Alexandria To Push Ahead With Asset Sales, Starting With Former Pfizer HQ

On the heels of a challenging year for life sciences, Alexandria Real Estate Equities is pushing forward with plans to sell some of its properties, the continuation of a strategy that has helped the firm narrow its focus on its so-called megacampuses and the revenue they generate.

Alexandria will continue its extensive property sales and asset recycling program, which yielded $1.4B in 2023 as well as $461M in total impairment charges. Among the sales will be a 42nd Street asset in New York City, acquired in 2018 and leased to Pfizer through mid-2024, Chairman Joel Marcus said during the company’s Q4 earnings call Tuesday. 

Pfizer moved to another HQ site in New York, and ARE decided to forgo a contemplated redevelopment of the building, due in part to “an abundance of prudence,” a series of “challenging state and local governmental policies,” and the state of the city’s life sciences market, Marcus said. The statement, coming weeks after the sale of a pair of Long Island City properties, suggests a significant pullback.

“In New York City, the life science market there remains, 14 years later, still a small, startup market,” said Marcus, referencing ARE’s initial entrance into the city. 

The firm’s focus on its megacampus strategy can be seen in its earnings, 75% of which came from megacampus properties last year. More assets will be sold in 2024, CEO and Chief Investment Officer Peter Moglia said on the call. This method is part of a plan to “widen the moat,” by selling stray assets and recycling the proceeds to fund megacampus expansion, he said. 

The life sciences market and larger economy are facing a “polycrisis,” from numerous financial challenges and geopolitical tensions to lagging funding in biotech and oversupply in the life sciences real estate market, Moglia said.

Alexandria’s strategy and efforts to maintain growth despite these headwinds suggested just how much the depressed funding market and leasing challenges have impacted the sector overall. 

But despite these challenges, life sciences remains one of the healthiest categories in commercial real estate. The REIT saw solid lab leasing over the past year, including big fourth-quarter leases with Novo Nordisk at the firm’s Waltham megacampus in greater Boston and Cargo Therapeutics, as well as 11% year-over-year net operating income growth. Revenues grew 11.5% year-over-year to $2.8B in 2023, with a nearly 30% rental rate increase last year. 

ARE’s portfolio includes 4.3M rentable SF, with 76% of leasing activity last year coming from existing tenants. Leasing activity in 2023 was half of the average of the “rocket ship” years of 2021 and 2022, but was just under the three-year average between 2018 and 2020, Moglia said.

But ARE, like many other players in life sciences real estate, has a hurdle to clear in the coming year due to expanding supply. Sixty percent of the property in Alexandria’s pipeline over the coming three years, expected to deliver $495M of stabilized net operating income, is leased or under negotiation. Filling the remaining 40% may be more complex because of additional supply coming online, especially from ARE itself, which forecasts next year will be the peak of completions for the foreseeable future. 

Projects Alexandria initially planned to open in 2023 and delayed to 2024 will add significant square footage to the total inventory of the big three markets: 7% of total inventory in Boston, 10.7% in San Francisco and 6.8% in San Diego. ARE has an in-house vacancy rate of 7.05% in greater Boston, 12.36% in San Francisco and 8% in San Diego. This is a market that has given tenants more leverage: ARE noted that the REIT will absorb $114M in rent giveaways to new tenants over the next 10 months.

ARE does have 300K SF of leases signed that won’t commence until later in the year, so it has a head start. But Chief Financial Officer Mark Binda estimated it will have 1.8M left to lease, which he called “manageable due to historic run rates.”

CBRE’s 2024 life sciences outlook said “It’s unlikely there will be enough demand in 2024 for the nearly 38M SF of new [research and development]/lab space under construction.” The company forecasts an oversupply in Boston, San Francisco and San Diego.

ARE hopes that an improving economic picture and increased activity by Big Pharma will create more leasing activity over the next 12 months. Large pharma firms face a patent cliff and substantial loss of revenue, yet have an estimated $1T in available cash to leverage for M&A activity, according to Alexandria Senior Vice President of Science and Technology Hallie Kuhn. She also highlighted the first IPO of the year: San Francisco-based CG Oncology, which raised a better-than-expected $380M, as a sign of the warmth in the markets. 

CBRE called the IPO market sluggish and noted venture capital funding was down 46% from its 2021 peak, while also noting that an interest rate cut could help catalyze the capital markets and VC activity.

Looking ahead, Binda provided guidance for 2024, including occupancy of 95.1%, solid rental rate growth of 15% and “some modest growth and occupancy through the year, as well as growth and same property occupancy in the second half of the year.”

Marcus predicted the industry would benefit from “key macro tailwinds,” including positive merger and acquisition activity, declining interest rates and increased innovation.