Property Sales Give Biotech Brokers the Jitters

Experts say the recently announced purchase of three San Diego life sciences buildings by Alexandria Real Estate Equities Inc., already among the dominant players in local biotech real estate, marks a continuing trend toward consolidation, and could also signal a spree of acquisitions within the biotech lab sector in coming months.

But it’s unlikely to immediately impact overall supply and demand in what has recently been a sluggish market for biotech-related property purchases and leasings, with rents likely to stay competitive as landlords look to lower their vacancy rates.

“This is a competition to control product,” said Greg Bisconti, a San Diego-based senior director in the Global Life Sciences Practice Group of Cushman & Wakefield Inc. “It’s too soon to tell whether this is a good sign or a bad sign, but so far the indications are favorable.

“These companies are looking to show that they’re user-friendly and pro-life-sciences,” Bisconti said of firms maneuvering for what remains a finite pool of lab space.

Pasadena-based Alexandria announced in early August that it would acquire three life sciences properties, and “other selected assets and interests” of Veralliance Properties Inc., a San Diego-based, privately held company that is also prominent among local office and life sciences property owners.

Representatives of both companies were not available for comment, and neither has disclosed the exact locations and sale prices. However, according to CoStar Group, the sale of one of those properties, the 66,244-square-foot Carroll Business Center in Mira Mesa, was completed in mid-July.

Impending Transaction

Alexandria representatives said in a statement that the overall transaction is expected to be completed during the third quarter of 2010, and ultimately include key management and operating personnel of Veralliance, including founder and President Daniel Ryan.

Alexandria, whose stock trades on the New York Stock Exchange under the symbol ARE, is a real estate investment trust focused primarily on life sciences laboratory properties. It is already the largest holder of local biotech lab space, and Bisconti said the Veralliance deal will take its San Diego holdings well beyond 2 million square feet.

Within the San Diego biotech cluster, the company said it already had an asset base of approximately 1.7 million square feet as of June 30. Its more than 30 local tenants include several prominent research institutions and companies, such as The Scripps Research Institute, Sanford-Burnham Medical Research Institute, Amylin Pharmaceuticals Inc., Eli Lilly and Co., and Laboratory Corporation of America Holdings.

Experts not involved in the Alexandria deal note that most of the players in local biotech are smaller firms, including startups, facing a host of financial and other challenges related to research and development.

Because of persistent local lab vacancy rates — currently around 11.5 percent by Cushman & Wakefield’s measurements — Bisconti said new owners of acquired spaces will be focused on filling them, and rents likely won’t be heading upward anytime soon.

‘Relatively Stagnant’ Lease Deals

A recent report by the San Diego office of brokerage firm Jones Lang LaSalle said leasing transactions within biotech remained “relatively stagnant” during the second quarter. Gross absorption of space in San Diego’s four main biotech submarkets was “extremely modest,” with eight deals completed, totaling 37,000 square feet.

The biotech vacancy rate stood at 13.87 percent at midyear by JLL’s measures, remaining flat from 13.96 percent at the close of the first quarter. At the midpoint of 2009, the vacancy rate was 15.66 percent.

The JLL report cited a global economic downturn, which has forced biotech companies to do more with less during the past two years. However, it said a recent rise in local biotech venture capital funding could help boost leasing activity in coming months.

Also, some larger lease transactions remained under negotiation during the second quarter and are expected to close in the second half of 2010.

Grant Schoneman, a locally based life sciences commercial broker at Jones Lang LaSalle, said current trends have been in place for the past two years, and will likely stay intact for the rest of 2010 and into early 2011.

Observers note that consolidations have nearly always been a part of the local commercial real estate scene, but they have had little impact on the financial dynamics of biotech tenants.

Finances Limit Expansion

Brian Cooper, a senior vice president in JLL’s San Diego life sciences practice who primarily handles tenant leasing, said biotech companies have numerous financial hurdles to clear in the current tough economy.

While they are generally benefiting from a tenant’s market, as landlords compete to keep or lure them with pricing and other incentives, they are often more focused on seeking long-term strategic partnerships to cover their research and development costs. They likely won’t be seeking out additional space until those basic financial needs are addressed.

“Real estate is the last part of the puzzle,” Cooper said.

However, acquisition activity could heat up going forward. For now, Bisconti noted, the relatively low number of quality biotech properties — compared with other office types — is attracting investment capital to companies involved in that real estate sector nationwide.

Alexandria and its two primary local competitors — the publicly traded REITs Healthcare Property Investors Inc., aka HCP Inc., and BioMed Realty Trust Inc. — could seek to build up their holdings in San Diego and other biotech hubs, such as Boston and the San Francisco Bay Area.

Bisconti projects that another 500,000 to 1 million square feet of biotech space could change hands in the local market by year’s end.

“You’re going to see more acquisitions in 2010 than you saw during the last two years,” he said.