Home AEC Alexandria Reports Strong Quarter, But It Will Cut Construction Costs Considerably Anticipating...

Alexandria Reports Strong Quarter, But It Will Cut Construction Costs Considerably Anticipating Macroeconomic Challenges Ahead

Alexandria Real Estate Equities
Alexandria’s project in Seattle located at 1150 Eastlake Ave. E. Rendering courtesy of Gensler.

By Vladimir Bosanac

Alexandria Real Estate Equities, a leading S&P 500 company, has reported strong financial performance in a challenging macro environment for the first quarter of 2023. The company is one of the top players focused on mission-critical real estate infrastructure for the life science industry, with a franchise that is active in high barrier-to-entry markets. The company’s earnings reflect the continued robustness of the life science sector across the country; however, some areas of concern have emerged for the company. As a result, it will reduce its costs considerably over the next year as it anticipates the next phase of the macroeconomic cycle.

Alexandria is known for its patented and trademarked lab space, which is a premium-priced, non-commodity product, with pricing power exercised in sought-after Alexandria-branded mega campuses. The life science industry is in its formative days, and Alexandria’s tenants continue to make transformative progress in medical innovation, according to the analyst call from April 25th, where the leadership of the firm reviewed the company’s first quarter of 2023 results. The firm has maintained strong financials despite the ongoing economic storm, according to Executive Chairman and Founder Joel Marcus. Alexandria’s top-line revenue is up almost 14 percent, funds from operations per share are also up 7 percent, and the company executed strong leasing performance. Joel exclaimed that the company has a fortress balance sheet and a disciplined approach to funding, with a solid progress plan for 2023.

However, the company anticipates some macroeconomic challenges in the near term and is preparing to limit its expenses to ensure a strong balance sheet.

“At quarter end, projects under construction and near-term projects expected to commence construction over the next four quarters totaled 7.6 million square feet and are 74 percent leased or under negotiation,” said Peter Moglia, Alexandria’s chief executive officer & co-chief investment officer. “This is very similar to last quarter, but in response to the uncertainty and volatility in the markets, we have made a strategic decision to reduce 2023 construction spend by $250 million by pausing or delaying projects that had been classified as under construction, so we can focus our capital on the most strategic projects that have the most attractive terms, enabling our highly bedded and vast tenant base.”

The reduction in spending by the company is expected to result in approximately $610 million in net operating income from deliveries between the second quarter of 2023 and the first quarter of 2026, Moglia stated. 

The construction industry has been facing cost volatility due to fluctuations in commodity prices, such as steel, copper, aluminum, and concrete, caused by shortages of raw materials, low yields for mines, high demand for electrification, and low capability utilization rates. The primary driver of construction inflation is labor, with wage increases, labor shortages, and inefficiencies due to the retirement of skilled labor, he added. Life science building projects are facing delays due to shortages of switchgear and equipment, such as HVAC units, generators, and large transformers, which sometimes have lead times of up to three years. Chip shortages and demand from electrification projects are driving these delays, making new laboratory office projects more expensive to build than before.

“Anyone contemplating a speculative development these days will have to contend with these delays and associated high costs, which will put the feasibility of building and financing the project at considerable risk,” Moglia said. As a result, he predicted that supply would be constrained to only what is under construction today.

On the leasing side, the firm achieved 1.2 million square feet of leased space during the first quarter, which is above its five-year average before 2021, and it marks the 12th consecutive quarter of leasing over one million square feet. 

“We achieved attractive economics primarily from our vast tenant base, accounting for 85 percent of the leasing this quarter, resulting in a rental rate increase of 48.3 percent, which was the highest in company history and a strong cash rate of 24.2 percent,” Moglia said.

However, the leasing velocity is slowing, and demand for space will likely be reduced in the coming quarters. “There are [fewer] tenants actively seeking space in the market today, which we believe is being significantly driven by uncertainty in the economy,” he concluded.