The life sciences sector was the hottest real estate segment during the pandemic, driven by the race to develop vaccines and ongoing advances in gene therapy. But the market has since slowed down over the last couple of years as players in the space grapple with the same challenges many other operators in real estate are facing, like high interest rates and the high cost to build. Alexandria Real Estate Equities (ARE) is the country’s largest life sciences real estate owner, operator, and developer, and its actions can be seen as somewhat of a barometer of the state of the industry. Lately, the life science REIT has been selling off some of its properties as part of an ongoing strategy, at the same time focusing on leasing up its megacampus properties in the country’s largest life sciences clusters.
Headquartered in Pasadena, Alexandria marked 30 years of operation earlier this year. The company’s current total market capitalization is $20.6 billion, and it operates 42 million square feet of space. The first few months of 2024 saw the life sciences REIT offload a number of properties, some of which sold for a loss. In February, Alexandria sold an office building in Andover, Massachusetts, for $3.9 million, a sharp drop from the $14.3 million the firm paid for the property when it acquired it in 2022. The next month, in South Boston, ARE sold a handful of industrial buildings for $13.3 million. Other recent sales came at the end of 2023, when the company sold two industrial properties in Boston that were previously slated to become life science developments for $87 million, down from $169 million that the company spent for the property in 2020. And ARE also sold two Boston-area properties for a combined total of $306 million.
The sales were not a surprise. Company executives revealed a strategic plan to sell off underperforming properties in its earnings call last October. The decision came as the amount of lab space availability increased and economic uncertainties accumulated. A recent report on the life sciences market from Cushman & Wakefield found that venture capital funding, which hit a peak in 2021, fell significantly in 2023. However, there are reasons for optimism going forward for the industry. In the first month of this year, series A funding in the market totaled $1.1 billion, averaging $50 million per deal—almost double the average deal size over the last three years. On the leasing side, Cushman & Wakefield researchers expect that rents will rise and demand will be steady in 2024, as nearly 16 million square feet of new space is expected to come online.
The public biopharma industry has doubled since 2008, going from around $2.5 trillion to more than $5 trillion, and venture capital in the industry is on pace to reach four times the levels deployed in 2008. But the company was confident in the future of the space, pointing to factors like the soaring popularity of drugs to address obesity, the FDA’s faster pace with approvals, and companies’ use of AI and machine learning in aiding drug discovery. Additionally, the company expected more than $400 billion would be spent on biotech in 2023 between federal funding, venture capital, and private funding. “We see demand holding steady today and believe it will trend upward,” said Alexandria’s CEO Peter Moglia at the time.
So far, in 2024, the REIT has offloaded $17 million in the first quarter and has an additional $258 million in pending transactions. Revenue for the first quarter of this year was $769.1 million, up 9.8 percent over the same time period last year. Now, with the first quarter of 2024 in the rearview mirror, company leaders are continuing their strategy of selling off underperforming properties and are keeping a steady focus on leasing. “We are particularly laser-focused on leasing for the 2025 pipeline as well as redevelopment space to be delivered in 2025,” said Executive Chairman & Founder Joel Marcus in the first quarter earnings call. Looking forward, company leaders expect to sell more non-core properties outright rather than partial interest sales. Executives said the company is about 20 percent through its $1.4 billion plan to shed underperforming assets.
Another big focus for ARE is the company’s “mega campus” strategy. The REIT has a number of what it calls mega campuses in the country’s largest life sciences clusters, including Boston, San Francisco, New York City, Seattle, and San Diego. Of its annual rental revenue, 74 percent comes from its collaborative mega campuses, according to the company. Future projects in the pipeline that are slated to deliver in 2024 and 2025 are 80 percent leased, and company leaders anticipate that leasing will continue to incrementally recover in its core markets. “We expect that the lack of funding activity in early 2023 will continue to be an overhang to full recovery for a quarter or two, but we have a strong conviction that a recovery will be achieved in the near term,” said Peter Moglia, CEO & CIO of ARE, during the earnings call.
In New York City, where lawmakers have been pushing to expand the city’s life sciences sector, Alexandria has Company leaders continue to be vocal about what they perceive as a lack of support for biotech startups in a market that has long been viewed as having a wealth of potential for expansion. “City and state money is better spent not so much on infrastructure tax credits because the private industry will bring the infrastructure,” said ARE Executive Chairman & Founder Joel Marcus.
Instead, Marcus believes money should be spent to support the founding and funding of early-stage companies. He reiterated these comments in the company’s recent earnings call, pointing to the contrast of a flatline in lab leasing in New York City—CBRE figures showed there was no life science leasing in the first quarter of 2024—with encouragement from elected officials to deliver more lab and life sciences space. “We sit in a very good position with our campus, but nonetheless, when you have local and state governments who are not mindful of using funding better spent on funding startups and also the health, welfare, and safety of the citizens, that’s very disconcerting,” Marcus said.
The life sciences sector is not immune to the challenges the rest of the real estate industry is dealing with, but despite coming back down to Earth from the ultra highs of 2021, it’s a segment that is still generating strong demand and showing solid fundamentals and growth. Alexandria’s decision to let go of weaker assets and focus on its best-performing properties is working for the company, as evidenced by its latest earnings report. Though the company already has a major presence in all of the country’s top life sciences and biotech markets, leaders at the firm have been clear about wanting to continue growing the markets, as evidenced by the push for more support for early-stage biotech companies in places like New York City. As company leaders anticipate a rebound in leasing over the next several months, Alexandria is positioned to continue to post good results, even as other REITs struggle.
