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Alexandria Reports Strong Quarter With Life Sciences Slowdown On Horizon

Alexandria Real Estate Equities' 15 Necco St. development, which will be the home of Eli Lilly's $700M research center.

Proclaiming the company has its “strongest balance sheet in the company’s history,” Alexandria Real Estate Equities Chairman Joel Marcus said ARE's vast and growing portfolio, strong tenant base and growing demand placed it in pole position for continued growth in the biotech sector. 

That may be true, but new quarterly and annual financials do suggest a slowdown for the typically high-flying REIT, including decreasing rental rate growth, a slight decrease in year-over-year lease rates, and a quarterly drop in net income.

Statements from leadership suggest the firm is still confident in rising rents, despite larger economic headwinds, and continued reinvestment of capital into its expansive construction pipeline. 

Alexandria leased 2M SF in Q4, up from 1.66M the previous quarter, and saw a 22% rental rate increase. Occupancy also increased quarter-over-quarter, from 94.3% to 94.8%, with 81% of new leases coming from existing tenants. 

The construction pipeline for the firm remains robust. Last quarter, ARE delivered 500K SF, part of a solid year that saw the company complete 1.77M SF of new product over 15 new projects. There are 7.6M SF under construction, 72% of which is already leased, and 77% of that comes from existing ARE tenant relationships.

CEO Peter Moglia predicted new construction through the end of 2025 will add $655M in annual incremental net operating income. He also pointed out that construction in general is beginning to slow down, based on leading indicators from the AIA Architectural Billings Index, and believes cost escalation on projects will drop to 4%-6%, versus 9%-10% today. 

Vice President of Science & Technology Hallie Kuhn, who argued the so-called slowdown in funding was an overstatement, said that of last year’s $58B venture capital investment in life sciences, 70% of that went into an Alexandria cluster. 

The firm’s property sales throughout 2022, including the March recapitalization of 100 Binney St. in Boston, netted the company $1.2B in profits.

Marcus also went into more detail about the firm’s two Q4 deals. The acquisition of 35 Gatehouse Drive in Waltham, Massachusetts, for $272M on Dec. 29 was a bid to stitch together existing ARE properties at 40, 50 and 60 Sylvan Road and 840 Winter St. to create a suburban mega-campus. It’s currently 100% occupied and now includes 75K SF of additional development space. 

The other pickup, a 3.8-acre tract in Austin, Texas, for $108M in October, was a long-term play and bet on the city’s future growth. Marcus wouldn’t comment on future plans, except to say the company will “do something unique in that spot.”

The company also noted plans to sell a number of properties in the future. Specifically, the financials note aggregate impairment charges of $20.9M during Q4, which reduced the carrying amount of 10 properties and a land parcel located in multiple submarkets, all of which they expect to sell in 2023. Marcus specifically noted that they are at the “letter of intent stage” for many of these expected transactions.