Wednesday, September 1, 2021

Suburban DC/Maryland - High Unlevered Yields, Modest Lab Rents

By David Gross 

A few weeks ago I wrote about how Suburban Maryland is not a premium rent market.  While downtown DC nearby has been one in the office sector, land is plentiful in its suburbs with no geographic restrictions like the Bay Area and San Diego have, and no major lab space clusters barely a mile of downtown like Boston has.   As a result, lease rates for new wet lab space are generally around $35-$40 per square foot, a far cry from the $60-$110 rates seen in Boston and California.  Considering that DC’s office rates are often comparable to Boston’s, this represents a significant discount for lab space considering the high educational demographics of the Washington area.

Maryland has long been a secondary market for Alexandria, representing nearly 10% of its portfolio, but just 6% of rent revenue due to lower rents than Boston/San Francisco/San Diego.  This has made me question why Boston Properties, which has long had a large presence in high office rent markets, would invest in Maryland as it pursues lab tenants, going against its “premium, low barriers-to-entry” strategy.

While Suburban Maryland doesn’t have the venture funding levels to sustain even San Diego rents, it does offer moderate land acquisition costs with rents that run about $10 higher than Suburban Philly or Research Triangle.  As a result, the yields there can be strong even when rents aren’t impressively high.  In recent SEC filings, Alexandria has reported unlevered yields on new Rockville, MD developments above 8%, compared to 6%-7% in Boston and the Bay Area.  (Unlevered yield = annual property income/total investment excluding debt service costs).  Total acquisition and construction costs in Maryland run around $500 per foot, compared to over $1,000 per foot in larger biotech hubs, but rents are high enough to push yields higher than lower rent or higher cost markets.

While high unlevered yields might make Maryland look attractive for more development, if enough wet lab space developers chased this yield those rents would drop bringing them down quickly.  With the region accounting for just 2% national life sciences venture funding, it is heavily dependent on big pharma spinoffs like AstraZenca’s Viela Bio (now part of Horizon Therapeutics), mature biotechs like Novavax, and NIH, which headquarters its National Center for Advancing Translational Sciences at Alexandria’s 9800 Medical Center Drive building in Rockville.  This tenant class is unlikely to push rents to the levels seen in venture-heavy markets in Boston and California.

Maryland and suburban DC require careful assessment of market conditions for lab developers, but can provide them with strong yields while offering tenants lower rates than other major metro markets.   

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