New York City-based Clarion Partners is eyeballing the San Francisco Bay Area life sciences sector for investment opportunity after clenching a multi-million dollar development deal in the top-ranked Boston market.
“We are talking with real estate companies in the Bay Area to find transactions that we can be part of,” said Mark Weld, an equity partner, managing director and portfolio manager for Clarion in its regional office in Boston. “It’s our intent to find some deals that we can invest in down the road.”
Clarion is looking first to San Francisco’s Mission Bay but is open to other regional locations, Weld said. “[Mission Bay] is very attractive given this is where UCSF is, and tenants want to be close to that institution.”
Boston is the top life science location in the country among 16 clusters identified by Jones Lang LaSalle in a late 2011 update on the industry. The Bay Area ranks third, behind the New York-New Jersey cluster based on six factors considered by the professional services firm. In only one category—venture capital funding—did the region capture first-place standing.
Other indicators JLL considered in drawing its conclusions were funding from the National Institute of Health, the prevalence of science and engineering graduate students and state investment in research and development. Boston ranked first in five of the six categories; it captured second in drawing VC investment.
Clarion’s Boston venture involves the development of the 414,000 square-foot Longwood Center in the Longwood Medical Area, “a hot spot for life sciences research organizations,” according to the Jones Lang report. Longwood Center has a total development cost of $350 million, according to industry sources. Clarion is a 50 percent partner in the development.
Alexandria Real Estate Equities Inc. originally held a 55 percent stake in the project, while Massachusetts-based National Development held a 45 percent interest. To allow Clarion to invest, Alexandria reduced its ownership position to 27.5 percent and National Development cut its stake to 22.5 percent.
According to Alexandria’s Web site, the construction debt on the project covers approximately 60 percent of the development cost, or $210 million. Mass Mutual Life Insurance Co. is the construction lender.
“Longwood is a well-established marketplace with huge existing infrastructure,” Weld said. “Mission Bay is well on its way to becoming that type of mature market and as such is characterized as a future growth market.”
Both Boston and the Bay Area have strong medical, research and academic organizations, though according to the JLL report, Boston has nearly 6 million square feet of academic and research institute facilities while the Bay Area has 4.2 million square feet. In Mission Bay, that includes the University of California, San Francisco and the Gladstone Institute. In Boston, it is Harvard Medical School, the Dana-Farber Cancer Institute and Children’s Hospital Boston. New York-New Jersey, Atlanta and Raleigh-Durham, N.C., all have more academic and research institute square footage than the Bay Area.
“There are only a few places around the country where we would be interested in life science assets,” Weld said. “Besides Longwood and Mission Bay, others would be San Diego (La Jolla) and Seattle.”
Weld would not give the exact equity investment Clarion made to Longwood Center. The investment was completed for a separate account that Clarion has with an institutional capital source. Development has just started, and construction should take around 30 months to complete. The Dana-Farber Cancer Institute has signed a lease for 154,000 square feet, or 37.2 percent of the building.
The vacancy rate for Class A life science properties in the Longwood Medical area is currently less than 1 percent and has not exceeded 5 percent in the last 10 years.
Alexandria is a major player in the life science property business with holdings in the greater Boston area; Northern and Southern California; New York City, New Jersey and Philadelphia; and Research Triangle Park in North Carolina. In the San Francisco Bay Area the company owns 2.3 million square feet of life science properties, including four buildings in Mission Bay, according to its most recent annual report.
In 2010, Alexandria sold several Mission Bay land parcels to Salesforce.com for $278 million, booking a gain of nearly $60 million. Salesforce, an information technology and cloud computing company, had intended to build a two millions square foot corporate headquarters on the site but has recently shifted course.
Joel Marcus, Alexandria’s chief executive, said his company’s Mission Bay space is 98 percent leased, reflecting how tight the life sciences market is in Mission Bay. The overall vacancy in the market is 2 percent or less, he said.
Alexandria’s other major Bay Area markets are South San Francisco, where it owns a one million square-foot portfolio, and Palo Alto, where it controls an additional 500,000 square feet.
Clarion invests in real estate nationally and internationally. It has more than $24 billion in assets under management.