Alexandria To Sell More Properties, Push 'Mega-Campuses' As Lab Supply Glut Weighs On Market
Alexandria Real Estate Equities will lean even more into its mega-campus strategy and sell what the company’s chairman considers “noncore assets” as the broader life sciences market continues to struggle.
The company has wasted no time executing this strategy. Green Street reported Tuesday, the same day as the second-quarter earnings call, that the REIT plans to sell two Cambridge properties: 215 First St. and 150 Second St., valued at $160M and $120M, respectively.
Gone was the talk of the “positive signs of rebound” identified last quarter. The mood of this call was more muted, highlighting a solid financial performance and mixed signals for future leasing activity while shifting from the idea that recovery has started to emphasizing ARE’s ability to weather an uncertain market.
Central to that effort are the company’s mega-campuses, which can be more than 1M SF. Chairman Joel Marcus said he wants to increase the revenue from these huge projects to 90% of the company's total from the current 74%.
Leasing performance and a series of new leases and divestments underscore this acceleration for large-scale properties, as does the overall trouble that seems to be impacting the industry at large, Marcus said.
“We’ve never seen such a supply in our particular niche,” said Marcus. “It’s always been there, but never been oversupplied in a sense. Combine that with more muted demand, and that’s the overarching issue. How that translates into a more robust demand, that’s what we’re all working through.”
There are positive signs of funding growth. Follow-on financing for life sciences hit $27.6B for the first half of 2024, exceeding 2023’s total, said Alexandria Senior Vice President of Science and Technology Hallie Kuhn. Life sciences venture capital, which already hit $24B so far this year, is projected to reach the third-highest annual total by the end of 2024.
A few signs of strain became apparent during the call, for both Alexandria and the market at large. Marcus noted that during a period of oversupply and a flight to quality, tertiary markets and inexperienced developers are struggling.
Many developments are opening fully vacant, he said, because developers “picked sites as if they were investing in offices.” Significant projects in San Diego and Boulder, both built and marketed with high hopes, have struggled to find tenants in today’s market.
ARE has its own leasing challenges. There’s been a decline in the weighted average lease term over the last six months, from 8.7 years to eight years. Marcus attributed that change to more demand for early-stage companies seeking shorter terms, in part to keep their future options open.
ARE leased about 1.1M SF this quarter, roughly the same as Q1, which was, as noted during the call, in line with the company’s average leasing between 2013 and 2020. But during that earlier period, ARE’s footprint was much smaller. In Q4 of 2018, when the firm leased 1.5M SF, its total rentable square feet was 24M SF, just over half of today’s 47M SF.
There’s also 1.1M SF of leases coming up for renewal in the back half of 2024 and 2025 in Boston, which is ARE’s most important market and the one that has the most supply issues.
Colliers reported Boston had 500K SF of negative absorption in Q1 2024, and just 20% of the millions of square feet coming online the rest of the year had been preleased. ARE Chief Investment Officer Peter Moglia said much of that space is coming up in Cambridge and should be easy to lease.
In addition, the completion of the 651 Gateway Blvd. project in South San Francisco, which still has 276K SF to develop, has been pushed back, indicative of tepid demand for that submarket. Marcus added that it has one of the most outsized supply issues of any submarket across the country.
Although market conditions remain challenging, ARE did clock a few significant transactions. Alexandria renewed its Tech Square lease, paying $270M to extend its ground lease for the 1.2M SF campus through 2088.
Formerly the home of Moderna, which has nearly finished its move into ARE’s 325 Binney St. property, ARE found Tech Square to be extremely valuable due to its singular location. Since it was first acquired in 2006, net operating income has quadrupled.
Alexandria also plans to lease it as a multitenant option as opposed to pursuing a single-tenant lease.
ARE reported a 7.4% increase in NOI and steady vacancy rates quarter-over-quarter. Rent growth is forecast at between 11% and 19% for the rest of the year, and upcoming projects in the pipeline are being leased at a steady rate. Approximately 87% of the space coming online between now and the end of 2025 has been preleased.
ARE expects to see much more asset recycling during the latter half of the year, noting that it has $807M in pending transactions, subject to letters of intent or purchase and sale agreement negotiations.
Investors seemed to notice the more somber tone taken during the call. ARE shares were down 4% to $121.41 at market close.
