John McCloud is editor of Industry Property Journal, from which this article is excerpted.

San Francisco—The decision by Wells Fargo & Co. to establish a life sciences group signals a major change in attitude by financial service companies toward the biotech sector. With some 30 officers in San Francisco, San Diego and Boston assigned exclusively to service biotech and medical device companies, the San Francisco-based bank is showing new enthusiasm toward a fledgling industry that until recently most major financial institutions regarded as too risky to embrace.

The reasons behind the decision are easy to track. Though biotechnology stocks fared poorly in 2006, analysts expect a strong recovery for 2007, particularly for larger companies. Amgen Inc. of Thousand Oaks, CA and Genentech Corp. of South San Francisco, the world's two largest biotech firms, experienced respective 13% and 12% drops in share value last year. However, both are expected to see about 25% gains this year.

Well-established pharmaceutical companies are also showing greater enthusiasm for biotech. Indianapolis-based Eli Lilly and Co. just announced plans to invest "significant resources" in biotech manufacturing at its headquarters campus. Merck & Co. Inc. of Whitehouse Station, NJ spent $1.6 billion in the past year to acquire three biotech firms and Berlin, Germany-based Bayer Schering Pharma AG says it will "aggressively" expand its biotech portfolio in 2007. The latter recently completed a $50-million manufacturing facility at its Berkeley, CA campus, which company R&D director Marc Rubin says will become "the center of our biotech universe."

The bright biotech outlook could prove providential for Slough Estates International, the business park owner from Slough, UK, which is exploring putting its entire US portfolio on the block. The portfolio consists of more than 4.7 million sf of life-science space in 24 properties in San Francisco and San Diego plus a 17,400-sf building in Peoria, IL. The properties generate annual rents approaching $115 million and encompass 420 acres, 151 of which remain to be developed.

Slough converted to a REIT earlier this month, but company CEO Ian Coull says the potential disposition of the US portfolio stems not from that change but from unsolicited interest in the properties shown by investors. Though he would not reveal the investors' identities, presumably they could include San Diego's Biomed Realty Trust Inc. and Pasadena, CA's Alexandria Real Estate Equities Inc., the nation's two largest owners of biotech space.

Both already have substantial investments in San Diego and San Francisco and have been actively acquiring or developing new properties. Biomed, which just issued millions of new shares in an effort to raise more than $2 billion, recently completed the purchase of a 702,940-sf life science research building under construction in Boston. In addition, an affiliate of Alexandria signed a long-term ground lease this month with the New York City Health and Hospitals Corp. that clears the way for development of the 1.1-million-sf East River Science Park in mid-Manhattan.

Other potential buyers could include Healthcare Property Investors Inc. of Newport Beach, CA, a multi-billion-dollar REIT whose current portfolio consists almost exclusively of medical care and retirement facilities, and Vornado Realty Trust of Paramus, NJ, which until now has specialized in office, retail and showroom properties. Whether either is truly interested in entering the pricier and riskier biotech market remains to be seen. One possibility floated by Coull is a buy-in by an outside investor rather than an outright sell-off.

In truth, few investors have the combination of capital and experience needed to acquire and manage the Slough portfolio, though if Sough is willing to sell the portfolio piecemeal the list of prospects could grow substantially. Smaller companies like Wareham Development Co. of San Rafael, CA and Simeon Commercial Properties of San Francisco, each of which owns about one million sf of life-science space across the bay from San Francisco, and Lyme Properties LLC of Hanover, NH, which developed a couple million sf of New England R&D and lab space, potentially have the resources to acquire a few properties, but not likely the entire portfolio.

Given the general competitiveness of the real estate investment market, it's likely more companies will develop an appetite for biotech properties as the biotech industry improves its profit/loss ratio and as more product becomes available. So far, the bulk of life-science development projects have been build-to-suit, but even some of these are coming to market as successful companies outgrow existing facilities or unsuccessful ones go under.

The number of life sciences properties put on the Boston market increased fivefold over the past three years, according to Boston real estate firm Richards Barry Joyce & Partners LLC. Before 2005, the brokerage says only one lab building had ever sold in Cambridge, MA, bringing $46.5 million, but $1.8 billion of such sales have occurred since then. Significantly, that first sale brought a hefty $508 per sf, but some subsequent deals have come in at twice that, placing biotech properties among the most expensive commercial buildings ever traded in the US.

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Biotech Industry Anticipates Upsurge

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