, coupled with solid indicators of positive rebound for life sciences in 2024,” Marcus said on Tuesday’s call.
Moglia laid out a timeline for a more landlord-friendly supply and demand situation in lab real estate. He believes demand hit bottom and will continue to recover, boosted by the kind of funding seen in the recent quarter.
“We have strong conviction that recovery will be achieved in the near term,” Moglia said.
This year will be the peak for new deliveries. Moglia said available overall competitive supply set to be delivered in the San Francisco region throughout the rest of 2024 will represent 9.7% of market inventory. In San Diego, new supply set to open the rest of the year represents 5.5% of inventory, while in Boston, it’ll be just 1.6%, but only because so much was delivered in Q1.
The continuing oversupply issue is clearly reflected in vacancy rates, which hit nearly 13% in Boston, 14% in San Francisco and 10% in San Diego. Moglia believes new supply will start to sharply dissipate in 2025. While industrywide development pipelines are significant today, new projects haven’t broken ground in a few quarters.
This quarter, ARE delivered 343K SF, representing $26M in annualized net operating income. Going forward, 80% of the 2.1M SF of new space delivering in 2024 and 2025 is pre-leased, a significant part of the 5.5M SF total pipeline currently in place.
Alexandria’s positive operating performance in Q1 showed the REIT once again reaping the rewards of its strategic focus on core markets and so-called megacampus sites, which generated 74% of total income. Operating income increased 9.7% this quarter, NOI growth rose 7.6% year-over-year and rental rates jumped by 33%. ARE leased 1.1M SF this quarter, despite what Marcus labeled a “tough macro environment.”
As part of the megacampus focus, ARE has been selling its one-off properties across major markets, resulting in $275M in noncore assets sold or pending sale in Q1. Marcus expects to sell $1.4B in assets this year, focused on full sales instead of partial interest sales, with a majority of sales taking place in the second half of the year.
Still, despite the enthusiasm for future quarters, there was slight hesitation. Marcus noted that macroeconomic conditions in the U.S., geopolitical issues, and the election made it prudent to “be conservative about what we’re doing here.”
