Boston Properties will try its hand at developing life science real estate in South San Francisco, Calif., through a new venture with Alexandria Real Estate Equities in the Bay Area biotech mecca.
The two listed REITs, which separately own a series of neighboring properties along Gateway Boulevard, have teamed up to jointly own the assets and develop new space, forming a combined life science campus totaling 1.7 million square feet.
Under the terms of the deal, Boston Properties contributed Gateway Commons, a 768,000-square-foot portfolio of three office buildings. Life science real estate provider Alexandria added three adjacent properties that it owns, including a newly constructed amenity center, totaling 313,000 square feet.
Both parties will also contribute land, creating three sites with a total of at least 640,000 square feet of potential lab and office development. The deal includes a parcel owned by Boston Properties and encumbered by a surface parking easement by Alexandria, which will be unlocked for new construction.
The combined properties will feature a mix of office and lab buildings, along with high-end amenities in a campus atmosphere. Each partner will have a roughly 50 percent stake in the venture upon completion.
“We free up three new development opportunities, we have no loss of income,” Boston Properties CEO Owen Thomas noted on the company’s fourth-quarter earnings call. “We and Alexandria have been and will be working on development plans for those sites.”
Tapping life science demand
For the institutional office REIT, the transaction also re-orients the property towards laboratory use in one of the country’s hottest life science hubs. South San Francisco “is a very strong lab market and frankly a less strong office market,” said Boston Properties President Doug Linde on the call.
“Right now we’re 100 percent office, and as of the formation of the transaction we have about 13 percent lab. So we’ve reduced our office exposure,” the executive added. Following the construction of lab buildings and the conversion of some of the existing assets, lab space could account for close to 50 or 60 percent of the overall campus.
“Our view is that the lab rents are in the mid-50s, plus or minus, and we try to achieve a 7 percent return on cost,” Linde said.
The collection of properties is located within walking distance to the South San Francisco Caltrain station with immediate access to Highway 101, just south of San Francisco. Kilroy Realty’s Oyster Point office development, which landed tech firm Stripe as a tenant last year, is less than a mile to the east.
Merging two portfolios
Gateway Commons consists of three buildings at 601, 611 and 651 Gateway Blvd., which range in size from about 216,000 to 290,000 square feet. Boston Properties acquired the buildings at 601 and 651 Gateway Blvd. from Hines Interests in 1999, according to Yardi Matrix.
The properties rise 12 and 16 stories and were built in 1984 and 1986, respectively. The remaining 11-story building at 611 Gateway Blvd. was completed in 2002.
For its part, Alexandria is bringing to the new venture one office building at 701 Gateway Blvd., a lab building at 681 Gateway Blvd., and an amenity building at the same address, which is currently under construction. The four-story lab building was completed in 20016 and spans 126,971 square feet.
The six-story, LEED Gold-certified office building was completed in 1999 and renovated in 2016. Alexandria purchased the 170,323-square-foot asset from PGIM Real Estate for $74.8 million in 2017, Yardi Matrix data shows.