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Alexandria To Break Ground on At Least 600K Square Feet in Mission Bay This Year

Looking to capitalize on its position as a supplier of scarce new life sciences space in the tight Bay Area market, Alexandria Real Estate Equities plans to break ground this year on at least about 600,000 square feet — and possibly about 900,000 square feet — of new laboratories and offices at its Mission Bay campus in San Francisco.
How much of that space Alexandria builds will depend on how many lease deals it can wrap up this year with life science employers and technology businesses for space beyond 1700 Owens St., which was completed last year, and 1500 Owens St., which is now under construction.
“I think because of very strong demand it is likely we will kick off potentially two more buildings with anchor tenants this year,” said Joel Marcus, Alexandria’s CEO, addressing analysts at a Feb. 12 conference call, held a day after the company released financial results for the fourth quarter of 2007 and all of last year (see separate story, this issue).
While Marcus did not identify the buildings, the two that follow 1500 Owens St. in Alexandria’s Mission Bay pipeline are the 229,000-square-foot 1600 Owens St., and the 365,000-square-foot 1455 Third St.
The company could break ground on the following two buildings in that pipeline, James Richardson, Alexandria’s president, told analysts. Those planned buildings are the 203,000-square-foot 1515 Third St. and the 62,000-square-foot 1450 Owens St.
“We’re well advanced in discussions with several large institutional users for significant portions of the additional four buildings that are most advanced in our pipeline,” Richardson said. “These four buildings will allow for approximately 900,000 square feet of additional space.”
Alexandria is in the process of securing permits from San Francisco officials for 1600 Owens, 1455 Third, and 1515 Third. The REIT has yet to submit schematic designs for the fourth, 1450 Owens — but those designs weren’t expected to be approved until summer 2008.
That activity is in addition to the construction in progress on Alexandria’s second building at Mission Bay, the 153,000-square-foot 1500 Owens St. That building is already on its way to being filled, he said, following the signing by a prospective tenant of a letter expressing its intent to lease 50,000 square feet. Alexandria would not name the would-be tenant.
Talk in real estate circles has included the J. David Gladstone Institutes among the “large institutional users” in talks for the new Mission Bay space. Gladstone now occupies a 200,000 square-foot building on a site it owns within the campus that was completed in 2004.
A Gladstone spokeswoman responded to BRN questions about its interest in the additional space by e-mailing: “I know we have some interest in future space needs,” and adding she would reply back with an answer to whether the institute was considering Mission Bay specifically. That reply had not been sent by deadline.
“We have good substantial interest on the remainder” of the space at 1500 Owens St., Richardson added. “While certainly much work lies ahead, Mission Bay is really beginning to take shape, as we had hoped at the outset of our investment in this premier cluster location.”
Mission Bay has succeeded in part by offering life sciences tenants an alternative to buildings in the Bay Area’s South San Francisco, where a construction boom in new life sciences R&D space has helped raise the average asking rents sought by landlords over the past year.
“As it gets built out, Mission Bay will be eventually an A-primo area. Those are brand new buildings. It’s a designated [redevelopment] area. It’s got nice access to both the train and light rail. It’s an interesting creation, in a sense, of the city of San Francisco,” Robert Schwartz, a senior vice president with Colliers International, told BRN.
Alexandria’s position as the nation’s largest life science REIT, Schwartz added, enhances Mission Bay’s chances of filling future buildings with new tenants, however long it may take: “Alexandria has been very successful out of the city in other areas. They’re excellent in life science. They know it. They understand the market, and they understand the dollars it takes to put in. They know how to design a building with a shell that’s optimized for life science use.
“As of yet, have they had an onslaught of major life science companies taking over and making it into the high density life sciences world that South San Francisco has kind of become? No. The question is, will it happen? And if so, how long will that take?” added Schwartz, who has specialized in the Silicon Valley and greater Bay Area commercial real estate markets since 1983.
One point in Mission Bay’s favor: South San Francisco’s asking rents for R&D space zoomed 15 percent, to $2.74 per square foot as of the fourth quarter from $2.38 per square foot at the end of 2006, according to Colliers. Biotech and other R&D users typically pay “triple net” rents in which tenants pay for utilities, taxes, and maintenance.

“I think because of very strong demand it is likely we will kick off potentially two more buildings with anchor tenants this year.”

Rents have risen even as the amount of available space has ballooned. South San Francisco ended last year with a total 975,217 square feet of R&D space on the market, almost triple the 344,470 square feet available in the year-ago quarter, reflecting in part the completion of 719,000 square feet of new R&D space in 2007, as well as the return to market of 365,000 square feet by Amgen in a cost-cutting move [BioRegion News, Aug, 20, 2007]. 
Neither the space increase nor the rent increase has slowed the South San Francisco market, however. According to Colliers, SSF’s overall vacancy rate for R&D space plunged during the fourth quarter of 2007 to 5.4 percent from 7.2 percent a year earlier.
The squeeze in SSF bodes well for Alexandria’s long-term gamble, namely that companies forced to look for space nearby will find it at Mission Bay. That gibes with one opinion offered late last year by another veteran commercial real estate professional: “If you want to pay, if you’re willing to pay whatever it costs you to be in South San Francisco, but the space just doesn’t exist, then you have to go somewhere else. So Mission Bay in San Francisco is going to get some benefit from that,” said Christopher Jacobs, a senior vice president with CB Richard Ellis [BioRegion News, Nov. 19. 2007].
According to CBRE, South San Francisco’s asking rents for various types of space during the fourth quarter were among the highest in the northern Peninsula section of the Bay Area. They ranged from $2.61 for R&D, steady from the final three months of 2006, to $4.24 for top-dollar “Class A” office space, up 43 percent from Q4 ’06.
Reaching Beyond Biotech
Alexandria’s success may also reflect a change in its Mission Bay leasing strategy carried out last year. After years of filling its campuses almost exclusively by pursuing life sciences tenants, Alexandria last year began marketing Mission Bay by reaching out to other types of technology businesses — such as software and information companies — in addition to its traditional tenant base of research institutions as well as biotech and pharma companies.
During the conference call, Richardson explained the strategy shift as an effort to capitalize as well on the region’s equally tight market for tech companies, stemming from what he called “the lack of high quality, large campus environments in the Bay Area generally.”
But the shift followed the signing of several large leases by Internet companies. Google, for example, last year agreed to lease another 310,000 square feet from the city of Mountain View, about 35 miles south of San Francisco, for a new hotel, conference  center and office space.
And in expanding its tenant base to a broader range of tech businesses, Alexandria took the unusual step of hiring a real estate brokerage specializing in Silicon Valley high-tech lease deals, Cornish and Carey, in addition to using a firm strong on life science deals, GVA Kidder Matthews.
According to “Office Market Trends: San Francisco,” a research report by the commercial real estate brokerage Grubb and Ellis, the percentage of San Francisco lease deals signed by all technology businesses more than doubled over the past two years, from 17 percent in 2005 to 36 in 2007.
According to NAI BT Commercial, the only life sciences companies behind any of the top 10 R&D space leases of 2007 were two medical device makers — Boston Scientific, which leased 360,000 square feet at the Bayview campus in Fremont for the year’s fourth-largest deal; and Advanced Medical Optics, which netted the number-eight deal by leasing 180,086 at 510 Cottonwood Drive in Milpitas.
And while life sciences companies completed the top 7 deals in the San Mateo County subregion that includes South San Francisco, according to NAI BT Commercial, the largest deal there was only 123,000 square feet and consisted of Amgen’s lease for 333 Oyster Point Road in South San Francisco, one of the spaces later placed on the sublease market.
Schwartz said the broader tech strategy has advantages for Alexandria: It not only brings a larger pool of potential tenants, but could save the developer money on tenant improvement costs, since IT and software tenants don’t need the fume hoods, eye washes, and other specialized equipment of life sciences employers.
“If somebody comes in there and they’re more general tech, and they only need $50 to $60 [per square foot in] tenant improvements, and it becomes a generic build-out, depending on the rent you get, from an owner’s standpoint it could be better,” Schwartz said. “If you have to put in a life-science level of cost of tenant improvement, then it’s got to be part of the rent, which gets very high, which means you have to be cautious about who you put in, cause you want to make sure they can pay the rent.”
That can skew deals toward biotech or pharma giants more capable of paying higher rents than an earlier-stage company deemed to be riskier as a result, he added.
Another likely concern for Alexandria is competition from another life sciences campus at Mission Bay. A venture of local developer McCarthy Cook and Company and RREEF, Deutsche Bank’s real estate investment unit, recently completed a 175,000-square-foot addition above 185 Berry St. within China Basin Landing.
Over a 15-month period, the developers added a three-story structure to an existing three-story, 230,000-square-foot building completed in 1991 and now 100-percent leased. The two lower floors allow a mix of office and R&D space, while the top floor houses the base isolation system and mechanical space for current and future tenants, Richard Hayes, vice president of leasing for McCarthy Cook, told BioRegion News via e-mail.
The developers are also adding space by redeveloping for life sciences use a 500,000-square-foot, six-story building on their campus. The Wharfside Building was built in 1922 as a warehouse and converted to office use in the 1960s.
“In addition of leasing up the newly completed [185 Berry St.] addition, we are undergoing a major repositioning of the campus, spending in excess of $20 million to upgrade elevators, common corridors, lobbies, garage and the courtyard and landscaping that separates the two structures,” Hayes wrote BRN.
The project could benefit, most likely long-term, from the presence of Mission Bay, Schwartz said: “It has some possibilities. Ten years from now, it could potentially look very synergistic.”
McCarthy Cook and RREEF hope to add life sciences companies to a tenant base heavy with high-tech and healthcare employers — including University of California, San Francisco, Catholic Healthcare West, LoopNet, Level3, Sprint, Cisco, iCrossing and Silicon Valley Bank.
Hayes said the developers behind China Basin Landing are anticipating the same mix of future tenants as Alexandria — namely companies spinning out of the UCSF and more mature life sciences businesses eager to capitalize on proximity to the an expanded medical center the university plans to develop over the next five years.
UCSF last year announced plans to expand its medical center by building a new $1.2 billion hospital complex to be devoted exclusively to the care of women (36 beds), children (183 beds), and people with cancer (70 beds). The new campus, set to open in 2013, will be on 14.5 acres between Third and Owens and Sixteenth and Mariposa streets, just south of UCSF's biomedical buildings.
“UCSF’s commitment to build a new campus including a hospital, research and teaching facilities will undoubtedly bring with it a number of bio-life sciences companies looking to leverage the expertise and energy the new campus will create,” Hayes told BRN. “We are expecting spin-offs from UCSF’s incubator as well as companies moving from the Peninsula, Silicon Valley and from various locations across the country and the globe as well.”

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