An ongoing partnership between JBG SMITH (NYSE: JBGS) and Gallaudet University in Washington, D.C. aims to enhance and improve the unique campus environment of the nation’s leading educational institution for the deaf and hard of hearing, while also bringing it into closer alignment with its surrounding community.
In January 2022, Gallaudet, a private federally chartered research university, and JBG SMITH received final zoning approvals for the first phase of their collaborative Sixth Street Development project. The multi-phase project will develop a series of properties on the western edge of the university’s NoMa (North of Massachusetts Avenue) campus, creating mixed-use development and broadening Gallaudet’s interaction with the surrounding Washington, D.C. community.
Phase one includes three buildings totaling approximately 760,000 square feet of multifamily residential, 60,000 square feet of retail, and 17,000 square feet of university spaces.
“Gallaudet University has been around for 150 years, so we think in terms of centuries,” says Sam Swiller, director of strategic real estate planning, business development, and external relations for Gallaudet. “In the last two decades the university has become much more ambitious about how it wanted to face the world,” he says.
The arrival of the NoMa-Gallaudet metro station (thencalled New York Ave–Florida Ave– Gallaudet) in 2004 spurred a wave of new development and opportunity in the area. Historically, Gallaudet had been physically and in many ways socially—isolated from the surrounding area, though it had always played a vital role in the city’s community. The university decided that this was the right time to take agency over its land holdings and future development in order to realize its goal of increasing student interaction with the surrounding community, which includes the popular Union Market specialty food hall.
Beginning in 2014, it partnered with JBG SMITH. The Sixth Street Development includes four parcels of land and three phases, each with unique designs and approaches to achieving their joint goals.
“This project really allows Gallaudet to engage with this burgeoning Union Market neighborhood on its own terms, striking a balance with engagement, and preserving its unique campus environment,” says Robbie Saclarides, vice president of development at JBG SMITH.
JBG SMITH is also delivering approximately 150 affordable housing units across the project. The majority will be offered at the 50% MFI (median family income) level, the deepest level of affordability contemplated in Washington, D.C.’s Inclusionary Zoning Program.
What would become Gallaudet University was established in 1864 when President Abraham Lincoln signed a bill into law after Congress authorized the institution to confer college degrees.
During its first commencement in 1869, diplomas were signed by President Ulysses S. Grant. Current presiding U.S. presidents continue the practice to this day. From its inception, Gallaudet has focused on advances in education of deaf and hard of hearing students and advocating for deaf rights worldwide.
Over the last 150 years, Gallaudet has evolved, becoming the leading institution for the education of deaf and hard of hearing, offering 40 majors for undergraduate degrees. The university also admits a small number of hearing, degree-seeking students. Graduate programs are open to deaf, hard of hearing, and hearing students. The university has roughly 22,000 alumni around the world.
“It’s a special place,” says Swiller, who identifies as hard of hearing but says he hadn’t learned American Sign Language (ASL) prior to first visiting the campus in 2009. “It was an eye-opening experience,” he recalls. When he first arrived at Gallaudet, Swiller taught classes, bringing his professional experience in real estate private equity to students before taking up his current role at the university.
Gallaudet employs ASL and written English for instruction. The campus represents the largest collection of ASL speakers in the world, so preserving and advancing its mission presented a unique set of challenges and opportunities for development.
Some of these include transitioning from a more pastoral campus to a more urban one, consolidating the university’s footprint to increase student interactions, orienting campus around a central heart, and building bridges between the campus and the larger community.
According to Swiller, the university faced a pivotal question: “How do we model a path for students to face the outside world and provide them with the best tools to meet the world on their terms?” To achieve its goals, the university created a real estate foundation to oversee its real estate activity and has conducted years of research to help answer this question.
The university also wanted to generate a stream of reliable cash to put to work in enhancing amenities for students, faculty, and staff, but selecting a developer presented its own risks.
“We were deeply concerned that whatever developer we brought on would be attentive to the needs of our school that focuses on the deaf and hard of hearing, which historically is a marginalized population,” Swiller says.
In 2012, Gallaudet launched an extensive request for proposal (RFP) process. Choosing from roughly 40 candidates, Gallaudet selected then-JBG Companies and finalized agreements in 2014. According to Swiller, JBG appealed to the university because it was a private developer with a great track record and financial capabilities, and it showed a deep understanding and respect for Gallaudet’s history and legacy.
JBG SMITH becoming a REIT in 2017 only added to their appeal, Swiller says, because they are long-term investors.
“As a REIT, we’re a long term holder which underpins our decision-making and I think Gallaudet is similarly a long term thinker, having been here since 1864,” Saclarides says. Sharing long-term visions helped when plans for Sixth Street were delayed for several years by a local lawsuit that was ultimately dismissed. The Sixth Street Development also fits well within JBG SMITH’s portfolio, which targets high-growth, transit-oriented markets.
“It’s been a lengthy, collaborative process that helped to establish the strong foundation of trust and understanding between the two parties,” Saclarides notes. “We’re working to get our first shovels in the ground, and we’ve been together every step of the way,” she adds.
The project has also involved collaboration with multiple public and private entities including district officials from the Department of Transportation, D.C. Water, D.C. Zoning Commission, as well as the community organizations such as the local Advisory Neighborhood Commission.
Gallaudet students and staff were also involved in identifying and selecting developers and throughout the process.
Design and architecture have provided another unique space for collaboration between JBG SMITH and Gallaudet.
The Sixth Street Project will employ DeafSpace Guidelines, more than 150 distinct architectural design elements developed by the DeafSpace Project, a collaboration between Gallaudet and architect Hansel Bauman. The guidelines address key touch points between deaf experiences and the built environment: space and proximity, sensory reach, mobility and proximity, light and color, and acoustics.
DeafSpace design also focuses on community building, visual language, and the promotion of personal safety and well-being. Built on long-held cultural traditions, Gallaudet research, and the latest architectural developments, DeafSpace accounts for challenges like poor lighting conditions—such as glare and backlighting—that interrupt visual communication.
“It’s about creating an environment that removes as much friction as possible for people that are visually communicative and those that are deaf-blind,” Swiller says. Basic examples include using techniques to minimize glare in rooms with direct sunlight, so it’s easier to see someone signing; knowing what design colors create the best contrast to the widest range of skin tones to allow for more visible signing, and creating circular seating areas to increase signing visibility and exchange. “DeafSpace design lends itself to good overall design,” Swiller says.
Gallaudet and JBG SMITH selected Seattle-based architects Olson Kundig for parcel two, which will abut the campus directly and the designed structures will gradually step down in scale as they approach the university to organically transition between environments. New York-based Morris Adjmi Architects was selected to design parcel three.
JBG SMITH and Gallaudet also partnered with landscape designers Future Green Studio on master planning for its open spaces and streetscapes to enhance comfort and safety for the deaf community.
“The public realm around our buildings will have the highest level of interaction with the deaf community and it was really important for us to deliver a design that supports ASL communication and the deaf experience,” Saclarides says. They’ve also enlisted deaf-owned, D.C.- based firm Copper & Water as consultants to peer review designs for Sixth Street Development.
Saclarides also notes the importance of creating designs with an understanding of edge conditions—zones of transition or the interface characteristics of a public space with its adjacent land uses and structures.
Their plans will deliver contextually-designed buildings that bridge the industrial warehouse buildings of the Union Market district and Gallaudet’s Victorian campus architecture with its bucolic central green, the latter designed by famed landscape architect Frederick Law Olmsted.
“It’s about working with the dichotomy of these contexts, historic in their own right, but coming from different roots,” Saclarides says, which aligns with the overarching principles for the Union Market district’s redevelopment. Striking a balance between old and new, stakeholders in Union Market district’s redevelopment plans have aimed to preserve the neighborhood character and traditional wholesale use of the area while fostering infusion of new mixed use.
Neighborhood development through the Union Market district and Sixth Street Development provides new dining, recreation, and employment opportunities for students and neighbors.
Plans for phase two include 625,000 square feet of multifamily residential and 50,000 square feet of retail. By monetizing these sites via ground leases, the university gains an influx of funding to apply to this mission. Other tangible community benefits include infrastructure improvements, protected bike lanes that connect to the wider Washington, D.C. network, and the creation of a more pedestrian-friendly Sixth Street area.
For the Gallaudet community, these benefits are more than structural. “We’re focusing on bringing more of our students and administrative activity closer to the historic district of the campus, which aligns with university President Roberta Cordano’s vision for preserving and nurturing what’s called ASL vibrancy—the idea that the more people signing around each other, the more the usage of the language is enriched,” Swiller says.
Gallaudet hopes to share that vibrancy with the surrounding community, while also protecting it.
“One of our goals is to build bridges with the community,” Swiller says. “This is an opportunity for the university to reorient itself and become more outward focused and to create places where that can happen.”
Enter Creativity Way, the tentative name for the planned pedestrian, linear park that will form the university’s new “front porch.” When completed, Creativity Way will feature a cultural center and ‘knowledge studios’ to showcase university-wide research, scholarship, creative activity, and innovation. It will also provide an unparalleled opportunity for the broader Washington, D.C. community and beyond to learn from the deaf community and about deaf culture, and vice versa.
“It’s an opportunity for us to welcome the world and the community to our campus in a way that our students can feel safe and thrive,” Swiller says.
“This is one of the only places in the world that has dominant ASL interaction, so that needs to be respected,” says Saclarides.
“Creativity Way is striking a delicate balance of engaging with the community but also protecting their own very unique environment,” she says. JBG SMITH’s team aims for that exchange of knowledge and experience to go even further. The company employs interns from the Gallaudet community, helping to give students real-world experience while exposing existing JBG SMITH employees to the deaf community and a second language in ASL, hoping to inspire further opportunities in the broader community.
“It is very hard for deaf or hard of hearing individuals to get fair opportunities in their career and life,” Swiller says. “We’re hoping that this project will create a place where students become their own advocates and really move forward through the world empowered.”
REITs are seeing tenants looking to upgrade their space and create an environment that employees will want to come back to.
After more than two years of wondering whether the office market would ever revert to its pre-pandemic norm—or at least an approximation of it—owners of office space in the United States are getting answers.
A return to office is well underway across the country. As expected, many employees are working from home part of the week, typically Mondays and Fridays. And leasing activity continues to rebound: JLL reports that absorption turned positive in the fourth quarter of 2021 for the first time since the onset of the pandemic, and although leasing activity in the first quarter this year slowed due to the omicron variant, it still represented an improvement in tenant demand for the fifth consecutive quarter.
Data from Kastle Systems, a company that reports a weekly measure of building access security card swipes by its business partners in ten major cities, shows that average occupancy for the week to May 25 stood at 42.95%. Occupancy ranged from 33.61% in San Francisco to 58.54% in Austin, Texas.
How these trends look six, 12, or even 18 months from now remains a riddle. While companies like Blackstone and Facebook have charted their future space needs with big leases in Midtown Manhattan and Sunnyvale, California, respectively, many office users are still pondering how work-from-home policies, business growth, and the potential need to expand space between individuals to create healthier environments will influence their office needs.
“It’s going to take a significant period of time for office users to figure out the right cadence of people coming back to work as well as the utilization of their physical office space and human capital,” says Douglas Linde, president of BXP (NYSE: BXP), which owns 52.8 million square feet of office space in Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. “Based on the labor market we find ourselves in at the moment, companies are focused on creating destinations their employees want to congregate at versus putting strict mandates in place.”
Determining the Right Size
In the first quarter of 2022, BXP signed 1.2 million square feet of leases and reported occupancy of 89.1%, a slight increase from the prior year. The REIT also executed more than 1.1 million square feet of leases in April alone. Still, building utilization trends ranged from 40% to 80%, with the lower and higher ends of the spectrum generally on the West and East coasts, respectively.
Similarly, Charlotte, North Carolina-based Highwoods Properties, Inc. (NYSE: HIW) leased 681,000 square feet in the first quarter this year, and its occupancy rate of 91.1% represented a year-over-year increase of 150 basis points. Office utilization of about 50% marked an improvement of 10 percentage points during the quarter, and executives expect it to accelerate based on return-to-work plans of their tenants.
One of the wild cards moving forward is to what extent employees engaged in counting, measuring, and other process-driven tasks will work from home, suggests Brian Leary, COO of Highwoods, which owns 27.4 million square feet of office space, primarily in eight markets, including Charlotte, Tampa, Florida, Atlanta, and Nashville, Tennessee.
“Companies need to determine exactly what the right size of their workforce is in this new technology-embedded environment,” Leary says. “If there are jobs that could be done just as well from home, then I think they could downsize at a rate that’s equivalent to their efforts to densify space prior to the pandemic, which was about 10% a year.”
It could be argued that executives would prefer to have employees in the office every day of the work week. For example, only one in three of 2,300 senior managers support a prolonged period of hybrid schedules, according to a recent survey by Robert Half, a talent solution and business consulting firm. But, separate Robert Half research indicates that half of 1,000 professionals surveyed would look for a job that offered remote work options if their employer required a full-time return to the office.
Consequently, whatever office space calculation they make for the long term, at this moment in time, companies are most focused on ensuring employee satisfaction and retention given the competitive employment market. As of May, professional and business service companies had hired 821,000 more workers than they employed in February 2020, according to the Bureau of Labor Statistics. At the same time, unemployment remained at an historical low of 3.6%.
Considering the jobs market, it’s not surprising that 53% of companies had instituted a voluntary return to the office versus 31% that had required it, according to an early 2022 office occupier survey conducted by CBRE. What’s more, only 19% of respondents said they would insist that employees work in the office all week, a decline from about 30% a year earlier.
“If a company is being restrictive at either end of the spectrum—demanding that employees be in the office all of the time or remote all the time—they’re going to have an unhappy workforce,” says Julie Whelan, global head of occupier thought leadership with CBRE in Boston. “People want flexibility. Putting out strict policies that dictate behavior is going to fall flat across the workforce, regardless of age or life stage or generation.”
It’s going to take a significant period of time for office users to figure out the right cadence of people coming back to work as well as the utilization of their physical office space and human capital.
How long can this dynamic last before the pendulum swings in the favor of employers, perhaps by way of an economic slump, is an unknown at this point. In addition to rising inflation and interest rates, a negative 1.5% GDP estimate for the first quarter of 2022, and a yield curve inversion at the end of March, have fueled recession predictions.
On top of that, faltering technology earnings are fueling stock market losses. As a result, tech companies are instituting hiring freezes and laying off workers after going on a hiring spree over the last couple of years.
“Technology is a space that’s particularly exposed to inflation, and it’s usually the first industry to decline,” says Bradley Tisdahl, founder of Tenant Risk Management, a New York-based brokerage. “Whether we’ll see a real contraction in the industry or if this is just a result of capital markets volatility, time will tell.”
Together, however, these forces ultimately could provide employers with the leverage they need to require people to return to the office full time, or at least more of the time.
“It’s possible that as business conditions become more challenging, business leaders will feel a heightened sense of urgency to bring employees together on a much more consistent basis,” Linde says. “Being in the office becomes especially critical when integrating new employees who have been hired over the last two years but who have never met their boss or colleagues.”
Despite the potential economic turbulence, hybrid work is here to stay, Whelan counters. Many companies were already providing employees with flexible work schedules prior to COVID-19, she points out, and widespread remote working during the pandemic provided a generous amount of favorable productivity data. Unless evidence comes along that shows remote working is detrimental, it will be difficult to dent employee preference for a hybrid workplace, she adds.
“Even in a recessionary environment, those lessons learned don’t die, and if anything, companies are going to be more conscious about their real estate costs,” Whelan says. “This is just the evolution of work, which typically happens slowly, decade over decade. But we happen to be in a time where it has accelerated and become more apparent.”
Flight to Quality
Reluctant to cause discord among employees by demanding a return to the office, companies nevertheless are fearful that the inability to foster collaboration, train new workers, and maintain a certain culture in a hybrid workplace could threaten cohesion and profitability over the longer term.
To convince employees to come back to the office, companies are creating more appealing workplaces.
Just before the pandemic hit, for example, Cousins Properties (NYSE: CUZ) began redeveloping Buckhead Plaza, a two-building office and retail property in Atlanta totaling 666,000 square feet. Among other improvements, the project created a welcoming entry, more green space and patios that enable outside work, meetings and events, and upgraded common areas, corridors, and restrooms.
“Certainly, the flight to quality is real,” says Kennedy Hicks, an executive vice president for Atlanta-based Cousins, which owns 20 million square feet of office space in select Sun Belt markets. “In addition to the ongoing migration of companies to the Sun Belt, we’ve seen tenants looking to upgrade their space and create an office environment that employees will want to come back to.”
Despite a pause in leasing due to omicron, Cousins executed 324,000 square feet of leases in the first quarter. Figuring in additional leases signed in previous months that will commence later in 2022 and into 2023, the REIT’s portfolio is about 91% occupied. Most of that activity has occurred in properties built since 2010, which represents about 19% of Cousins’ portfolio.
While part of Cousins’ strategy centers on leveraging migration to Sun Belt markets, the flight to quality is also happening in the Northeast corridor and West Coast markets, Tisdahl points out.
“I’m not going to say leasing is back to normal by any stretch of the imagination, but momentum is building,” he says. “In New York, new buildings are generating interest, and older Class A inventory in places like Midtown is seeing leasing activity, too. But we haven’t seen any deals for Class B buildings yet.”
If a company is being restrictive at either end of the spectrum—demanding that employees be in the office all of the time or remote all the time—they’re going to have an unhappy workforce.
Focus on Experience
Other efforts to attract employees include enhancing human, digital, and physical amenities, Whelan says. These typically aim to improve the overall workplace experience by emphasizing indoor air quality and building wellness certifications, implementing the latest technology and smart building innovations, and incorporating outdoor meetings and gatherings as well as food-and-beverage events into the work week, she adds. Office landlords are eager to help.
The Hub, a 31-story office building connected to the Boston Garden, BXP helped Verizon design outdoor spaces on multiple floors, including a private roof deck roof deck on the 31st floor and a shared indoor-outdoor gathering space on the 8th floor, among other amenities, Linde says. The REIT is working with an on-site food hall to expedite delivery to the building, as well.
“Companies are rolling out the red carpet to encourage people to come back. They’re offering food-and-beverage in meaningful quantities and are creating outdoor spaces for activities that allow people to congregate and meet in bigger groups,” he explains. “Our focus is providing businesses with places that allow people to do their analysis work but that also encourage them to leave their desks and meet with others in attractive and enjoyable environments.”
Meanwhile, Highwoods has launched “Better Together,” an initiative in which it partners with tenants to create “transformative, innovative, distinctive, and collaborative” workplaces. Part of that strategy includes working with tenants that want to reconfigure their space and bolster amenities, Leary says. It also includes providing breakfast, lunch, and after-work hangouts and events. At its Bank of America Tower at Legacy Union in Charlotte, Highwoods recently secured a retail lease with Night Swim Coffee, a popular and fast-growing local coffee upstart.
“We’re reaching out and being proactive with a number of our customers in a variety of ways,” he explains. “We believe that if we can stimulate workers with caffeine or breakfast in the morning, nourish them at noon, and then lubricate them later with a drink, they will stay.”
Similarly, as part of its Buckhead Plaza redevelopment, Cousins Properties obtained an open-container license to enhance the options that tenants have when holding events in the upgraded outdoor areas, Hicks states.
“Companies want to do more team-building events that involve food-and-beverage to incentivize people to come back,” she says. “They also want to have the ability to hold meetings and work conversations outside.”
It remains to be seen whether these strategies, an economic slowdown that gives employers leverage, or a combination of the two will ultimately fill offices five days a week. Then again, time alone might convince employees to return full time, suggests John Poulos, executive vice president and managing director at SK Commercial Realty in Atlanta.
“Time heals all wounds,” he says. “Nobody would ride the elevator with someone else last fall, and six months later, I’m waiting for an elevator and there are 10 people in it when the door opens.”
Alexandria Real Estate Equities, Inc. pioneered the life science real estate niche and continues to break new ground in the sector.
A quarter century after it began life as a garage start-up, Alexandria Real Estate Equities, Inc.’s (NYSE: ARE) decision to focus on the niche segment of life science real estate looks sounder than ever as demand for sophisticated lab space across major U.S. markets sits at an all-time high.
Pasadena, California-based Alexandria is the only publicly traded, pure-play office/laboratory REIT. The company, led by founder and Executive Chairman Joel Marcus, focuses exclusively on highly specialized lab space used for research and development in the booming life science industry.
The REIT owns, operates, develops, and acquires Class A buildings in urban cluster campuses in key markets and offers tenants top-of-the-line amenities and the highest-quality, sustainable building materials. The S&P 500 investment-grade rated REIT boasts an asset base of approximately 74 million square feet.
Alexandria’s already-strong performance was amplified by the pandemic when demand surged from new and existing tenants across its portfolio, as billions of dollars flooded into the research and development of a COVID-19 vaccine and other therapies to combat the virus. The company outperformed its expectations for 2021 and is reporting a robust 2022.
“There’s a ton of demand for life science real estate,” says Daniel Ismail, lead analyst for Green Street’s office team. “The pandemic helped supercharge a demand story that existed pre-COVID.” It also highlighted the resiliency in terms of the essentialness of the underlying real estate, he says. “Many traditional offices during the pandemic were completely empty. Even now, many office buildings in the country are 30% to 40% occupied. For Alexandria, these buildings stayed open and operational because it’s very difficult to do lab work from home.”
Serving growing pharmaceutical and biotech companies, Alexandria reported its highest-ever annual leasing volume in 2021 with 9.5 million square feet. The company leased 4.1 million square feet during the fourth quarter alone. That annual leasing activity is projected to generate more than $6 billion of contractual triple-net base rents. In the first quarter of 2022, the company leased another 2.5 million square feet.
Since life science demand exploded, new developers and property owners want a piece of the action. However, Alexandria has an immense advantage with its long-term relationships with large, industry-leading companies, many of which are revolutionizing the biotech sector. Alexandria boasts more than 1,000 tenants including Moderna, Bristol-Myers Squibb, Sanofi, Illumina, and Takeda.
Alexandria’s accomplishments haven’t gone unnoticed. “They’re a giant in a very small industry, which has been really unique for them, and it’s been a great attraction for investors,” says David Rodgers, Baird & Co. Inc.’s senior analyst covering office real estate. “They were the first to focus on life science real estate and really dedicate the bulk of their business to it. As a public company, staying true to that focus of clustering assets around key life science geographies has really paid off over the long term.”
In 1993, the partners at Jacobs Engineering Group asked Marcus, a certified public accountant and biotech industry attorney, to create a business plan to launch a private REIT that would exclusively own and invest in life science real estate, essentially, creating a brand-new asset class. They asked Marcus, then 47, to lead the company.
Alexandria began as a garage startup in 1994 when biotech was still an emerging industry. Marcus co-founded it with $19 million in Series A capital. Concentrating on the fast-growing biotech market in San Diego, Alexandria acquired four buildings. The new company proved that biotech companies were underserved, and that there was strong market demand.
Alexandria raised about $100 million in capital, which led to its IPO in May 1997, becoming the first REIT focused on lab space. It raised an additional $155 million on the public market. “We were the first group that identified life science real estate as a niche, which could both garner and deploy capital to an important industry, which really had no major infrastructure capital going into it in the early 1990s,” Marcus says.
“When I rang the opening bell at the IPO, I was interviewed and someone asked, ‘How big could this company be?’” Marcus recalls. “I said, ‘Well, in 10 or 15 years, maybe we could be a $1 billion company.’ And lo and behold, we passed $44 billion in enterprise value at the end of 2021.”
In May, the company celebrated the 25th anniversary of its IPO. Life science, meanwhile, has moved from being a niche segment to mainstream real estate. “Many institutions want exposure, especially pension funds, life insurance companies, traditional investors, and even private equity,” Marcus says. “It really has transformed in a way that I could never have quite imagined, and that’s coincided with the boom in the biotechnology industry.”
Launching the niche was the first step. Marcus recognized that companies utilizing labs often cluster, so Alexandria pursued locations where clusters were likely to develop, including urban areas near major universities.
Marcus followed Harvard Business Professor Michael Porter’s theory of “cluster development” and began operating under an urban cluster model, where a world-class location, technology and innovation, a talent pool of scientists and professional managers, and ample risk capital all merged.
Marcus says those four components are necessary for life science companies to flourish. He pivoted from developing and acquiring single assets to focusing on highly-amenitized urban cluster campuses in seven key markets: Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park near Raleigh, North Carolina.
“There’s a competitive need for biotech companies to be in many of these major markets,” Ismail says. “For Alexandria to own big concentrations of campuses where they can provide the amenity base, as well as the opportunity to expand and move into different facilities and have them run incredibly professionally by one of the most experienced teams in the industry, is a real competitive advantage for Alexandria’s tenants.”
Marcus says top life science clusters and the upgraded amenities that Alexandria’s buildings offer are a significant advantage for companies in their ability to recruit and retain top talent in a very competitive environment. “Our industry is very collaborative, and campuses become very important places for people to go,” he notes.
Occupancy across Alexandria’s portfolio was 94.7% in the first quarter while rent growth was 32.2%. Alexandria projects further rental growth of 30% to 35% for full-year 2022. Its first quarter revenue rose 28.2%, from the year earlier, to $615.1 million.
Driven by a voracious appetite for space, Alexandria raised the outlook for funds from operations (FFO) per share growth to 8% for the year. “We beat guidance and we raised guidance. I think that gives a sense of how we’re viewing this year,” Marcus says.
Alexandria’s pipeline includes 8 million square feet under construction or scheduled to begin construction in the next six quarters, which is projected to generate $665 million in new annual rental revenue.
“Nearly 80% of that space is pre-leased or under negotiation,” Marcus says. “That’s an extraordinary number of commitments ahead of delivering the space. We’re building in Seattle, San Francisco, San Diego, Boston, Maryland, and North Carolina. Each of the markets is seeing strong demand. Over 80% of that demand comes from our existing 1,000 tenants. We’ve got a built-in demand driver by our own clients, which is very unusual.”
For example, Alexandria signed a massive, 462,000-square-foot lease with vaccine-maker Moderna at its Alexandria Center at One Kendall Square mega campus in Cambridge, Massachusetts. The under-construction Moderna Science Center, at 325 Binney Street, will house the mRNA pioneer’s headquarters and research and development operations.
Alexandria is designing it to be the most sustainable commercial lab building in Cambridge. Plans call for a net-zero commercial lab, relying on geothermal energy and on- and off-site renewable power. Alexandria is targeting LEED Zero Energy and Fitwel certifications. “It will be ultra-efficient, minimizing its carbon footprint and harnessing geothermal energy and renewable electricity, which is really a game-changer,” Marcus says.
For decades, Alexandria has been a leader in building sustainable campuses. Its goal is to develop and operate efficient and healthy buildings by reducing carbon emissions and mitigating climate risk. The company had one of the world’s first office/lab projects certified in the U.S. Green Building Council LEED Core and Shell pilot program, and now has over 80 projects that achieved or are pursuing LEED certification.
Additionally, Alexandria earned the first-ever Fitwel Life Science certification for its leadership in prioritizing tenant health and wellness and was named a 2021 Global Real Estate Sustainability Benchmark (GRESB) Global Sector Leader.
In the first quarter, Alexandria inked a 427,000-square-foot lease with Bristol Myers Squibb, its largest tenant, (by annual rental revenue) for the development of that company’s newest, cutting-edge research hub focused on cancer as well as immune-mediated and neurodegenerative diseases at the Alexandria Point mega campus in San Diego.
The REIT also signed a 334,00-square-foot lease with Eli Lilly and Co. for the development of Lilly’s new state-of-the-art Institute for Genetic Medicine at 15 Necco Street in the REIT’s Seaport Innovation District submarket of Greater Boston.
Both facilities will provide many amenities and be highly sustainable, high-performance buildings. “Each of these tenant relationships started literally decades ago,” Marcus says. “We have developed very broad and deep multi-cluster and multi-market relationships with most of the top companies in our industry.”
Next Emerging Market
Many cities want to become the next emerging life science market, but obstacles exist. Marcus says it takes roughly 25 years for a cluster to mature.
“It’s difficult for other clusters to become mainstream and grow, because it’s hard to attract the four key elements: location, innovation, talent, and capital,” he explains. “Any number of cities would like to get there but probably don’t currently have those characteristics: Chicago, Denver, Phoenix. You can name a dozen cities.”
That being said, Alexandria is eyeing Texas as the next emerging market, where the REIT is in the “process of a series of transactions,” although Marcus says he cannot comment further.
In Alexandria’s fourth-quarter 2021 earnings call, Marcus said, “Literally, [there’s] no real presence of commercial life science [in Texas] today, but our intent is to create a market and really bring early-stage commercial life science to Texas, much like we did in New York.”
In addition to exploring potential new geographic markets, Alexandria is also staying on top of innovations in the life science industry through Alexandria Venture Investments, a venture capital platform Marcus created in 1996 that invests directly in the companies it serves. It invests in disruptive life science, agri-food tech, climate innovation, and technology companies.
Ismail says the platform gives Alexandria a competitive edge. “They’re incredibly active on the venture capital side of the business,” he explains. “They own a billion-dollar venture capital portfolio and have invested in startups and established technology companies.”
This is relatively unique to Alexandria within the public REIT world, he says. It allows them to be enmeshed in the life science business, not only as a landlord, but as a company that’s actively investing in the business, trying to understand the science, understand the tenants, staying abreast of trends. “It’s undoubtedly a differentiator that has borne fruit.”
Addressing Future Challenges
While the outlook for Alexandria certainly looks solid, one thing that people are watching is the health and liquidity of the underlying biotech industry, Rodgers notes.
“Additionally, high-level interest rates always have an impact on real estate, but that’s where Alexandria’s strong balance sheet comes in,” Rodgers continues. The company’s balance sheet has $5.7 billion of liquidity as of March 31, 2022.
“When the world is in a tumultuous situation of global conflict, economic stress, and rising interest rates, those are a series of things that investors worry about,” Rodgers says. “However, from Alexandria’s standpoint, they should be able to continue to fund their growth. They’re certainly not overcommitted in any way, and they have several great projects going forward.
Ismail agrees: “There’s some concern with biotech stocks, but overall, that’s more of a potential change in the rate of growth rather than something that appears likely to upset or end the party.”
Meanwhile, both labor and material costs have increased, Marcus says, “but the biggest wildcard has been the supply chains throughout the world. China of course, but many other locations.” And then there are transportation and increased energy costs as well.
“About 80% of our projects are under fixed-rate contracts, and we’re in the process of finalizing fixed-rate contracts for the remaining 20%, so we’re insulated as best you can,” he continues. “But new construction and development will be more expensive, and certainly, entitlements around the country are getting tougher to obtain.”
However, Marcus says existing assets will become more valuable as a result. “We’ve done a really good job on our construction/development side in making the most of the demand,” he adds.
Making an Impact
Since its founding, Alexandria has been committed to making a positiveimpact on the health, safety, and well-being of its tenants, stockhold-ers, employees, and communities. The company is addressing some
of society’s most pressing issues including harnessing the agri-food ecosystem to combat hunger, addressing the mental health crisis, and accelerating groundbreaking medical research.
One of Alexandria’s largest efforts is OneFifteen, a data-driven opioid treatment and recovery campus in Dayton, Ohio, created in partnership with Verily, the life science arm of Google-parent company Alphabet. Inspired by the OneFifteen platform, Alexandria is developing a new model in Seattle to combat the home- lessness crisis. Alexandria hopes OneFifteen will encourage similar projects around the country.
As we reach mid-year, it’s a natural time to reflect on how the REIT industry, and our individual companies, have performed to date—and what might lie ahead for the rest of 2022.
Clearly the economic climate has become increasingly uncertain as inflation persists and the Federal Reserve continues to increase short-term interest rates, slowing the economy and increasing recession risks. As investor pessimism has become pervasive, REITs have experienced disappointing stock performance despite continuing to post impressive operational results with record high earnings in the first quarter and extremely resilient balance sheets.
Heading into a period of slower growth, high inflation, and significantly higher interest rates, I see REITs as well positioned for strong relative performance and stability. While slower growth and higher interest rates make the operating environment more challenging, REITs are uniquely positioned because of their well-managed balance sheets, and REITs, like other forms of real estate, have historically outperformed during periods of moderate and high inflation.
Many REIT executives speaking at last month’s REITweek 2022: Investor Conference in New York highlighted that current operations are excellent with strong demand and rent growth. Looking ahead to a potential economic slowdown, they highlighted how strengthened balance sheets, strong credit profiles, and high quality portfolios put them in good stead for any potential downturn.
While there are certainly plenty of issues to be concerned about in the world today, I think we all left the conference feeling reinvigorated and pleased to be able to gather again in person.
One area that is consistently discussed at all Nareit conferences is ESG. Environmental stewardship, social responsibility, and good governance are core attributes of the REIT industry. They are critical to the communities that REITs operate in and to REIT investors.
As the Nareit ESG Dashboard shows, all of the largest 100 REITs by equity market cap are now reporting their ESG efforts publicly. In addition, 78% of the 100 largest REITs reported on their carbon emissions in 2021—double the 38% that were reporting on carbon emissions in 2017.
As you can read in this issue, the REIT industry as a whole is exhibiting strong momentum in its voluntary reporting on ESG and climate-related issues. However, that does not mean there aren’t challenges ahead, even for those REITs that have a long history of voluntary sustainability engagement and disclosure. Given this industry’s remarkable strength, however, I have no doubt that these challenges will be taken in our stride.
While technological innovation in the REIT industry has been on the upswing for some time, the last few years have really accelerated that trend as companies have sought to meet the rapidly changing demands and expectations of their tenants and stakeholders that have been shaped in the wake of the pandemic.
To capture that drive to innovate, we are launching a new column in this issue, REITech. It is intended to show how the industry is using technology to stay at the forefront of new trends that enhance the tenant experience.
In this inaugural column, we spotlight the various ways that Prologis Ventures, a venture capital arm of Prologis, Inc., (NYSE: PLD) is helping to ease pain points faced by its customers in today’s fast-paced logistics industry.
If you know of an interesting example of technology at work in the REIT industry today, please contact me to be considered for a future column.
The search for innovative ways to solve problems or simply make life better for the communities in which REITs operate is not restricted to the utilization of technology though, as this issue’s DNA of ESG column shows. Here you can read about Weyerhaeuser’s (NYSE: WY) partnership with Oregon-based Operation Tiny Home, which is aiming to address veteran homelessness and housing instability by building tiny homes that veterans and their service dogs can share. Weyerhaeuser is already thinking about other ways in which tiny homes can be used to help population groups, including those displaced by natural disasters, get back on their feet.
As the article points out, tiny homes are not meant for everyone, but they do offer an innovative solution for the growing problem of homelessness.
Innovative design is on display elsewhere in this issue in our Shaping Communities column. Here you can read about a unique partnership between JBG SMITH (NYSE: JBGS) and Gallaudet University in Washington, D.C., a leading educational institution for the deaf and hard of hearing. What sets this project apart from other developments is the use of “DeafSpace” guidelines, developed by Gallaudet and architect Hansel Bauman. The guidelines address the five major touch points between deaf experiences and the built environment: space and proximity, sensory reach, mobility and proximity, light and color, and acoustics. The story underlines the adaptability, creativity, and sensitivity that our member REITs exhibit in their development projects. I hope you enjoy this article, and the rest of the content in this issue.
Dr. James Pogue, president and CEO of JP Enterprises, is an expert in unconscious bias and diversity and inclusion. His consultation firm focuses on leadership, culture, and strategy and he is committed to helping leaders and organizations get better at having the difficult conversations necessary to bring people together. In his view, that’s the “right kind of uncomfortable.
Why is the work that you’re doing so important right now?
There’s an argument that ‘right now’ started a long time ago, but because of recent events it’s been highlighted in a much more significant way. I really want to highlight what was already there and remind people that as you’re regrowing your companies, as you’re rehiring people, how you should be thinking about your inclusion efforts moving forward.
There are a lot of people, a lot of brains, a lot of talent that comes wrapped in different skin, that comes wrapped in different sexualities, that comes wrapped in different ages. Do you want to be competitive for all the talent or just the talent that you’re most closely aligned with?
How do you get people to open up about their DEI journey?
The reality is that most people want to open up about it, they just have not been provided a reasonable opportunity to do so. My job is to say, what do you want to be and how do you want to get there, and how fast do you want to get there? Do you want to be competitive, and with whom?
How can people get started in their organization?
I always encourage people to do an assessment first. After that, you have to execute on those strategic recommendations, which must be long term. It took us a long time to get to where we are. It’s going to take us some time to turn this ship around. I challenge leaders to execute for the long haul, to lead in this space, without having to have expertise in it. You need to have a leader-led way of identifying where your growth is and what success is going to look like.
What insights did you gain from being a Nareit DEI Award judge this year?
There’s a lot of good work that’s happening, a lot of passion behind it, and a lot of people supporting it, but there is a next step for all of us. People are really in that first third or second third of where they want to be on their diversity journey, so the applications were written with a sense of optimism, a sense of what’s next. I’m looking forward to next year’s applications, seeing where people have gone based upon what has happened this year.
Health Care Showing Signs of Recovery
The health care property sector provides real estate that houses seniors and provides medical care for people of all ages, and lab space for medical developments. The health care sector was hit hard by the pandemic, as senior housing occupancy rates fell and some medical offices were forced to stop procedures while costs for COVID-control increased.
Despite challenges, the latest earnings reports show signs of recovery. In the first quarter of 2022, health care FFO was less than a percentage point below its pre-pandemic level from the fourth quarter of 2019. Yearover-year same store net-operating income in the first quarter was up 6.1%, positive for the first time since third quarter 2019. Health care REIT stocks had a total return of 16.3% in 2021, and in 2022 are one of the best performing sectors with a total return of -10.2% through June 30.
Health care REITs own more than 2,500 senior housing properties, including both assisted living and independent living communities; more than 1,200 skilled nursing facilities; 2,500 medical offices; and more than 200 life science spaces.
Demographics support continued demand for senior housing, as baby boomers age. Medical offices have had robust recovery after initial shutdowns from social distancing measures, and lab spaces are experiencing tremendous growth in the past several years.