Saturday, July 09, 2005

The Bay Area continues to evolve.

Arie de Geus once spoke of the living company. The Bay Area has become a living region, in which living companies and industries behave as the functional equivalent of cells and organs in addition to their functions unto themselves.

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Heading for the 'Frisco Bay --- By Steve Bergsman

824 words
11 July 2005
Barron's
28
English
(c) 2005 Dow Jones & Company, Inc.

Earlier this year, Sirna Therapeutics announced it was moving its corporate headquarters from Boulder, Colo., to San Francisco -- one more in the long line of biotechnology firms to put down roots in the region. From a real-estate perspective, homegrown and transplanted companies together have transformed the fabled Bay area into the largest biotech community in the country, occupying 16 million square feet. And demand for laboratory space, from San Francisco to Palo Alto, shows no sign of slowing, as the proximity of Genentech and first-rate universities beckons other research firms.

The biotech land rush offers the first ray of hope in a long while for a region decimated by the bursting of the technology bubble in 2000. Office-vacancy rates in greater San Francisco remain high, at about 14.5%, while the vacancy rate in industrial buildings is 5.8%. Laboratory vacancies, on the other hand, are scarce, at only 4% of existing capacity. And prices, which fell from a 2000 peak of $5 per square foot per month to a trough of $1.75 to $2.50, are on the rise again. "By year end prices will be in the high $3 range," says Dino Perazzo, first vice president and director of CB Richard Ellis's life-sciences group for the western U.S. "A year from now, they could be over $4 per square foot."

While some biotech companies are signing leases for office and industrial space -- Tercica (ticker: TRCA) earlier this year took 28,278 square feet in South San Francisco's Hitachi building -- most are seeking new facilities or existing structures that have been repurposed by developers to meet their highly specialized needs. Wareham Development, for example, is building about 100,000 square feet of lab space in the Bay area, and has entitlements for 225,000 square feet in Emeryville and 125,000 square feet in Berkeley, says Rich Robbins, a principal with the San Rafael, Calif., firm.

The Bay area's biotech boom has been fueled, in large part, by industry giant Genentech (ticker: DNA), which is famous for spinning out new companies that set up shop nearby. Connetics (CNCT), in Palo Alto, Tularik, in South San Francisco, and VaxGen (VXGN.PK) in Brisbane, Calif., are all Genentech offspring. Genentech itself committed late last year to lease 780,000 square feet of space in South San Francisco, in a deal that could be worth as much as $540 million through 2020. This marks the largest lease deal in the history of the Bay area, and comes "on top of several hundred thousand square feet the company already leases in the area," says Ed Grammens, of Newmark Pacific.

Biotech clusters -- such as those in the Bay area, the Cambridge/Boston axis and to some extent the fast-growing San Diego life-sciences sector -- generally develop around academic centers, with which they usually share research. In San Francisco's case, Stanford University and the University of California at Berkeley dominate, but the University of California at San Francisco, a graduate institution, is coming on strong. Its 43-acre life-sciences campus at Mission Bay is fast becoming the focal point for much of the biotech research in the region.

Indeed, Sirna Therapeutics (RNAI) found space adjacent to the Mission Bay campus, in an economic enterprise zone that offers exemptions on city wage and sales taxes. "We're starting with a pilot operation in about 5,000 square feet, which will enable us to get our feet wet," says CFO Martin Schmieg.

Not surprisingly, San Francisco also has been a draw for Alexandria Real Estate Equities (ARE), a Pasadena-based real-estate investment trust with a specialty in life sciences. Since last fall, the company has completed three deals with Catellus Commercial Development for parcels of land that wrap around the UCSF life-sciences campus. In the latest deal, earlier this year, Alexandria picked up 705,000 square feet for $32 million, bringing its total Bay area portfolio to 2.1 million square feet. The REIT, which boasts above-average growth in funds from operations, trades for about 74 and yields 4.4%. Bear Stearns analyst Ross Smotrich rates the stock Outperform.

Perhaps nothing confirms San Francisco's status as a biotech mecca more than a decision made in early May by the overseers of the California Institute for Regenerative Medicine to locate the headquarters of the state's new stem-cell research program in the city. True, San Francisco beat Los Angeles, San Diego and other locales partly by offering generous concessions. But this new prize all but guarantees a continued influx of life-sciences firms, and a fresh shot in the arm for the area's economy.

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