Alexandria Is 'All In' On Megacampuses With $1.2B Of Asset Sales Pending
Seeking to endure what Chairman Joel Marcus called a “stubborn economic and operating environment,” Alexandria Real Estate Equities is on track to unload about $1.2B in property on top of the $319M it has sold already this year.
These assets are primarily what the company considers the non-megacampus variety, and selling them allows it to push even harder toward its strategy of operating more giant life sciences centers.
Properties that don’t fit the megacampus mold account for about 24% of the company’s rental revenue, and any one of them could potentially be targeted for sale, ARE Chief Financial Officer Peter Moglia said during the company’s third-quarter earnings call. Some assets simply don't fit the 30-year-old company’s new strategy anymore.
“We’re going all in on it,” Moglia said. “We feel like all the assets we have are good assets. We deem some of them to no longer be part of our strategy, so those are the ones we’re selling in order to fund our pipeline, which is increasing our percentage of megacampus assets.”
The $1.2B in pending sales is split about evenly between stabilized properties and a combination of land sales and vacant or underutilized property. The next quarter alone already has $577M in dispositions subject to nonrefundable deposits.
Selling these properties also brings in some extra cash at a time when the broader life sciences market is suffering. According to a recent JLL report, nearly a third of the nation’s lab space is available, a figure only expected to climb over the next year as delivery of new lab space optimistically funded during the early pandemic years gets delivered into a radically different rental environment.
While ARE missed earnings expectations by a penny, and stock traded down 1.35% on Oct. 22, the megacampus strategy seems to have paid dividends this quarter. ARE posted a $30M increase in revenue quarter-over-quarter and leased 1.5M SF, a 33% jump from Q2 and the REIT’s strongest quarter since the end of 2022. A total of 316K SF was delivered in megacampus properties, all 100% leased. Rental rates across all properties have shot up 16.4% year-to-date.
But even these quarterly numbers, and the pivot towards the megacampus concept, can’t smooth over the bumpy road ARE and others in the industry face in coming quarters due to a supply glut and diminished demand.
Alexandria laid out its delivery schedules and preleasing statistics for the country’s three main life sciences markets through 2026, when the company will have added an estimated 8M SF of new supply. Some markets look particularly challenging. In San Francisco, for instance, ARE will deliver 300K SF in Q4 of this year, which has no tenants so far, and 1.7M SF next year, which is 23% preleased.
Things look better in Boston, where 200K SF will be delivered next quarter, completely preleased, and 2.4M SF set to complete in 2025 is already 65% preleased. In San Diego, half of the 1.3M delivering next quarter is preleased, and the 700K SF delivering in 2025 is 23% leased.
The company has significant plans to sell property to fund its larger capital projects. By 2029, Marcus said, “Our revenues will be overwhelmingly driven by our unique and highly competitive megacampuses.” He also noted during the Q2 call that he wanted to increase the revenue from these huge projects to 90% of the company's total from the Q2 figure of 74%. In just the last three months, that share has risen to 76%.
The long-term plan remains to shed underperforming or noncore assets to focus on megacampus developments. Among the deals this quarter is the sale of 1165 Eastlake Ave. E., a 100K SF life sciences asset in Seattle, to the Fred Hutchinson Cancer Center. That $150M deal allowed ARE to bolster the value of its neighboring assets on 1208 and 1201 Eastlake Ave. E.
As ARE has forecast in earnings calls all year, sales are set to pick up in Q4. Earlier in October, ARE agreed to sell $369M of its Boston area assets, which Q3 financial results suggest were dispersed due to “non-strategic location” and the ability for “immediate reinvestment into our development and redevelopment pipeline.” ARE also agreed to sell 1.5M SF of land in the Sorrento Mesa and University Town Center submarkets for $314M.
Marcus also noted there was a large nonlab, tech tenant reupping a lease in Texas. He wasn’t forthcoming with any further details during the call, citing confidentiality agreements.
Funding in the biotech industry remains a story of the haves and have-nots, one factor that’s keeping industry purse strings so tight and restricting leasing activity. Senior Vice President of Science and Technology Hallie Kuhn commented that certain kinds of funding for firms with solid clinical data is booming.
For those firms, the IPO market has opened slightly and the follow-on financing market is robust, forecast to hit the second-highest annual level in history, she said. But even venture capital, which Kuhn said is on track to hit the third-highest figure in history, has been more disciplined. A recent analysis by Savills found much of the VC funding this year is going to late-stage startups with a proven track record.
But those startups looking to prove their ideas in the marketplace face strict scrutiny for every dollar spent, especially on leases. Moglia said boards have been especially tight-fisted, which means companies are performing extensive due diligence to get the best lease rates and deals are taking longer and longer to complete.
