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.   

Invitae Expanding into RTP/Morrisville, NC for $33.50 per Square Foot

 By David Gross

San Francisco-based genetic testing provider Invitae announced earlier this year that it would add 245,000 square feet of lab/office space in Research Triangle Park at 1001 Airport Boulevard in Morrisville, NC.  The company, which reported having 2,100 employees at the end of 2020, plans to hire up to 374 people at its new location.  

The property is a redeveloped shopping mall located across I-40 from Raleigh/Durham airport.  Invitae's initial base rent is $33.50 per square foot with 3% annual escalators across at 160 month term.   According to media reports, RTP beat out Frederick, Maryland, about 45 miles northwest of DC along the NIH/I-270 corridor, for the location.

Earlier this year, Invitae added 40,000 square feet near its headquarters in San Francisco's Portero Hill neighborhood, moving to a Class B creative space at 444 De Haro Street.   Asking rents in that neighborhood are $45-$50 per square foot post-COVID, not significantly higher than the company paid for its RTP expansion space.

At $39/square foot, Suburban Maryland is not a Premium Market

 By David Gross

Earlier this week, I commented on Boston Properties' (BXP) strategy of pursuing lab space in Metro DC, a market it knows well from its office holdings, but not one that commands premium pricing in wet lab space.  Cell therapy tools developer MaxCyte recently announced a 67,000 square foot lease at 9713 Key West Boulevard in Rockville, for what appears to be approximately $40 per square foot based on SEC filings, and Sensei Biotherapeutics leased 7,000 square feet in Alexandria's 1405 Research Boulevard building last year for $39 per foot.  This is nowhere near the $60+/square foot rates now seen in Boston, San Francisco, New York, and San Diego. 

In its recent earnings call, BXP said labs are just over 6% of its portfolio, and it expects this to double over the next few years.  It recently acquired 435,000 square feet near the Shady Grove Life Sciences Center for just $267/square foot, and will be converting all the properties it bought into labs.  While it's also pursuing lab properties around Boston, BXP is likely developing properties this region because of its strong presence in the DC area office market, which often commands premium rents from high billable rate law firms and contractors seeking proximity to the Federal Government.  But in biotech, the activity is centered in a suburban area that has few geographic barriers to entry, is driven by NIH funding, not venture capital, and where lease rates are about 1/2 of what they are in more VC and IPO-driven life sciences markets.  

Is Boston Properties Investing in the Wrong Lab Space Markets?

By David Gross

It's become well known that lab space is greatly performing office space.  With rates in San Diego now topping $60/square foot, the high end pricing has moved well beyond Boston, SF, and New York.   The leading lessors are also moving beyond Alexandria, BioMed Realty, and Healthpeak as commercial space developers are running to this sector.  Leading Class A office developer Boston Properties, which owns the Embarcadero Center, Citibank Building, Salesforce Tower, and Prudential Center, is aggressively following this trend, and converted and acquired nearly 600,000 feet of lab space in Waltham and Suburban DC/Maryland last quarter.

Boston Properties (BXP) is a publicly traded REIT like Alexandria, and focused on high rent markets, primarily Boston, New York, DC, San Francisco, and Los Angeles.  Its stock has returned 30% YTD compared to 16% for Alexandria, and it will be interesting to see whether it decides to go up against Alexandria in San Diego, which is  a top-of-the-line lab market, but a middle-of-the-pack office market. Meanwhile, DC is exactly the opposite.  The modest $269 per square foot price Boston Properties paid for its Suburban Maryland campus is well below the $500+ per square foot prices to build or acquire labs in San Diego.  If BXP wants to get serious about labs, it might need to rethink which markets command premium rents, because right now La Jolla/Torrey Pines is running way ahead of where it's investing along the I-270 corridor outside Washington.