[BTinSF]

Friday, November 14, 2008
Alexandria Real Estate postpones two bio buildings
Mission Bay developer had tenants ready to go, CEO says
San Francisco Business Times - by J.K. Dineen

Alexandria Real Estate Equities will delay starting construction on two buildings at its Mission Bay biotech campus, despite having tenants willing to lease at least 200,000 square feet, company Chairman and Chief Executive Officer Joel Marcus told analysts during an earnings call.

Marcus said Nov. 3 that Alexandria has “deferred two future build-to-suits for credit institutional tenants” in Mission Bay due to the seizure in the credit markets and economic downturn.

“We could be teaming up on two new construction starts in Mission Bay for something in the range of 200,000 to 300,000 (square) feet and have no leasing challenges other than the negotiations of the lease, but we are simply not doing that,” Marcus said. “We don’t think it’s prudent, and clearly the capital markets are such that that would not be a smart move.”

The statements show not only the strength of tenant demand at the burgeoning Mission Bay life science cluster, but also reflect the reality that the national credit crisis has seeped into every sector of commercial real estate development, including biotech.

Marcus would not name the companies looking to pre-lease space on the campus in the third quarter earnings call, a transcript of which was posted on financial information site Seeking Alpha. He referred to the prospective tenants as “credit institutional tenants that need to be at Mission Bay.”

“One actually needs to be there for a variety of obvious reasons to them and to the nature of the institution. The other has a major collaboration with (University of California, San Francisco) and has a strong desire to be there,” he said in the call.

Marcus said the two firms “were flexible in their need, but would have liked us to pull the trigger.” He said the deals would be revisited next year, although he said Alexandria is “assuming this is a prolonged downturn.”

“We are going to be very cautious about making any new commitments,” said Marcus.

Alexandria declined to elaborate on Marcus’ remarks to analysts, or to specify the buildings involved.

The decision comes as major new commercial construction starts have sputtered to a halt across the United States. In San Francisco, Beacon Capital Partners recently abruptly pulled the plug on a 27-story tower it had started to build at 535 Mission St. Nearby on Rincon Hill, Urban West Associates recently said it would delay construction on phase two of its high-profile One Rincon Hill condo development at the foot of the Bay Bridge. Around the city a half dozen other highly-touted condo towers are on hold.

Despite the overall economic downturn, Alexandria’s Mission Bay biotech cluster has been resilient. It landed a 105,000-square-foot deal for Pfizer’s new Biotherapeutics and Bioinnovation Center at 455 Mission Bay Blvd. South, one of the largest and most significant new leases in San Francisco this year. It also snagged UCSF’s new Orthopedics Institute for its speculative 1500 Owens St. Both those buildings are under construction.

The first spec lab building Alexandria built in Mission Bay, 1700 Owens St., is 100 percent occupied. Overall, San Francisco’s 1.1 million-square-foot lab market is 100 percent occupied, according to a new Bay Area life science report by Cornish & Carey.

With the early success at Mission Bay, Alexandria has spent the past two years rapidly entitling seven more life science buildings totalling 1.5 million square feet. Still, Marcus said on the earnings call that it may be hard to finance new construction even for developers with tenants lined up. He said one “top-tier lender” said they were not currently funding “three or four major construction projects, all fully leased to credit tenants.” He said based on “anecdotal evidence from our discussions with a variety of construction lenders, very little, if anything, is moving through the current pipeline.”

Rich Robbins, president of Wareham Development, which has developed 2 million square feet of biotech space in the East Bay, said biotech companies are facing the same capital issues as every other company: “It’s tough out there, no question.”

But he said Wareham’s properties are 90 percent leased and the company doesn’t plan on slowing down new construction. The developer plans to break ground early next year on 80,000 square feet in Emeryville, across from Emeryville Station, as well as on another 100,000 square feet in Berkeley.

“We have always felt very certain about needing to build 250,000 square feet of pure lab every two to three years,” Robbins said. “That has been our template, and we’re holding to it.”

Building highly specialized new lab space in an expensive market like San Francisco is a difficult undertaking at a time when “nobody knows what credit means,” said Robert Schwartz, a senior vice president with brokerage firm Colliers International.

“Alexandria is a good company and it knows biotech as well as anyone,” said Schwartz. “They are a good barometer to what is happening in the industry.”

jkdineen@bizjournals.com / (415) 288-4971

Source: http://sanfrancisco.bizjournals.com/...17/story1.html