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Alexandria Eyes NYC Joint Venture, More Biotech Space in San Francisco

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Alexandria Real Estate Equities recently offered analysts upbeat updates on two life science campuses it is developing on opposite coasts, saying it will build more space at Mission Bay in San Francisco and start serious lease talks with tenant prospects interested in the firm’s East River Science Park in New York City.
 
During an Aug. 3 conference call, Alexandria CEO Joel Marcus and James Richardson, president and director, said demand from prospective tenants was strong enough in the tight Bay Area market to justify new construction of at least one building at Mission Bay, 1600 Owens St.
 
“We expect to kick off another Mission Bay multi-tenant building over the next quarter or two, and then stay tuned for maybe other progress there,” Marcus said. “We’re likely to start Mission Bay 2 in the third quarter.”
 
Richardson went further: “We are likely to initiate development on one or more buildings in the second half of ’07 as we continue to gauge demand levels.
 
“[Mission Bay] is really becoming the science and technology destination of choice on the Peninsula, and we believe this is going to bode very well for our overall construction and absorption metrics,” Richardson said.
Those remarks came during a conference call in which Alexandria trumpeted its second-quarter financial highlights, including a 42 percent jump in funds from operations, to $41.6 million from $29.2 million, on revenues that climbed 23 percent to $95.9 million from $70.2 million. The company marked its 40th consecutive quarter of reporting results as a public company traded on the New York Stock Exchange.
 
Additional Approvals
 
Alexandria can proceed with 1600 Owens since it has received schematic design approvals, in addition to the city Planning Commission approval received last November. While 1600 Owens has been approved for 229,000 square feet, Marcus told BioRegion News through a spokeswoman the building would be the same size as 1500 Owens, or 155,000 square feet.
 
The company also has additional development options it can carry out quickly.
 
According to the San Francisco Mayor’s Office of Economic and Workforce Development, Alexandria has design approvals for two additional life science buildings — the 365,000-square-foot 1455 Third St., set for a 2009 completion; and the 203,000-square-foot 1515 Third St., set for 2010 completion. And later this year, Alexandria is on track to win design approvals for a third life science building, the 62,000-square-foot 1450 Owens St., also slated for completion in 2010.
 
The REIT also has four development parcels yet to be developed: Block 29, approved for up to 170,500 square feet; Block 30, approved for 330,000 square feet; Block 31, approved for 384,275 square feet; and Block 32, approved for 330,000 square feet. In all, Alexandria plans to build 2.2 million total square feet by 2011, and has rights to build another 2.7 million square feet.
 
Over the past year, Alexandria completed the 153,000-square-foot 1700 Owens St., and has been constructing the 155,000-square-foot 1500 Owens St., which includes 132,000 square feet of leasable space.
 
1700 Owens St. has attracted tenant businesses by offering not only traditional wet-lab space for life science companies, but office space intended for venture capital firms and other businesses that serve biotechs and pharmaceuticals.
 
The building’s largest life science tenant is Merck, which occupies about 70,000 square feet. That space was originally leased by Sirna Therapeutics, which Merck acquired last year for $1.1 billion. Pharmion, a Boulder, Colo.-based biotech focusing on the hematology and oncology markets, leases another 17,100 square feet for its clinical research division, accounting for about half of the second floor. 1700 Owens has also attracted several VC firms requiring just a few thousand square feet of office space — including Arch Venture Partners, the Column Group, Novo Ventures, and Versant Ventures.
 
1700 Owens is one of three completed buildings within the Mission Bay “redevelopment area,” where San Francisco officials have approved more than 3.5 million square feet of commercial, retail, and residential development over the past decade in hopes of revitalizing the neighborhood.
 
The J. David Gladstone Institutes, a trio of independent biomedical research institutes formally affiliated with the University of California San Francisco, occupies the 180,000 square-foot 1650 Owens St., a research facility completed in November 2004 at UCSF’s 43-acre Biotechnology Research and Life Science Campus. The facility houses the first biotech company to move to Mission Bay — FivePrime Therapeutics, a developer of protein and antibody therapeutics, which occupies 29,000 square feet.
 
Another Mission Bay building, the 260,000-square-foot 550 Terry Francois Blvd. completed last year, is occupied by the Old Navy unit of Gap Incorporated.
 
Also being built at Mission Bay, but outside the city’s redevelopment area, is a two-story, 175,000-square-foot addition to the existing 230,000-square-foot China Basin Landing project at 185 Berry St. Owners McCarthy Cook & Company and RREEF Real Estate are marketing the new space for both life science and traditional office use, with occupancy planned for 2008.
 
Within the redevelopment area, the 450,000-square-foot 409 and 499 Illinois St. are being built by Shorenstein Properties. FibroGen of South San Francisco will move its headquarters and its research and development operations to 239,000 square feet it has agreed to lease at 409 Illinois, also next year.
 
Tax Relief
 
In announcing the lease last year, FibroGen cited one key incentive from San Francisco: Under current Mayor Gavin Newsome and Supervisor Michela Alioto-Pier, the city and county of San Francisco in 2004 enacted a seven-and-a-half-year exemption from city payroll taxes for biotech companies. The city’s payroll tax rate is 1.5 percent.
 
Todd Rufo, project manager-business affairs with the Mayor’s Office of Economic and Workforce Development in San Francisco, said the city did not want to be at a disadvantage in pursuing biotechs to neighboring Bay Area communities like South San Francisco and San Mateo County, which have no similar tax. “[The exemption] signaled the city’s commitment to supporting the growth of biotech in San Francisco.”
 
Rufo said the city views Mission Bay as an anchor of its biotech cluster, which now includes some 40 biotech companies. San Francisco’s latest biotech triumph came last month, when Osprey Pharmaceuticals announced it would move its business operations, including the office of its chief financial officer, to the city’s financial district from Montreal.
 
“Our effort has definitely been built around the strength of Mission Bay and promoting what we see as the value proposition for the city and for Mission Bay, centered in large part on the strength and concentration of the human capital, financial capital, and physical capital of the city,” Rufo said.
 
Also under construction is 1500 Owens, “which we expect to deliver either third or fourth quarter,” Marcus said. There, Alexandria is constructing a six-story building with space for labs as well as offices and 2,749 square feet of street-level neighborhood stores.
 
Alexandria’s occupancy at Mission Bay has climbed to 87 percent, Marcus said, based on “leases in place or in process.”
 
Richardson said Mission Bay and East River Science Park are both examples of life science parks capitalizing on locations close to institutions likely to generate tenant businesses, as well as to the financial centers of their respective coasts: “Close proximity to the highest-value resources in these brain-trust markets is critical to long-term enduring and growing asset and franchise value.”
 
Left unanswered by Alexandria during the conference call: What tenant mix will Alexandria try to draw for its new buildings and how will it differ from 1700 Owens? And what effect will another expansion-minded REIT entering the life sciences market — Health Care Property Investors of Long Beach, Calif. — have on the timetable for developing the rest of Mission Bay?
 
HCP’s entry into the lab market won’t affect Alexandria’s Mission Bay development plans, Marcus insisted in answers to BioRegion News questions submitted after the conference call through spokeswoman Judith Sylk-Siegel: “They have nothing to do with Mission Bay.”
 
Alexandria offered analysts more information about its New York City project, East River Science Park, now under construction. Marcus said Alexandria by mid-August would start serious “yellow-line” negotiations with “one very large institution” seeking 150,000 square feet at the campus.
 
“We have another important requirement from another New York City institution, a requirement from a New York City life science company, and two European company headquarters. And we don’t even have a marketing team in place yet,” Marcus said. “We hope our [marketing] effort will come together in the next 60 days.”
 
Alexandria is in talks with prospective tenants for a total 300,000 square feet at East River Science Park, Marcus told BRN.
 
East River Science Park has begun construction of its 725,000-square-foot first phase, to consist of an east tower and a west tower to be completed six months later. The east building would house amenities such as a digital conference center and a “convergence” café. The west building would feature “chemical and heavy infrastructural capabilities for tenants,” Marcus said at the New York Biotechnology Association’s 2007 annual meeting on April 10. The breakdown of office, lab and incubator space has yet to be set.
 

“We think the economics of [East River Science Park] are very compelling. We wish that the markets weren’t as they are, but they are what they are.”

The science park is contemplated as a 1.1 million-square-foot campus on 3.5 acres sandwiched between two medical institutions, Bellevue Hospital Center and New York University Medical Center. Street-level stores would line the right side of East 29th Street from the project’s entrance heading east to an esplanade along the East River, part of the project’s 46,000 square feet of open space. [GenomeWeb Daily News, April 11].
 
Seeking a Partner
 
In addition to the talks with would-be tenants, Alexandria disclosed on the conference call that it has begun talks with prospective joint-venture partners willing to purchase a minority share of the New York City project. Alexandria would retain the majority share; “We’ll have well over a 50 percent position,” Richardson said.
 
Marcus said the search for a minority-share partner has been discussed “over the last quarter in anticipation of the market potentially moving sideways. He told BRN talks have taken place with “several” would-be partners, with Alexandria’s interest primarily in a financial partner.
 
“What we’re looking to do is create a venture where we retain a majority of the economics, certainly the control of the project. That partner would really be, essentially, an equity partner in a minority position. We think the economics of the project are very compelling. We wish that the markets weren’t as they are, but they are what they are,” Marcus said. “We’ll have news probably over the coming quarters.”
 
Those economics include its Manhattan location near two medical centers, a dearth of lab space in the New York region, a ground lease with New York City, and the benchmarking of the low end of potential lease rates on rents fetched a year ago in Cambridge, Mass., where average asking rents zoomed 27 percent over the past year, from $40.12 per square foot triple net to $51.25, according to CB Richard Ellis. (Colliers quotes an even higher second-quarter average asking rent of $60 per square foot, triple net)
 
Alexandria is one of many REITs that have looked to raise capital quickly through joint ventures rather than through stock sales, given this year’s decline in REIT returns. During the first half of this year total returns for an aggregate of REITs compiled by the FTSE Group and National Association of Real Estate Investment Trusts fell 6.96 percent, while the Standard & Poor’s 500 rose by the exact same percentage.
 
“It has been easy for private equity funds to raise capital very cheaply. The way they’re set up doesn’t reward a buy-and-hold strategy. They’re trying to get a lot of money under management very, very quickly. And in that situation, it may be that the most efficient way to do that is through something like a joint venture,” said Brad Case, vice president of research and industry information with the National Association of Real Estate Investment Trusts.
“There does seem to be a situation where the private side has an advantage in the capital markets right now. That’s a cycle; that won’t last. But while it is the case, since REIT stock prices seem to be trading at a discount — at a pretty substantial basis relative to the value of their assets — that does translate to a little bit of an advantage on the private side for raising capital,” Case added.
 
Case said Alexandria and other REITs are generally more interested in partners that can bring money to a venture as opposed to development or management experience they already possess: “A partnership between a REIT and a developer, there’s no value-added there.
 
“The REITs have the expertise they need to do what they do,” Case added. “What they can certainly use is more capital to expand their operations. A joint venture, or a fund directed by a REIT, accomplishes that.”
 
During the conference call, in response to a question from Dave Aubuchon, an analyst with AG Edwards, Marcus said Alexandria rejected selling off part of the New York City project in return for a management fee or leasing income, but would consider such an option, “If we saw those assets as particularly strategic long-term for us. The ones we’re talking about are not in submarkets where we see the need or the interest in trying to expand our presence or trying to franchise.”
 
Marcus said the joint venture may take place before any leases are signed at East River Science Park. “We might have one, which is the big one.”
 
Christopher Kinum, managing director of Cushman & Wakefield’s Global Life Science Practice, said Alexandria’s focus on an institutional anchor tenant makes sense given the growth of research institutes, teaching hospitals, and university research efforts. He cited Yale University’s decision in June to purchase the 136-acre West Haven., Conn., campus being vacated and sold by Bayer HealthCare in a deal that has yet to close [BioRegion News, June 18].
 
“With what Yale recently did, we’re finding that both educational institutions and certainly research and teaching hospitals are expanding. And I think they certainly would be a logical target” for Alexandria to pursue as prospective tenants, said Kinum, an executive director with C&W based in the firm’s East Rutherford, NJ, office. “I would tend to believe [an institutional tenant] might be the anchor, and then they’d look to fill in the rest of the project by hoping to get some corporate, pharma and biopharma in as tenants in the building as well.”
 
Another advantage for Alexandria in New York, Kinum said, is the city’s dearth of life science space. The city has only a handful of campuses for biotechs and pharmas — including Columbia University Medical Center’s three-building, 579,000-square-foot Audubon Business and Technology Center in Manhattan; and State University of New York Downstate Medical Center in Brooklyn, which consists of a 13,000-square-foot lab building built and vacated by ImClone Systems, as well as two phases totaling 24,000 square feet of an incubator building.
 
SUNY Downstate and the New York City Economic Development Corporation have teamed up to create BioBAT, a 486,000-square-foot bioscience center within the Brooklyn Army Terminal. BioBAT signed its first tenant in June when the International AIDS Vaccine Initiative agreed to relocate its laboratory to 36,000 square feet at the bioscience center.
 
“Because of the cost of basic real estate in New York City, there are not a lot of heavy research and manufacturing and discovery operations in the middle of Manhattan,” Kinum said. “So the logical targets are clearly institutions. But that doesn’t mean that someone out of Manhattan might not want to come in and be part of a commercial think tank.”

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