Oxford Properties Expands its San Diego Life Science Presence

Oxford Properties announced it is expanding its San Diego life science presence with the purchase and lease back of the Ionis campus:

Oxford Properties Group (“Oxford”), a leading global real estate investor, asset manager and business builder today announced the purchase and long-term lease back of Ionis Pharmaceuticals’ (“Ionis”) 18.4-acre life science campus and corporate headquarters. Located in the established San Diego life science submarket of Carlsbad, the campus features approximately 250,000 square feet of existing life science and office space. As part of the transaction, Ionis will lease the properties for a minimum of 15 years.

The transaction follows on from Oxford’s entrance into the San Diego life science market in February this year via a US$464 million acquisition of a 13-building portfolio. It builds on Oxford’s already robust global life sciences portfolio and growing West Coast presence with high quality assets in the Bay Area and Seattle. The acquisition grows Oxford’s existing San Diego life science portfolio to 900,000 square feet of income-producing properties, which will increase to over 1.2 million square feet upon completion of its development pipeline in the local market.

Founded in 1989, Ionis is a publicly traded biotech company and a leader in discovering and developing RNA-targeted therapeutics. Ionis currently has three marketed medicines and a premier late-stage pipeline highlighted by industry-leading cardiovascular and neurological franchises. It has a long history of R&D successes and has delivered multiple breakthroughs in antisense technology.

“Our team continues to create sustained yet highly-targeted growth against one of our highest conviction global investment strategies, to build a global life science business of scale,” said Chad Remis, Executive Vice President, North America at Oxford. “Today’s acquisition adds another leading life sciences company to our business as well as high quality income-producing assets to our growing portfolio plus complements our development pipeline in San Diego. The transaction perfectly encapsulates the purpose of our life science business; by investing Oxford’s capital and capabilities to own, build and manage this highly technical real estate infrastructure we are able to free up the resources of life science firms to better focus on what they do best – research and create the life changing therapeutics of tomorrow. We look forward to working with Ionis as they continue to advance their science for the benefit of society at large.”

“Ionis has long maintained a strong financial foundation to support our business objectives. While we have a healthy cash balance, we also have near-term capital needs to scale our organization to deliver on our growth initiatives. This transaction will provide us with significant cash proceeds while allowing us to conduct our day-to-day operations as we normally do. We have worked closely with Oxford to create a bespoke solution that can accommodate our future growth and retain flexibility as our business evolves,” said Elizabeth L. Hougen, executive vice president and chief financial officer of Ionis.

The Ionis campus features three assets of one and two storeys and comprises approximately 250,000 square feet across 18.4 acres. The buildings are all modern vintage, with the oldest completed in 2011 and the most recent in 2021. They feature chemistry labs, biology labs and R&D support systems as well as modern office space. The campus is located in Carlsbad, part of the prominent San Diego North County life science cluster and home to leading firms such as Novartis, Thermo Fisher and Genentech. The North County has become highly sought after by life science firms in recent years, which has dropped the vacancy rate to 3.6%[1].

San Diego has defined itself as one of the most important life science markets globally. Nearly 40% of its population holds a bachelor’s degree or higher, rapidly outpacing the national average of 28%, and its universities graduate more STEM talent than any other region in the US. Its ecosystem is anchored by renowned research institutions and non-profits including San Diego State University, UC San Diego, Scripps Research and the Sandford Burnham Prebys Medical Discovery Institute. San Diego’s life science market has witnessed record demand over recent years, leading to significant and sustained rental growth with asking rents growing by 34% in 2021.

“Our purchase of the Ionis campus adds to Oxford’s significant presence in a top three global life science market that is characterized by high barriers to entry,” said Tycho Suter, Vice President of Investments at Oxford. “We have long-term conviction in the San Diego life sciences market, which is supported by its strong STEM presence and a highly-skilled labour force as well as world-renowned research and academic institutions. Together, it creates a highly innovative ecosystem that captures research funding, venture capital and business growth to the region.”

Oxford has invested in the life science industry since 2017. It has built substantial expertise in the sector while deploying capital through a variety of equity and credit investments as well as cultivating a significant development pipeline. Since the start of 2021 alone, Oxford has invested over US$3 billion in global life sciences and has identified a further US$5 billion of follow-on development opportunities. Oxford’s life science business now operates across the top 10 North American life science markets and in leading European markets through holdings in Cambridge, London and Paris.

This purchase and long-term lease back of Ionis Pharmaceuticals’life science campus and corporate headquarters makes perfect sense for Oxford and Ionis.

Let me give you some background.

In February, Oxford Properties entered the San Diego life science market with US$464 million acquisition of 13-building portfolio:

Supporting its strategy to help deliver the much needed and highly technical real estate infrastructure to companies creating the life-sciences of tomorrow, Oxford Properties Group (“Oxford”) today announced the acquisition of a nine-asset, 13-building life sciences portfolio in San Diego’s Sorrento Mesa and Sorrento Valley. Oxford, a leading global real estate investor, asset manager and business builder, acquired the 650,000 sq ft portfolio for $464 million.

The announcement marks Oxford’s entrance into the San Diego market, building on its already robust life sciences portfolio and growing West Coast presence with previously announced assets in the Bay Area and Seattle. The portfolio, together with recently acquired development lands, provides Oxford a diverse and high-quality life science offering in a market which it has high long-term conviction.

As a result of this transaction, Oxford’s North American established life science portfolio is now present across nine key markets. It has a development pipeline comprising significant scalability of new, specialized product across R&D, incubator and GMP facilities. The firm’s substantial growth in its life science business since 2017, now includes over US$2 billion of acquisitions in North America in the past 12 months.

“Our team continues to create sustained, yet highly-targeted growth against one of our highest conviction global investment strategies to build a dedicated life science business of scale,” said Chad Remis, Executive Vice President, North America at Oxford. “Today’s acquisition adds high quality, income producing assets to our growing portfolio and perfectly complements the beginning of our development pipeline in San Diego. Life Science portfolios of this size rarely trade, so it presents a unique opportunity to add immediate scale in a globally-significant life science market that is characterised by high barriers to entry.”

The acquired portfolio is 98% leased with 12 of the 13 buildings centrally located within San Diego’s Sorrento Valley and Sorrento Mesa, two of the most sought-after life science markets in North America. The portfolio consists largely of one-to-two story buildings with a 60/40 life sciences-to-office ratio, modern MEP systems and ample tenant parking.

Sorrento Valley and Sorrento Mesa have emerged as epicentres of growth within San Diego’s life science ecosystem which in 2021 recorded over 4 million sq ft of leasing volume, an all-time high, and 80% higher than 2020 (which was a record year on its own.). As a result of record high demand and limited vacancy, asking rents in San Diego’s life science market have recorded a 34% increase.

San Diego has defined itself as one of the most important life science markets globally. Nearly 40% of its population holds a bachelor’s degree or higher, rapidly outpacing the national average of 28%, and its universities graduate more STEM talent than any other region in the US. Its ecosystem is anchored by renowned research institutions and non-profits including San Diego State University, UC San Diego (‘USCD’), Scripps Research and the Sandford Burnham Prebys Medical Discovery Institute. There are 760 UCSD-affiliated start-ups alone, which generate approximately US$16.5 billion in annual revenue and employ more than 100,000 professionals, of which 74,000 are based in San Diego.

“The San Diego life science market is supported by a strong STEM presence, a highly-skilled labour force as well as world-renowned research and academic institutions. Together, it creates a highly innovative ecosystem that captures research funding, venture capital and business growth to the region,” said Tycho Suter, Vice President of Investments at Oxford. “The acquired portfolio gives us a meaningful presence in a market where we have high conviction. Furthermore, with over a third of the portfolio’s leases set to expire in the next two years, it provides Oxford the opportunity to utilize our active asset management capabilities to create value via targeted upgrades to lab space, improving the customer experience and offering that these buildings have in the marketplace.”

Back then, PERE reported that Oxford's expansion in the booming San Diego biomedical research and development market was done through the acquisition of nine assets from Blackstone’s BioMed Realty. 

Tycho Suter, Vice President of Investments at Oxford was interviewed and had this to say:

“San Diego is a very significant life sciences market, likely the number three-ranked market in the world, and we had been trying to get into it, but it’s been very competitive,” Suter says. “This was a nice way for us to get into the market and really cement and cover the major life sciences markets on the West Coast.”

The portfolio spans 650,000 square feet across 13 buildings, a dozen of which are located in San Diego’s Sorrento Mesa and Sorrento Valley neighborhoods, near the heart of the research corridor on the city’s northwest side. Most of the properties are one or two stories tall and have a combination of office and laboratory space.

Overall, the properties are 98 percent leased, giving Oxford cashflow to balance out its heavy exposures to new development and repositioning in the sector, Suter says. The firm has more than two dozen projects in the works throughout North America. Stabilized assets do not often trade hands in the life sciences world, Suter notes, as most of the real estate is controlled by REITs and open-end funds.

“These income producing properties don’t usually trade and it’s even more rare to see a portfolio of this size and quality,” he says. “This does not occur very often in the life sciences space, or at least has not to date, so it was a great opportunity for us to come in at scale and in a high conviction market.”

From Q4 2020 through the third quarter of 2021, one-third of the transaction volume in San Diego’s life sciences real estate market were portfolio acquisitions, according to the data tracking firm Real Capital Analytics. While this pales in comparison to Boston, where more than 70 percent of transactions were for portfolios, it is significantly more than most markets, which saw no portfolio deals last year.

San Diego is the fourth largest laboratory and R&D real estate market in the country, with 17.7 million square feet of related property, according to the brokerage CBRE. The city also ranks fourth in terms of total employment in the industry, at roughly 69,000.

Now that Oxford has a presence in each of the top seven US life science hubs plus Toronto and Vancouver, Suter says the firm will focus more on expanding its footprint in each of those locations rather than venturing into smaller markets.

“We don’t want to just be a single asset holder in one market, we’d prefer to have fewer markets but more assets within each market,” he says. “So, we will look to expand in each of these markets, including San Diego.”

No doubt about it, San Diego is among the top biotech hubs in 2022:

Boston, unsurprisingly, remains the leading city for biotech startups and activity, with 135 tenants seeking space and more than 13.6 million square feet under construction.

Other top cities for biotech include San Francisco, San Diego and a little corner of North Carolina—Research Triangle Park—that sits between Raleigh and Durham. 

Read on for a recap of what’s going on in these busy hubs for biotech and the biggest companies spreading out, hiring and making medical breakthroughs.

***

3. San Diego

If you want to get a sense of San Diego’s solidifying position as a major biotech hub, look no further than last year’s Fierce 15. The city itself delivered one entry to the list in the form of cancer-focused Erasca, alongside Tyra Biosciences from neighbouring Carlsbad.

Forming one end of "biotech beach" that runs up to Los Angeles, San Diego also plays host to a major event in the biopharma calendar thanks to the BIO International Convention. The rest of the year, the area flaunts 18.8 million square feet of lab and R&D space with another 3.2 million sq. ft. of new development under construction and 1.7 million sq. ft. to come from conversions, according to CBRE Research.

The list of lease transactions in the first quarter reflects the mix of up-and-comers and established players that has contributed to the area’s success. Neurocrine Biosciences, which is focused on neurological and endocrine-related diseases, led the charge by leasing around 535,000 sq. ft. for its headquarters in Carmel Valley.

Behind it came Bristol Myers Squibb, which signed off on a new 427,000 sq. ft. R&D campus in the University Town Center near La Jolla. “BMS looks forward to bringing our teams across San Diego to work together at our new innovative research hub," Rupert Vessey, executive vice president of research and early development, said at the time.

Gene sequencing company Singular Genomics was the other big leaseholder of the opening months of the year, taking on 205,000 sq. ft. in Torrey Pines.

It hasn’t all been plain sailing for San Diego’s biotechs, however. Biosplice let go of 41 workers in February without public explanation, while Metacrine laid off half its staff in the wake of a failed trial in the liver disease nonalcoholic steatohepatitis.

Biotech is a sector I know extremely well, it has exploded over the last ten years and there are many established and up-and-comer players who all need lab and R&D space to carry out their work.

The field remains extremely competitive and that's why the demand for life science properties remains robust in hubs like San Diego. 

As far as Ionis Pharmaceuticals, I can't share much with you except that Fidelity is their biggest investor (owns 15% of the shares) and its stock has done better than the broader biotech index:

Biotech stocks are very volatile, it's the nature of the beast. Even the best experts like Perceptive Advisors and others can get burned investing in biotech, which is why they diversify their portfolio.

Demand for life science properties is less volatile, it's just increasing as the industry keeps growing. 

Pension funds can invest in both but I'd stick to life science properties, it's a safer bet with less heartburn. 

In other related news, yesterday I saw Oxford Properties announce The Stack has become Canada's first new commercial office tower to achieve Zero Carbon certification:

Oxford Properties Group (‘Oxford’), a leading global real estate investor, asset manager and business builder, announced that The Stack, a 37-storey, AAA-class 550,000 sq. ft. commercial office tower in downtown Vancouver, has achieved the Canada Green Building Council’s (‘CaGBC’) Zero Carbon Building - Design standard certification. As Canada's first commercial high-rise office tower to achieve this certification, The Stack sets new a new standard for environmental performance across workplaces in Canada.

As well as being the first high-rise commercial office tower to achieve the certification, it is also the largest project in Canada to achieve it to date.  Upon completion later this year, The Stack will become the tallest office building in Vancouver which added to the technical complexities to achieve the Zero Carbon Standard. The Stack has incorporated many innovative features that minimize carbon emissions, energy and water usage as well as landfill waste. These include low carbon building systems, triple-pane glazing on all windows, rainwater management and enhanced air tightness. On-site renewable energy will be achieved through the use of a rooftop photovoltaic solar panel array.

“Oxford’s purpose is to create economic and social value through real estate and The Stack embodies Oxford’s ongoing commitment to sustainability and decarbonization,” commented Andrew O’Neil, Vice President of Development, Oxford Properties. “The CaGBC certification is the culmination of over five years of planning to pioneer a new zero carbon framework in a high-rise and architecturally-significant office tower, all while juggling the demands of realizing an economically-viable commercial project for our stakeholders.

“By being the first commercial high-rise office project in Canada to achieve this certification, we have garnered significant learnings that we can apply to future projects, and share with our peers, to lead the real estate industry to new levels of sustainability.”

Also targeting LEED v4 Platinum Core and Shell certification, The Stack will deploy smart building technology to provide insights on energy management, optimize building performance and enable preventative maintenance. Designed to encourage active transportation options and promote wellness, The Stack will feature 250 bike parking stalls and club-quality fitness and change facilities for an exceptional customer experience.

In 2015, Oxford set out to reduce its carbon footprint by 30 percent by 2025. Last year Oxford announced it had exceeded their goal, reducing its portfolio carbon intensity by 37 percent, four years ahead of schedule. The company has achieved this by pioneering groundbreaking new developments that raise the bar on sustainability, investing in data and analytics to set hourly carbon targets for its properties, and human solutions that encourage sustainable active transportation by a building’s customers.

The Stack is set to become the latest in a line of landmark developments delivered by Oxford. The company is responsible for several landmark and award-winning development projects such as Vancouver’s MNP Tower, 402 Dunsmuir and Riverbend Business Park, Manhattan’s St. John’s Terminal which was recently acquired by Google, The Leadenhall Building in London and Toronto’s Park Hyatt. The Stack continues to achieve strong interest from a wide range of occupiers and is currently 70% pre-leased.

“Oxford has strong conviction that best-in-class offices that are smart, wellness-focused and sustainable will continue to be highly desirable to occupiers and continue to outperform,” commented Ted Mildon, Senior Director at Oxford Properties. “There is a real need among businesses to ensure they are located in buildings that not only inspire and engage their workforce, but also actively contribute to their own ESG goals. As a result of our Zero Carbon certification, The Stack is uniquely positioned to do so in the Vancouver market.”

The CaGBC’s Zero Carbon Building - Design standard represents a unique, made-in-Canada framework that guides the design and construction of low-carbon, highly efficient buildings. This, in turn, helps the development industry achieve climate change commitments and assist new and existing buildings to reach zero carbon.

“Oxford continues to demonstrate leadership in lowering carbon emissions across their portfolio. The Stack is the first new high-rise office building to achieve CAGBC’s Zero Carbon Building - Design certification. With this stand out project, Oxford is setting a new benchmark for Canada’s top real estate owners,” comments Thomas Mueller, President and CEO, Canada Green Building Council. “Shifting investor and market interests in carbon solutions, along with advances in technology and know-how, make it more feasible for Canada’s major real estate projects to follow suit. The time is now to target zero carbon in all new building construction and in existing building retrofits. By pursuing LEED v4 in addition to ZCB-Design, Oxford is ensuring The Stack will offer the best in sustainable design: zero carbon emissions, reducing environmental impacts and improving occupiers’ wellbeing.”

For more information about Oxford’s environmental, social and governance practices, visit www.sustainable.oxfordproperties.com. To learn more about The Stack, visit www.thestackyvr.com.

Congratulations to Oxford for being the first to achieve Zero Carbon certification on The Stack. 

See my recent discussion with QuadReal's Jamie Gray Donald to understand the difference between green-certified buildings and net-zero buildings:

“Just as green-certified buildings have outperformed in the past decade, we believe net-zero buildings will outperform the market in the coming decade.”

He explains:

LEED buildings are better from a sustainability standpoint. Often on the energy efficient and carbon reduction, they get you about 30% of the way there. LEED buildings don't have a net-zero requirement. They have requirements and get lots of points for more energy efficient buildings but they haven't necessarily given significant points to fully electrified buildings. Net-zero takes it further to when natural gas boilers need to be replaced instead of relying on fossil fuel based options.

I asked him in their portfolio if any buildings have achieved this net-zero status:

I can't give you exact numbers but the majority of our office buildings are LEED certified. 95+% of our buildings are certified to BOMA Best which is the Canadian green building certification which is more broadly applicable to residential buildings, retail and warehouses. From what we can tell, we are about 30-40% on the way there toward net zero and some leading offices are already at 60-70% carbon reduction. In our Canadian portfolio, we don't have any building which is net-zero certified yet. We have a new office building in London that was built to the UK net-zero standard and another one that is retrofitting to the UK net-zero standard. 

I asked if he thinks this is the wave of the future, that buildings will be required to go beyond LEED and shift to a net-zero standard:

Yes, definitely. We see regulatory pressure, right now it's mostly at the city level where cities are changing their code requirements for new developments and phase in code requirements on existing buildings. Then we see a lot of Fortune 500 companies with net-zero commitments but have not included net-zero requirements in their leasing commitments but we see that coming over the next few years. We want to get ahead of regulation and market demand knowing it takes a few years of planning and implementation to achieve this. The way we are doing it, we are not just buying carbon offsets, we are making rational changes to equipment and building that takes a couple of years of planning and capital allocation.

As far as demand for net-zero buildings, he told me they see it in London, UK where "net-zero buildings are leasing up faster and commanding a higher rent, so we expect that to come to Toronto and Vancouver over the next five years."

I also congratulate QuadReal for being recognized for its continued commitment to environment, social and governance (ESG) transparency by GRESB, the leading global sustainability benchmarking organization:

QuadReal’s diversified Canadian portfolio of office, industrial, retail and residential assets was awarded 1^st place in the Americas and 4^th globally in this year’s Real Estate Assessment. This result complements QuadReal’s top GRESB rankings from the previous three years.

Eight Canadian real estate investors and their portfolios have been recognized as sustainability leaders in the Americas through their notable placements in the 2022 Global Real Estate Sustainability Benchmark (GRESB) Survey, with one also leading globally.

You can learn more about the results here and Oxford and others made the list.

Alright, let me wrap it up there.

Below, from net-zero skyscrapers to green business parks, in this very recent WRLDCTY conversation with Oxford Properties Group President Michael Turner, he discusses the role institutions can play in the delivery of projects, and ideas that shape cities to the needs of their citizens. 

Great discussion, worth listening carefully to Michael's insights to understand why Oxford has scaled very nicely into life sciences properties and continues to do so as part of its plan to build a multi-billion-dollar portfolio in that sector. 

I also embedded an older (2015) CNBC interview where Mad Money host Jim Cramer interviewed former CEO Dr. Stanley Crooke who talked about the name change (from ISIS Pharmaceuticals) and updates on clinical trials that were going on back then. 

You can learn more about Ionis Pharmaceuticals here, they are a leader in discovering and developing RNA-targeted therapeutics.

Third, in episode 34 of Fly on the Wall (October 2020), Brendan Wallace catches up with Tyler Henritze, Head of Acquisitions Americas, Blackstone Real Estate, who provides a look into the company’s thematic investment approach. Tyler explains how Blackstone’s allocation of capital to traditional real estate sectors is informed by evolving trends in technology and shifts in demographics, using the Industrial, Biotech/Life Sciences, and Entertainment sectors as examples. 

Lastly, a recent interview where Kathleen McCarthy, Co-Head Real Estate, Blackstone discusses her outlook on global real estate with Bloomberg's Carol Massar at Bloomberg Invest.