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

June 3, 2021 by Abbie Falpando-Knepp

Investors see the higher rents translating into higher property values, which explains why construction projects are moving ahead without tenants lined up. Among the biggest spec builders is IQHQ, a startup that raised $2.6 billion last year to develop laboratory buildings that are breaking ground without signed leases. In April, the firm launched construction of Fenway Center, a $1 billion complex on a platform above Boston’s Interstate 90 with a rooftop view of the famed Red Sox ballpark. The firm isn’t concerned about filling up the space, according President Tracy Murphy.

“We build spec, but we don’t build blind,” Murphy said in an interview from San Diego, where her firm is pouring concrete for a 1.6 million-square-foot waterfront lab complex. “I don’t see any end in sight for money coming in.”

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Harrison Street, a Chicago-based alternative real asset investor, has about $2.6 billion invested in lab properties and wants to double that over the next 24 months, Chief Executive Officer Christopher Merrill said in an interview. Alexandria Real Estate Equities Inc., the largest life sciences real estate investment trust, also has big expansion plans.

In January, it paid $1.5 billion for a project in Boston’s Fenway neighborhood. The company has 4 million square feet of space under construction — about 1 million of which still hasn’t been leased.

As investors clamor to break ground, there’s a risk of an oversupply of space, said Jeffrey Langbaum, an analyst with Bloomberg Intelligence. Another hazard for developers is that lab space construction can cost as much as 15% more than conventional offices. Science buildings require stronger structures and higher ceilings to accommodate features such as enhanced air filtration. That limits potential other uses for the property if health-industry tenants don’t materialize.

Lab buildings are trading for capitalization rates, a measure of returns for investors, of less than 4%, which is lower than apartment buildings or industrial properties. There’s been cap rate “compression” over the last year amid a surge in investor capital flowing into the sector, according to Sarah Lagosh, managing director in the Boston office of Eastdil. 

The recovery of traditional offices is expected to take time as companies call employees back over the next few months. Even then, many firms have said they’ll let people stay home at least part of the time. That’s raised concerns about the future of downtown skyscrapers, while Covid-19 has added to the momentum for life sciences properties.

“The pandemic has pushed life sciences into warp speed,” said Jonathan Varholak, who runs the life sciences team in the Boston office of the real estate firm CBRE. “You can’t do chemistry from home.”

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Originally Appeared Here

Filed Under: REAL ESTATE

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