Basics Like Benches, Glass-Washing Gear Hard To Come By
By Lou Hirsh CoStar News February 1, 2022 | 6:56 P.M.
Alexandria Real Estate Equities is coming off a record year for its leasing of mostly life science real estate, but it's struggling with high construction costs and supply-chain disruptions slowing tenants as they try to get into new offices and laboratories.
Instead of a lack of clients, “the bigger risk we face is delays caused by supply chain problems,” Peter Moglia, Alexandria’s co-CEO and co-chief investment officer, told analysts during a fourth-quarter earnings call Tuesday. That's mainly because biotech tenants are struggling to get hold of lab basics like benches and glass-washing gear.
Lab and office space demand is not a problem for Pasadena, California-based Alexandria, the real estate investment trust that's among the nation’s largest biotech property owners. It reported a company record 9.5 million square feet of new leasing during 2021, more than doubling the 4.4 million square feet leased in 2020. The company leased 4.1 million square feet during the fourth quarter alone.
Company executives said space in projects now under construction totaling 4.8 million square feet — in key biotech hubs led by Boston, San Francisco and San Diego — is already 82% leased or nearing completion of lease negotiations. Another 2.6 million square feet expected to begin construction over the next six quarters is now 89% leased or in negotiations.
Totaled up, the company projects those developments will bring in $610 million in new annual revenue as they are completed over the next two years.
But there are obstacles to overcome. Moglia said Alexandria is expecting construction material and labor costs, especially for steel, to remain higher this year than before the pandemic, though they are expected to fall starting in 2023.
According to economics forecasting firm IHS Global, steel prices rose 27% from the prior year in 2021 and are expected to climb another 14% in 2022, before declining 13% in 2023 and 9% in 2024.
Helping Tenants In some cases, he said, Alexandria has used its nationwide access to suppliers to help tenants get what they need faster, which can also boost its costs. In general, Alexandria’s construction timetables haven't been disrupted by supply-chain trouble, Moglia said. Alexandria owns a nationwide portfolio spanning 38.8 million square feet housing more than 850 tenants.
In a research note before the earnings call, analysts David Rodgers and Nicholas Thillman of equity research firm Baird said Alexandria has a highly leased-up construction pipeline, though private and government research funding for the industry could dry up at some point.
The pandemic accelerated demand for biotech space for vaccine research and development. For instance, a new report from brokerage JLL notes San Diego life science asking rents rose 34% over the prior year in 2021.
Biotech landlords recorded a 51% increase in lease transactions, to 139, and 80% growth in square footage leased over 2020 in San Diego, topping 4 million square feet.
For the fourth quarter ended Dec. 31, Alexandria reported total revenue rose 24.4% from the year-earlier period, to $576.9 million. Net income was $72.8 million, down from $435.9 million in the year-earlier quarter.
Funds from operations, an industry-recognized metric gauging the performance of changing portfolios, rose 23% from the year-earlier period to $303.6 million.
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