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Pfizer’s Plan to Move R&D Center to Mission Bay Site Backs Alexandria’s East Bay Flight

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Pfizer’s plan to relocate its Biotherapeutics and Bioinnovation Center to Alexandria Real Estate Equities’ Mission Bay campus in San Francisco resulted in a healthy new lease, and is a signal that the real estate investment trust successfully retooled its Bay Area portfolio earlier this year, executives said last week.
 
San Francisco Mayor Gavin Newsom joined Pfizer and Alexandria executives last week in announcing the drug maker’s 15-year lease for about 100,000 square feet — with an option for another 50,000 square feet — at 455 Mission Bay Blvd. South, the third building for which the REIT has broken ground at Mission Bay.
 
The Biotherapeutics and Bioinnovation Center, or BBC, will move about 100 staffers to Mission Bay from South San Francisco, Calif., where the center and a company bought by Pfizer in 2006, Rinat Neuroscience, now occupy 106,000 square feet at 250 East Grand Ave., within the HCP-owned Britannia Pointe Grand Business Park.
 
At Mission Bay, the BBC will occupy all five floors of the building’s west wing, except for a 5,000-square-foot retail space; and will have an option to lease 50,000 square feet in the east wing. An atrium will connect both wings of the 210,000-square-foot building, which are being constructed simultaneously at an undisclosed cost, and slated for completion in the first quarter of 2010.
 
“We’ve got piles in the ground, we start digging for foundations and grade beams the next week or two. Steel has been ordered. We’re well on our way,” Stephen Richardson, a senior vice president with Alexandria and the director of its San Francisco Bay Area regional market,told BioRegion News last week.
 
Two days after celebrating the Pfizer deal at an Aug. 5 groundbreaking ceremony, Joel Marcus, Alexandria’s chairman and CEO, said the lease’s importance went beyond filling space at the Mission Bay campus.
 
The Pfizer lease, which Richardson said took “a number of months” to negotiate, “also confirmed that our strategy in exiting the weaker, secondary East Bay market in the first quarter in a successful fashion was really the thing to do,” Marcus told analysts during the earnings call.
 
Earlier this year, Alexandria sold off five Alameda, Calif., properties totaling 272,730 rentable square feet for about $170 per square foot, or about $46.4 million. “We did it at a very good price, and at a $20 million gain,” Marcus said on the Aug. 7 call.
 
Three months earlier, Marcus said Alexandria sold off the buildings to avoid exposure to the scheduled rollover of several near-term leases, and because in contrast to the buildings it is constructing at Mission Bay, the Alameda buildings “are not Class A buildings. They’re probably Class B buildings. And they are dated buildings as well.” [BRN, May 12]
 
Two other signs of Bay Area progress cited last week by Marcus: Occupancy of Alexandria’s space in the region inched up to 97.6 percent from 96.7 percent in Q2 ’07. It’s also up sequentially from the 96.9 percent reported for the first quarter of the year. The Bay Area includes urban Mission Bay and suburban properties in South San Francisco.
Alexandria reported no change during Q2 from its situation at the 135,000-square-foot 249 East Grand Ave. There, the REIT earlier this year signed a 65,000-square-foot lease with an undisclosed tenant with an option to expand into the rest of the space — an option “which we’ll know later in the year,” Marcus told analysts.
 
And at the two-building, 162,000-square-foot Alexandria Technology Center on East Jamie Court, “16 percent is now leased” to an undisclosed tenant, “and we’re actively negotiating leases for another 86,000 square feet,” Marcus added.
 
Closer to Partners
 
In a statement, Pfizer said a key factor in BBC’s move to Mission Bay was the presence on the same campus of several research partners, notably the University of California-San Francisco and FivePrime Therapeutics.
 
In May, Pfizer and FivePrime said they would jointly focus on discovering antibody and therapeutic protein products capable of treating “certain areas of cancer and diabetes” in return for an undisclosed up-front payment from Pfizer, an equity investment by the drug giant, and three years of committed research funding.
 
A month later, Pfizer agreed to provide UCSF with $9.5 million in research and other support over three years under an agreement designed to encourage collaborations between the company and UCSF’s existing Mission Bay unit of the California Institute for Quantitative Biosciences, or QB3, a partnership between UCSF, UC Berkeley, and UC Santa Cruz.
 
BBC is also a key element of Pfizer’s revised business model, which relies on the center to foster new research by acquiring or collaborating with academic, institutional, and/or smaller biotech partners, which tend more than bigger biotechs to retain their entrepreneurial cultures as they develop new drugs.
 

“We’re ready to go … but there are no plans to build projects on a speculative basis. Until a lease is executed, as with Pfizer, we’re definitely not moving forward with any of those buildings.”

“This move to be next door to UCSF’s Mission Bay campus will position Pfizer’s Biotherapeutics and Bioinnovation Center for success in the aggressive pursuit of the most exciting and innovative science and the recruitment of the very best scientists,” BBC President Corey Goodman said in a Pfizer statement. “Mission Bay presents a unique opportunity for our organization to collaborate with world-class biomedical scientists and biotech organizations in a setting which allows researchers to easily mingle, exchange ideas and collaborate.”
 
Pfizer’s new business model replaces one anchored on maintaining in-house global R&D operations — the pharma giant’s response to a host of industry-wide problems, including fading patent protection for existing blockbuster drugs, a dearth of new blockbusters, and greater competition from generics.
 
That model is being adopted by several other large pharmaceutical and biotech companies. Last year, Takeda Pharmaceutical, whose US headquarters is in Deerfield, Ill., established a new subsidiary, Takeda San Francisco, a collaboration vehicle or “center of excellence” for research into therapeutic antibodies based at 285 East Grand Ave. in South San Francisco.
 
“When big biotech and pharmaceutical companies with pending patent expirations are motivated to grow and supplement their technology pipelines, they look at the world and say, ‘Where do we need to be?’” Dino Perazzo, a senior vice president with the commercial real estate company CB Richard Ellis, and the director of its Global Life Sciences Group, told BRN last week. “The answer is based on their answer to another question: ‘What do we need? We need new technology.’ Where are they going to go for that? Where the technology is.”
 
Pfizer is the world’s largest pharmaceutical company based on revenues. A Mission Bay presence made sense for Pfizer given not only the proximity to its collaboration partners, but the campus’ visibility in life-sci circles, which could help the company recruit staff, said Perazzo.
 
He said Pfizer’s top-tier status will help drive future life science-leasing activity across the Bay Area, both in San Francisco and its suburbs. Alexandria’s Richardson agreed: “You’re just seeing the emergence of Mission Bay as another spoke in the wheel that has different ingredients, different attributes that may appeal to a very diverse set of tenants up here that aren’t going to compete directly with, and I do think generally complement, what we have down on the Peninsula.”
 
Pfizer is the second pharma giant to join Alexandria’s Mission Bay tenant roster. The first, Merck, was not reeled in by the REIT, but surfaced at the life-science campus after it acquired San Francisco-based Sirna Therapeutics in 2006 for $1.1 billion. Merck occupies 66,000 square feet in the first building completed at Mission Bay, 1700 Owens St.
 
Designs for Pfizer’s new building were approved a year and a half ago by the seven-member San Francisco Redevelopment Agency Commission. The space within 455 Mission Bay Blvd. South was approved as part of a 365,000-square-foot section of the campus the city calls 1455 Third St. However, Richardson said, 1455 Third will be used as the address of a completely separate building in Alexandria’s development pipeline at Mission Bay. That pipeline also includes:
  • 1600 Owens St., a 229,000-square-foot building
  • 1515 Third St., a 204,000-square-foot building.
  • 1450 Owens St., a 62,000-square-foot building. The redevelopment agency commission is expected to approve that building’s design and architecture in September.
No Anchor Lease, No Further Starts
 
Alexandria will not start any additional construction at Mission Bay until it signs anchor tenants to leases for a significant portion of space in a building. Just how much must be leased before breaking ground is a decision the REIT will make case by case, Richardson said.
 
“We’re ready to go, prepared for a tenant, as we were for Pfizer. But there are no plans to build projects on a speculative basis,” Richardson said. “Until a lease is executed, as with Pfizer, we’re definitely not moving forward with any of those buildings.”
 
Alexandria’s Center for Science and Technology at Mission Bay will, when completed, consist of 13 Class-A facilities totaling approximately 2.7 million square feet of space.
 
Last year, Alexandria completed 1700 Owens, which contains 153,000 square feet of life-sci research and R&D space. The REIT also started construction on a second building, the 158,000-square-foot 1500 Owens St. Last week the curtain wall was being installed, Richardson said, with completion probable in the second quarter of 2009.
 
1500 Owens attracted a new user during the second quarter — UCSF’s orthopedic surgery clinic, which signed a lease for two floors totaling about 41,000 square feet. “That’s a perfect example of the diversity of Mission Bay that you may not necessarily find on the Peninsula,” Richardson said.
 
The clinic will expand a UCSF presence at Mission Bay, which consists of a 57.5-acre biomedical research campus set to accommodate about 9,000 students, faculty, and staff when completed in 2020. Plans for a 289-bed UCSF hospital complex are under review by city officials.
 
When it comes to drawing tenants, Richardson said, “UCSF’s presence is on par with the urban aspect of the campus, if not even more important. If UCSF were not here, but we hade an urban design, I don’t think we’d be nearly as successful as we are with UCSF.”
 
For the balance of the space at 1500 Owens, Marcus said on the conference call that Alexandria is “working on a multi-tenant configuration, since we’re overflowing at 1700 Owens.”
 
Last year Alexandria broadened its marketing to draw tech companies compatible with Mission Bay’s tenants and life-sci anchors like UCSF and the J. David Gladstone Institutes. Richardson said that effort was aimed at “broadening the vitality of the community and the diversity of tenants” at the campus, where he said the REIT is “very much on track with where we expect to be with the life science realm.”
 
Asking rents, Richardson said, “are in, say, the mid-$40s” per square foot triple net, comparable with the regional market.
 
1700 Owens is part of a total 900,000 square feet of completed R&D and office space at the 303-acre Mission Bay Redevelopment Area, according to the San Francisco Redevelopment Agency. That figure includes properties not developed by Alexandria — such as the 180,000-square-foot 1650 Owens St., completed in 2005 by the Gladstone Institutes, which owns the building; as well as a pair of six-story office buildings: the 260,000-square-foot 550 Terry Francois Blvd., owned by Tishman Speyer and leased entirely to Gap for its Old Navy unit until 2017; and the just-completed 291,000-square-foot 500 Terry Francois Blvd. In June, developer Lowe Enterprises sold the building to CB Richard Ellis Investors’ Strategic Partners U.S. IV fund, for a reported cost of about $149 million.
 
The redevelopment agency also lists some 800,000 square feet under construction within the redevelopment area, plus another 1.3 million square feet approved or under review by San Francisco officials.
 
In addition to Pfizer’s new building and 1500 Owens, that space includes two life-sci buildings not developed by Alexandria. Shorenstein Properties is completing a redevelopment of the former Esprit warehouse site at 409 and 499 Illinois St., near 16th Street, with two buildings totaling 450,000 square feet. FibroGen will occupy 239,000 square feet at 409 Illinois; the company will move from South San Francisco into its new space in late November.
 
The San Francisco waterfront may someday see a third option for biotech and pharma companies. The life sciences are among the “green” technologies that Miami developer Lennar hopes to accommodate within at lease 2 million and possibly up to 5 million square feet of R&D space envisioned at its $1 billion, mixed-use development now being conceptually planned about 3 miles south of Mission Bay, at the former Hunters Point Shipyard site.
 
Lennar’s plan won a boost from voters in June, when majorities approved a city-favored referendum allowing detailed review of the project once the developer submits formal site plans — and shot down a city-opposed referendum that would have conditioned the project on stipulations that included marketing half the residential units at below-market “affordable” prices and/or rents [BRN, June 9; June 2].
 
But given the long-range prospect for developing plans, then awaiting reviews, that officials have said Lennar’s project would require, “a cluster of companies physically locating there any time in the near term or medium term, I think, is highly unlikely. I would characterize it as multiple decades, not years,” Alexandria’s Richardson said.
 
By then, Alexandria — which holds most of the life sciences space at Mission Bay, expects to have long concluded the bulk of Mission Bay’s life-sci leasing.
 
“As the mayor [Newsom] said from the podium, we did what we promised. And I would say, stay tuned for more good things to come,” Marcus said.

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