Big Mergers and Consolidations, Ailing Credit Markets and Shrinking Availability of Research Capital Causing Life Science Cos. to Re-Evaluate Their Real Estate Needs, But Govt. Spending Remains a Bright Spot
Evidence that the life science property sector is not immune to the economic ills plaguing broader markets has accumulated steadily in the first half of 2009. Two of the most vivid examples of the economic forces facing the biotech and life science real estate market occurred just this week on opposite coasts.
In San Francisco, pharmaceutical giant Pfizer this week scrapped plans to move its biotechnology research center into 100,000 square feet of space at San Francisco’s Mission Bay redevelopment.
And in New York, OSI Pharmaceuticals Inc., a cancer drug maker, announced Tuesday it plans to consolidate about 350 U.S. employees at a 43-acre site in Ardsley, NY, in Westchester County,
from its operations in Melville and Farmingdale, NY, Boulder, CO, and Cedar Knolls, NJ.
Pfizer and several other major pharmaceutical firms announced a series of mergers and consolidations this year amid what some analysts fear may be a prolonged drought in the flow of research capital that has fueled biotech growth since the mid-1970s. Pfizer confirmed Monday that it's pulling out of a 15-year lease agreement with Alexandria Real Estate Equities (NYSE: ARE
) at 455 Mission Bay S. Blvd., part of Alexandria’s 13-building, 2.7 million-square-foot Center for Science and Technology life science complex near the University of California, San Francisco's Mission Bay campus.
At the time the agreement with Pfizer was announced 11 months ago, the deal as portrayed as a significant economic development victory for the city, which competes for life science tenants with Boston, Baltimore, Philadelphia, San Diego, Washington DC"s Maryland suburbs, and other emerging biotech clusters.
Driven by technological advances in research and development, combined with increases in prescription drug spending and an aging baby-boomer population, the pharmaceutical industry has enjoyed long-term growth. Through tax incentives and other perks, the city of San Francisco has positioned Mission Bay as one of the nation's most prestigious biotech addresses.
Three months after the August lease announcement, however, Alexandria Chairman Joel Marcus revealed in a November conference call that the life science REIT would postpone development of build-to-suit projects in Mission Bay for a pair of institutional credit tenants, which the company declined to name, as concern deepened last fall about the struggling credit and financial markets.
Then in January, Pfizer announced a $68 million bid for Madison, NJ-based Wyeth Pharmaceuticals, one of a host of pharma and biotech mergers that has transformed the industry, including Merck & Co.'s proposed $41 billion takeover of Schering-Plough Corp. in April and Roche's takeover of Genentech in March. By April, Corey Goodman, a Bay Area biotech leader who had championed and been slated to run Pfizer’s relocated biotherapeutics center in Mission Bay, had left the company. A Pfizer spokeswoman told media outlets that the decision not to relocate the biotherapeutics center from South San Francisco to Mission Bay was based on economics, including an analysis of the company’s real estate portfolio following the Wyeth acquisisition.
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OSI Pharmaceuticals, which is Long Island's largest biotech company, agreed to purchase the Westchester County property, which contains 400,000 square feet of existing lab and office space, for $27 million.
The move is described by local boosters as a blow to the biotech prospects of Denver and Long Island. However, OSI will receive incentives from the state of New York for remaining in the state.
"We have recognized that we will only truly capture the full strategic value of our oncology franchise if we simplify our business by bringing together all the elements of our U.S. operations onto a single site," said OSI Chief Executive Colin Goddard in a release.
In a commentary on Newsday.com, Goddard added that the main factor for moving out of Long Island "is our disappointing conclusion that a long-awaited biotech cluster -- which is essential to creating a viable labor market for our company's growth -- will not emerge on Long Island anytime soon. "
The sluggish economy has dampened the enthusiasm of life science companies and startups to expand, according to a March report by Foresight Analytics, which described the near-term prospects for life-science real estate as "shaky." In the wake of consolidations, big pharma companies are re-evaluating and sometimes downsizing their property requirements. The net effect is rising vacancies, declining rents and a growing inventory of new and subleased biotech and lab space on the market, the Foresight report said.
Preliminary sales and leasing data for the second quarter shows that leasing transaction activity dropped sharply in the first six months of 2009 for office, industrial and flex buildings specifying biotech/lab space as an amenity, with more space becoming available than is being absorbed, according to CoStar Analytics. Early figures show that leasing activity in the first two quarters totaled just under 2 million square feet, down sharply from the roughly 3.1 million square feet in activity at midyear 2008.
One silver lining is that the biotech industry turbulence has apparently not caused a large spike in vacancy rates so far. Vacancies in buildings with lab and biotech space stood at about 14.5% nationally at the end of the second quarter -- up modestly from 14.2% at the beginning of the year but unchanged from the same period in 2008, despite the delivery of almost 2 million square feet over the last 12 months.
Indeed, some biotech projects have continued to perform well. BioMed Realty Trust, Inc. (NYSE: BMR
) reached 91% occupancy at its Center for Life Science Boston in the second quarter. In a vote of confidence last week from lenders, John Hancock Life Insurance Company, TIAA-CREF and Westdeutsche ImmobilienBank AG of Germany provided a $350 million, five-year loan at a fixed rate of 7.75% for the Center, a 700,000-square-foot research facility in Boston's Longwood Medical Area.
San Diego-based BioMed and its peers have outperformed the broader REIT sector during the recession. The company posted record revenue and funds from operations (FFO) in the first quarter, BioMed Chairman and CEO Alan Gold reported during an April 30 conference call. Capital is contrained from government grants, public markets, private equity, venture capital, mergers and acquisitions and partnership transactions, but still available by and large, Gold noted.
"The one particular bright spot in the current environment is government funding," Gold said. "The stimulus package implemented includes almost $22 billion for science and research spending, and we see positive signs this funding is not just approved, but the mechanisms are in motion to deploy this capital in the very near term.
"We expect that this has the potential to be a significant positive catalyst for the universities and institutions in the short-term, but also for the future of smaller biotechs spawned by technology that is advanced further with this government support."
That said, downsizing biotech companies are clearly returning space to the market for sublease. For example, ImmunoGen Inc. listed 14,100 square feet of available sublease space at the 90,000 square feet it leases at 830 Winter St. in Waltham, MA, north of the Boston area’s Cambridge biotech cluster. The company moved from Cambridge to the less expensive Waltham submarket last year.
Significant leases signed in the first six months of 2009 include the following, according to CoStar information:
- Cell analysis and antibody development company eBioscience Inc. signed a six-year lease for the 49,347-square-foot, two-story office building at 10240 Science Center Drive in the Torrey Pines area of San Diego. The company will continue to fully occupy the 52,800-square-foot facility across the street at 10255 Science Center Drive.
- The Brain Sciences Institute of the Johns Hopkins University School of Medicine leased 25,000 square feet at the John G. Rangos Sr. Building in Baltimore, an eight-story, 278,000-square-foot, Class A office building at 855 N. Wolfe St. The second floor lab space will house BSI’s central operations. Johns Hopkins Neurology Department also occupies the building.
- Rockville-based contract services company Fisher BioServices leased 20,249 square feet at 20439 Seneca Meadows Parkway in Germantown, MD, signing a 7-year deal with occupancy slated for October. MiddleBrook Pharmaceuticals, which currently occupies the space, negotiated for an early release from its deal, which paved the way for Fisher BioServices to negotiate directly with the landlord, Minkoff Development Corp.
- The Vaccine Research Institute of San Diego leased 10,736 square feet in a 67,998-square-foot flex facility at 10835 Road to the Cure in the Research Park at Torrey Pines in San Diego. The property is bounded by the University of California, San Diego to the south.
Another positive sign is a recent report from the Milken Institute, which suggests that the nation’s top life science hubs will weather the downturn and, as BioMed's Gold surmises, will benefit from federal policy and stimulus initiatives as the economy recovers.
Boston, Greater Philadelphia and the San Francisco Bay Area continue to be the most successful life science hubs in the nation based on employment, R&D capacity, output, investment and other measures, the Milken report said. Other markets rounding out the top 10 include Greater New York; Greater Raleigh-Durham; Greater Los Angeles; Chicago; San Diego; Minneapolis; Washington, D.C.; and Seattle.
Ross DeVol, director of regional economics at the Milken Institute, said "we’ve been saying for years that regions that cultivate their life sciences assets -- including universities, hospitals, tech spin-off and start-ups -- are best prepared to succeed in a changing economy.
"These top performers are well suited to ride out the recession and thrive in the recovery."