The $ 10 Billion Bright Spot in the Battered World of Office Real Estate



Investors are seeing that higher rents translate into higher property values, which explains why construction projects move forward without lining up tenants. Among the biggest spec developers is IQHQ, a startup that raised $ 2.6 billion last year to develop laboratory buildings that open up new possibilities without a signed lease. In April, the company began construction on the Fenway Center, a $ 1 billion complex on a platform above Interstate 90 in Boston overlooking the rooftop of the famous Red Sox stadium. According to President Tracy Murphy, the company doesn’t worry about filling up the space.

“We build specs, but we don’t build the blind,” Murphy said in an interview from San Diego, where her firm is pouring concrete for a 1.6 million square foot waterfront laboratory complex. “I see no end for money to come.”

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Harrison Street, a Chicago-based alternative real estate investor, has invested about $ 2.6 billion in laboratory facilities and wants to double that amount over the next 24 months, CEO Christopher Merrill said in an interview. Alexandria Real Estate Equities Inc., the largest life sciences investment fund, also has big expansion plans.

In January, he paid $ 1.5 billion for a project in the Fenway area of ​​Boston. The company is building 4 million square feet of space, of which about 1 million has yet to be leased.

According to Geoffrey Langbaum, analyst at Bloomberg Intelligence, as investors push for new space, there is a risk of oversupply. Another danger for developers is that laboratory facilities can cost 15% more to build than conventional offices. Scientific buildings require stronger structures and higher ceilings to provide functions such as improved air filtration. This limits other uses of the property if healthcare tenants do not materialize.

Laboratory buildings trade at a capitalization rate – a measure of return for investors – less than 4%, which is lower than that of apartment buildings or industrial sites. According to Sarah Lagosh, managing director of Eastdil’s Boston office, there has been a “contraction” in capex over the past year, amid a sharp increase in investor capital inflows into the sector.

The rebuilding of the traditional offices is expected to take time as companies call back employees over the next few months. Even so, many firms said they allow people to stay at home at least part of the time. This has raised concerns about the future of downtown skyscrapers, while Covid-19 has given impetus to life sciences facilities.

“The pandemic has propelled life sciences at incredible speed,” said Jonathan Warholak, head of the life sciences team at CBRE’s Boston real estate office. “You can’t do chemistry at home.”

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