Biotech's Builder: How The Pharma's Landlord Could Benefit From The Drug Boom

In Manhattan, overlooking the East River and sandwiched between New York University Langone Medical Center and Bellevue Hospital, two gleaming 16-story towers act as beacons to the booming biotech sector.

Completed in 2010, the 310,000-square-foot Alexandria Center for Life Science is already 100% occupied. It contains a hub for Eli Lilly's cancer business and a Pfizer lab dedicated to exploring leads generated by academic researchers. The second building, some 410,000 square feet of labs and office space, was finished in January and is already 60% full. Roche, the anchor tenant, says moving 250 clinical trial specialists there from Nutley, N.J. has resulted in 25 new collaborations with charities, biotechs and New York hospitals. There's also an accelerator for startups, an enviro-friendly garden and fancy restaurants to feed all those scientists.

This influx tracks back to a single man: Joel Marcus, 67, the corporate lawyer who founded Alexandria Real Estate Equities, a real estate investment trust that focuses entirely on biotechnology firms, 20 years ago. "Our thesis is that if you come to an urban cluster, you're going to participate in that cluster," says Marcus. "You're not going to hide behind the walls of your isolated campus."

That jibes nicely with the nascent reurbanization trend across the technology and pharma sectors. Following the lead of legendary Bell Labs, which decamped from Lower Manhattan in 1962 for a 472-acre spread in rural Holmdel, N.J., most technology companies in the 20th century opted for self-contained suburban campuses over urban settings. Now companies from Novartis to Twitter have opened vast new facilities in city centers to be closer to their young employees--and each other.

Alexandria is at the vanguard of the movement. In New York biotech circles Marcus' two towers have been "transformative," says Marc Tessier-Lavigne, the former chief scientific officer of Genentech and now president of nearby Rockefeller University. "Pharma for the first time in many decades has played a role here. Joel doesn't build real estate. What he does is build bioscience communities."

As a result, Marcus' REIT is up 20%, double that of the MSCI REIT Preferred Index, with annual revenues of $679 million and net income up 8% to $121 million.

It's been a long journey and one that was almost ended by the 2009 financial crisis. Marcus was a top biotech lawyer in the 1980s, working on the deal between Amgen and Japanese conglomerate Kirin that was one of the industry's first joint ventures. But in 1994 he started on a side project, a real estate company that would lease space to biotechs, conceived by entrepreneur Jerry Sudarsky and backed by big names like Joe Jacobs, the legendary founder of Jacobs Engineering, and Joe Flom of giant law firm Skadden, Arps, Slate, Meagher & Flom.

At first Marcus said no, but the other founders kept telling him he had an entrepreneurial spirit and that they were too old to do the job. He finally dropped all his clients and started Alexandria. Marcus learned fast that biotech companies were different from other businesses. For one thing, not only could they grow amazingly fast, but they also could shrink in an instant. In the fall of 1998 one of his biggest San Diego clients, a diabetes-focused biotech called Amylin, got bad news and laid off 80% of its staff. Marcus let them out of their lease, saying, "I believe you're going to be successful, and when you are I want to be your landlord for all the space. You're going to need that space." Remembers Joe Cook, who was Amylin's CEO: "That's a really smart businessman right there." When Amylin launched the blockbuster diabetes drug Byetta a decade later, it stuck with Alexandria until it was bought by Bristol-Myers Squibb for $5.3 billion in 2012.

But when the banks crashed in 2008, they almost took Alexandria (and every other REIT) with them. Alexandria's shares plummeted from an alltime high of $114 to just $30. Seeing his life's work falling apart, Marcus worked quickly to right the ship. The key was to get the ratings agencies--Moody's and Standard & Poor's--to rate his company's debt as investment-grade so that he would be less dependent on banks. That required having fewer non-income-producing assets on the books. Reluctantly, he sold 2 million square feet of land in Mission Bay, Calif. to Salesforce.com for $300 million. It was still a $70 million gain on what he paid for it.

Refocusing development dollars on sites near major urban universities and hospitals turned out to be Marcus' salvation. The model is Boston, where over the last decade the company turned the mostly deserted warehouses around MIT into a thriving biotech scene that generates $150.6 million in rent each year.

Now Marcus is starting to look beyond biotech. He recently signed a joint venture with Uber, the company disrupting the taxi business in major cities, to provide it with offices. He sees tech and biotech companies competing for the best space in cities in a Darwinian process, with land in the hubs where scientists and entrepreneurs congregate remaining in high demand. If he's right, Alexandria's returns should be steady for years to come--while literally reshaping the landscape of the technology business.