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Biotech REIT Alexandria Real Estate Equities plans to cut its construction spending by $250M this year by pausing or delaying projects in its portfolio.
On the real estate investment trust's first-quarter earnings call Tuesday, Alexandria President Peter Moglia attributed the decision to labor shortages and rising wages amid an already-volatile and fluctuating market for raw materials.
“Cost of materials and supply chain volatility were the initial drivers of construction inflation,” Moglia said, according to a Seeking Alpha transcript. “But now the primary driver is labor with a triple whammy of wage increases, shortage of workers and the inefficiency of the remaining labor force due to the retirement of older, more skilled labor.”
Moglia went on to say that the materials required for biotech-specific development are under additional strain, pointing to “extremely long” wait times for switchgear and equipment and up to three-year wait periods for large transformers.
He said that all these factors make laboratory office projects “more expensive to build than ever before.”
The spending reduction includes halting at least one project that was under construction. The REIT said it "temporarily paused" construction on the 71K SF second phase of a Houston office-to-lab conversion as it waits for further lease-up of the first phase. It also said it was pausing a 180K SF project in the Research Triangle submarket that wasn't under construction but was in its "near-term pipeline."
Despite the cost-cutting, which was first reported by CoStar, Alexandria still has a large portfolio of lab projects moving forward. It said it has 5.5M SF under construction, 1.2M SF in its near-term pipeline, and 74% of that portfolio is already pre-leased or under negotiation.
The company's net income was $121.7M in the first three months of the year, according to its Q1 report, compared with a $117.4M net loss this time last year. However, the occupancy rate of its portfolio was down from 94.8% to 93.6% quarter-over-quarter.
Alexandria operates nearly 42M SF in North America, with properties from Maryland to Seattle. Its largest markets are in Boston, which holds 30% of the REIT’s portfolio, and San Diego, which accounts for 16%.
Its tenants include pharmaceutical giants like Eli Lilly and Co., Moderna and AstraZeneca, as well as higher education institutions like Harvard University and New York University. Uber Technologies Inc. is its largest tenant with over 1M SF.
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