Global REIT Acquires Palo Alto, California, Office Buildings Slated for Life Science Conversion
By Katie Burke CoStar News January 10, 2022 | 4:15 P.M.
A portfolio acquisition valued at nearly half a billion dollars is setting the stage for another blockbuster year in Silicon Valley's life science real estate sector, with developers and investors eager to pay top dollar in the already pricey market to capitalize further on anticipated growth.
Alexandria Real Estate Equities, a biotech-focused real estate investment trust with a substantial hold on the region's research and development market, finalized a deal to acquire a four-building package of office buildings in a high-end Palo Alto tech campus for $446 million, according to Securities and Exchange Commission filings.
The REIT's latest Stanford Research Park acquisition — which includes the properties at 3301, 3303, 3305 and 3307 Hillview Ave. — was completed through an all-cash transaction in which Alexandria paid an affiliate of Morgan Stanley $267.6 million for the buildings and $178.4 million for its ground lease, according to property records filed with Santa Clara County.
The deal with the seller, a Morgan Stanley-affiliated fund, encompasses more than 292,000 square feet of fully leased office space, resulting in a price tag that equates to roughly $1,530 per square foot. The Morgan Stanley fund purchased the four office buildings and the ground lease in 2015 for a bit more than $76.1 million, according to CoStar data. Neither Alexandria nor Morgan Stanely responded to CoStar News' requests for a comment.
The Pasadena, California-based REIT said in a filing with the SEC it plans to redevelop the buildings into office and lab space and fold them into the developer's already expansive roster of life sciences properties in the Stanford Research Park, a 700-acre technology park developed through a partnership between Stanford University and the city of Palo Alto. The university owns the land at the more than 10 million-square-foot research park, where all building sales are subject to ground leases.
Sale prices and rental rates in the region have surpassed pre-pandemic levels, and prominent buyers such as Alexandria have pushed those increases even higher.
According to CoStar data, Alexandria's recent deals are substantially above the regional average of about $955 per square foot, a figure that has climbed since the beginning of the pandemic and from the $920-per-square-foot average reported at this time last year. Alexandria's repeated willingness to pay well above the market average underscores the REIT's intense appetite for the region, especially given the amount of money it plans to invest in repositioning the properties for life sciences uses.
With the purchase, Alexandria has invested more than $1.37 billion in properties throughout Palo Alto, one of Silicon Valley's most expensive suburbs. The REIT invested about $650 million in six buildings in the Stanford Research Park over the past six months, a small chunk of the billions of dollars it has invested in the greater Bay Area's booming biotech market.
Since it kicked off its Palo Alto shopping spree several years ago, Alexandria has closed a $136 million purchase of the Embarcadero Place office complex along Geng Road, a four-property portfolio acquired from Los Angeles-based REIT Hudson Pacific Properties. Alexandria followed up with the $100.3 million acquisition of 3170 Porter Drive, a Stanford Research Park property leased entirely to biotech giant Jazz Pharmaceuticals.
In 2019 and 2020 combined, it spent almost $620 million to purchase eight flex office properties, including the acquisition in October 2020 of two Hillview Drive office buildings leased to business software provider SAP Concur and electronics manufacturer Panasonic, according to CoStar.
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