Company's Nearly 8 Million Square Foot Construction Pipeline Is 78% Leased or in Negotiation
By Lou Hirsh CoStar News July 26, 2022 | 4:47 P.M.
Alexandria Real Estate Equities reported strong second-quarter leasing despite an otherwise volatile economy, as one of the nation’s largest biotech property owners navigates supply chain snags and rising costs to keep new projects on schedule.
The Pasadena, California-based company, which oversees a nationwide biotech property portfolio of more than 41 million square feet, reported second-quarter revenue rose more than 26% from the year-earlier period, buoyed by rising rents. It also announced this week that co-CEO Stephen Richardson is retiring after 22 years with the company, with co-CEO Peter Moglia becoming the company’s sole chief executive.
Founder and Executive Chairman Joel Marcus told analysts Tuesday that the company recorded the third-best quarter for leasing in its 28-year history, with nearly 2.3 million square feet of new space signed amid still strong demand in the quarter ended June 30. The company saw rents rise more than 45% from the year-earlier quarter, as pharmaceutical companies and other large tenants seek out expansion space. About 87% of leasing came from existing rather than new tenants.
The company said its construction pipeline includes 7.8 million square feet of projects that are already 78% leased or in negotiation. Those projects are expected to be under construction within the next six quarters and to deliver $665 million in new annual revenue when completed, executives said.
Alexandria completed six projects during the second quarter totaling 375,000 square feet in markets including the San Francisco Bay Area, San Diego and North Carolina’s Research Triangle region.
Pending projects remain mostly on schedule. But Alexandria and its tenants face rising costs for labor, as well as construction materials such as aluminum and gypsum, used in wallboards, and for diesel fuel that powers construction vehicles.
Moglia said there are also lingering supply chain delays for critical parts, including semiconductors and electrical system components. Labor costs are expected to rise further in coming months as workers look to deal with their own rising living expenses. “Extraordinary lead times remain for equipment used in our product types, including generators, building controls, transformers, switching gear, electrical panels, air handlers and chillers, all of which have lead times which are double what they normally are — many exceeding a year,” Moglia told analysts.
Alexandria so far has protected itself through moves including procuring some supplies on behalf of incoming tenants, and signing construction contracts with guaranteed maximum costs factored in. Higher rents that it commands in several of its ongoing projects also will help it recoup rising project costs, executives said.
While most of Alexandria’s tenant base includes companies well beyond startup stages, life science demand continues to be fueled by historically strong venture capital and government funding, though that has tailed off in the past year after a record $78 billion was invested in North America in 2021, according to a first-quarter biotech report from brokerage Cushman & Wakefield.
The life science industry continues to demand lab and office space to accommodate workers geared to research and development into treatment for coronavirus and other ailments. The 10 largest U.S. biotech markets, led by Boston, San Francisco and San Diego, had 17.1 million square feet of projects under construction at the end of the first quarter, Cushman & Wakefield reported.
For its second quarter ended June 30, Alexandria reported revenue of $643.8 million, up 26.3% from the year-earlier period. Net income was $269.3 million, down from $380.6 million amid rising costs. Funds from operations, an industry-recognized metric gauging performance of changing real estate portfolios, totaled $338.8 million, up from $282.3 million recorded a year ago.
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