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GE's Real Estate Presence in West Coast Life Science Scene May Be Short But Sweet

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Arden Realty, the West Coast arm of GE Real Estate, has emerged as a major player among life-sciences landlords — at least in the short term — after agreeing to acquire about 1 million square feet of research-and-development and office space in the past month.
 
Arden Realty’s new life sciences space, which will become part of four commercial portfolios totaling 7.5 million square feet the company has purchased to date, consists of 377,600 square feet in the Silicon Valley city of Sunnyvale, Calif., and the remainder in the larger biotech clusters of San Diego, Seattle, and South San Francisco, Calif.
 
Arden does not plan to hold on to its life-sciences properties, let alone the rest of its new acquisitions, long-term.
 
“We are a trading platform, so that does mean we will buy and sell anywhere in a two- to five-year timeline,” David Dowdney, Arden’s northern California acquisitions director, told BioRegion News on July 11. “While we look at each asset individually, generally two or three to five years is our kind of outlook.
 
“We’re primarily an office/R&D player, but we do have life science within our portfolio. There’s no immediate mandate to accumulate life science. But we seem to be finding that as we kind of chip away at the edges of it,” Dowdney added.
 
Arden Realty has already begun looking to sell its life sciences space by seeking bids for a deal that could close at the same time as its original acquisition, according to a broker familiar with California’s biotech markets, who spoke on condition on anonymity because he was not authorized to discuss the possible spin-off sale. Among those potential buyers, the source said, are the nation’s top three life science landlords: Alexandria Real Estate Equities, BioMed Realty Trust, and Health Care Property Investors.
 
The three, all publicly traded real estate investment trusts, have added to their West Coast holdings in recent months. HCP announced June 4 it will spend $2.9 billion to buy the US portfolio of British-owned Slough Estates USA, which comprises 5.2 million square feet of space in 82 properties in South San Francisco and San Diego County; as well as 3.8 million square feet the company had committed to build in both regions, and another 3.3 million square feet in as-yet-unscheduled future development phases. That deal is expected to close in the third quarter, allowing Slough to expand in the even hotter European and Asian biotech markets [BioRegion News, June 11].
 
Alexandriahas completed a single 155,000-square-foot building at its Mission Bay campus in San Francisco, with 2.2 million total square feet planned by 2011, plus rights to build another 2.7 million square feet. BioMed broke ground May 18 on an 84,000-square-foot expansion of its Towne Centre Drive campus in San Diego, a lab and office complex to be occupied by Illumina.
 
Arden agreed to acquire from Blackstone Group the San Diego, Seattle, and South San Francisco life science properties as part of a total 5.9 million square feet in 38 properties totaling 106 buildings. The sale was announced June 18. Blackstone had closed on that portfolio a year ago this month as part of its larger $5.6 billion acquisition of CarrAmerica Realty.
 
Arden’s buying spree continued on July 9, when it announced it completed its acquisition of the Sunnyvale properties among a total 1.4 million square feet in 26 properties across Silicon Valley, including Palo Alto and Santa Clara. Arden purchased the Sunnyvale and Santa Clara properties from two limited liability companies, MS/FC Crossman and MF/FC SV 1, and the Palo Alto and other Silicon Valley properties from an investor portfolio advised by the US real estate business of UBS Global Asset Management.
 
Dowdney represented Arden in the purchases from both sellers. Greg Cioth led a team from Eastdil Secured that represented the UBS investor portfolio, while Joe Moriarty of Commercial Property Services represented MS/FC Crossman and MF/FC SV 1.
 
The next day, Arden announced the acquisition of the five-building, 163,347-square-foot Scottsdale, Ariz., center office campus from Prince Properties. Mark Levy, an associate acquisition director, represented Arden in the transaction while Christopher Toci and Ted Harrison of Cushman and Wakefield represented Prince.
 
Arden would disclose neither the cost of its Sunnyvale and Silicon Valley acquisitions, citing confidentiality agreements with the sellers, nor the cost of the CarrAmerica/Blackstone acquisition, since that sale is not expected to close until August. The company did say it paid $45.5 million for the Arizona properties.
 
“They [Arden] are buying so much stuff. You’ve got an awful lot of money going into the Arden platform via GE. People buy a lot of stuff and then they flip the stuff that doesn’t fit their portfolio. And what Arden is going to do right now is an unknown,” said John Minervini, a senior director and member of the Global Life Science practice group of Cushman & Wakefield based at its San Diego office. “If they do decide to keep the life sciences stuff, are they going to focus on growing that with a focused team like the BioMeds and the HCPs and the Alexandrias?”
 
Go West
 
Arden’s wave of acquisitions reflect GE Real Estate’s desire to expand its holdings to the West Coast — the reason offered by the real estate unit of General Electric when it acquired Arden for $4.8 billion in May 2006.
 
“We’re hard at work. I’m hard at work as we speak,” Dowdney said. “The marching orders are to expand all the way up the West Coast. These markets continue to outperform other markets.”
 
Headquartered in Stamford, Conn., GE Real Estate has $49 billion in total assets and last year closed on deals totaling $29 billion. Arden, based in West Los Angeles, owns 193 properties totaling 15.3 million square feet in California and Arizona. The company operated as a REIT before its acquisition by GE.
 
Since then, Arden has sought to expand its West Coast footprint beyond its traditional areas of focus in parts of Los Angeles, Orange County, and San Diego. Arden announced May 25 it would sell 33 non-core properties totaling 4.6 million square feet for $1.5 billion to Cabi Developers, a subsidiary of Mexican-owned development firm GICSA. Under the deal, set to close this month, Arden would continue to manage the properties and serve as advisor to Cabi, which also owns properties in Florida, Nevada, and Texas.
 
Minervini said the West Coast has some of the nation’s hottest commercial real estate markets, both in life sciences/R&D and Class A office space. Vacancy rates are in the single digits in the Bay Area and San Diego regions, helping push rents higher.
 
“They’re buying in areas where they might go flat, but they’re just never going to lose,” he said.
 

“You’ve got an awful lot of money going into the Arden platform via GE. People buy a lot of stuff and then they flip the stuff that doesn’t fit their portfolio. And what Arden is going to do right now is an unknown.”

The strength of West Coast biotech markets helps explain why the nation’s top life sciences landlords are all based there. Alexandria is based in Pasadena, Calif.; BioMed in San Diego, and HCP, Long Beach, Calif.
 
Unlike HCP, BioMed, or Alexandria, Arden is assembling a portfolio that combines life science properties within a broad mix of office, warehouse, and office-warehouse “flex” holdings.
 
“If this portfolio was 100 percent life science, that would be a little bit too much for us. But we like the life science element, and it comes along with the basket of goods,” Dowdney said. “Life science goes hand in hand with the markets we want to be in. It goes hand in hand with other technology growth. Silicon Valley, for example, has a life science element.”
 
Arden’s life science holdings in Sunnyvale include:
  • 1221 Crossman/480 Java/441 Moffett — a 151,000-square-foot office/lab campus whose tenants include Kyphon, a developer of medical devices designed to restore and preserve spinal function and diagnose lower back pain;
  • 904 Caribbean — a 76,000-square-foot life science building with offices and clean rooms, whose tenants include Cepheid, a maker of DNA- and RNA-analysis systems;
  • 914 Caribbean — a 70,600-square-foot warehouse building occupied by Abbott Laboratories;
  • 323-325 Mathilda — a 20,000-square-foot medical office building occupied by the Palo Alto Medical Foundation; and
  • 1311 Orleans — a 60,000-square-foot office/lab building whose tenants include Molecular Devices, acquired earlier this year by MDS.
In South San Francisco, Calif., Arden has agreed to acquire 500 Forbes Blvd., a 156,000-square-foot building that houses cancer therapy developer Cell Genesys.
 
In the Seattle suburb of Bothell, Wash., Arden agreed to acquire the 10-building Canyon Park cluster of campuses — Canyon Park East, Canyon Park Commons, and the Canyon Park Office Center. At the five-building, 275,768-square-foot Canyon Park East, Targeted Genetics leases the entire 75,000-square-foot Building A through 2015.
 
In its 2006 annual report, publicly traded Targeted Genetics disclosed it was seeking a subtenant for part of the space, which it envisioned for manufacturing use but had never occupied since signing its lease in 2000.
 
The company’s progress toward finding a subtenant could not be learned at deadline; a Targeted Genetics spokeswoman did not return messages from BioRegion News.
 
In its first-quarter filing with the US Securities & Exchange Commission on May 9, Targeted Genetics said it had paid $10.2 million in contract termination costs for the Bothell facility, and expects to incur another $2.8 million in accretion expenses in September 2015 when the Bothell lease expires.
 
Other biotech tenants at Canyon Park include Eden Bioscience, producer of a plant protein intended to boost yields of corn, cotton and rice crops; the gene synthesis company Blue Heron Biotechnology; and cancer drug developers Seattle Genetics and Sonus Pharmaceuticals.
 
Canyon Park East is part of more than 2 million square feet in 11 sites that Arden has agreed to acquire in the Seattle area.
 
In San Diego, Arden agreed to buy about 2.5 million square feet within 34 buildings. The newest piece of that portfolio is the three-story, 45,000-square-foot La Jolla Commons Pavilion, where the building shell, located within the city’s University City section, was completed in April.
 
Also within that portfolio is the 49,347-square-foot 10240 Science Center Drive, a 6-year-old office building that CarrAmerica snapped up last December for $15.6 million from Pfizer following downsizing at the drug giant.
 
Greg Bisconti, vice president/principal with Burnham Real Estate’s life sciences group, based in San Diego, said both buildings could be successfully repositioned by a new owner.
 
Bisconti recalled how earlier this year he expressed interest in the buildings for a client, the South San Francisco drug discovered Exelixis, during a search it has since put on hold. CarrAmerica did not come down much from its proposed cost for a tenant fit-out, and didn’t respond at all when Bisconti presented a proposal by Exelixis for La Jolla Commons Pavilion. While built to support lab uses, the building could also be fitted out for offices.
 
“I don’t know if that was because they were putting their portfolio up for sale at that time, or it was just [because] they didn’t feel they’d be able to be competitive as a lab building,” Bisconti said.
 
“I personally think the highest and best use for the building based on what’s going on in the office market at UTC [San Diego’s University Towne Center section] is probably going to end up being an office building, cause the rents are very similar and the improvements are going to cost a fraction of what it’s going to cost for lab space,” Bisconti said.
 
Lab fit-out costs, he said, average $175 to $200 per square foot, compared with $40 per square foot for office space.
 
Bisconti said rent for La Jolla Commons Pavilion is not likely to be more than $3.25 per square foot triple net, in which tenants pay maintenance, utilities, and taxes. That’s above the low end of average asking rents for UTC of $2.75 per square foot, though some owners ask for about $3.75 per square foot.
 
As for the former Pfizer building, he said: “I think [it] will end up being a lab building and somebody down the line is going to have to make a judgment call down the line whether to spec it [offer it on a speculative basis without first signing up an anchor tenant] or to price it accordingly.”

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