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Monday, May 23, 2022

Strength of Specialty Office

For investors, medical and life science properties trade at a premium.

Even during the pandemic, commercial real estate in the medical office and life science areas proved to be reliable product for investors. The sectors continue to do well in the San Fernando Valley.

The Tri-Cities has seen medical buildings trade for close to $25 million a piece while the Conejo Valley’s life science corridor of Thousand Oaks, Newbury Park and Westlake Village — originally launched by Amgen Inc. — has seen its boundaries expand into Agoura Hills and Santa Clarita.

Tri-Cities purchases

Last September, a 50,986-square-foot on-campus medical office building in Burbank sold for $23.9 million, or $468 per square foot.

Commercial real estate firm GPI Cos. purchased the property at 2701 W. Alameda Ave. from a private real estate investor. Mark Shaffer, Anthony DeLorenzo, Chris Bodnar, Lee Asher, Gerard Poutier and Cody Chiarella at CBRE Group represented the seller.

The property came onto the market for the first time since it was built more than 50 years ago. The building was 90 percent leased to a diverse mix of 22 medical tenants, most of them medical practitioners staffed at Providence Saint Joseph Medical Center in Burbank — one of the largest employers in the San Fernando Valley.

“Health care investors continue to target markets with strong tenant demand and proximity to a dominant hospital campus,” Bodnar of CBRE’s Healthcare & Life Sciences Capital Markets said in a statement. “The 2701 W. Alameda property is very well positioned for the future.”

Shaffer said the 2701 W. Alameda property fielded a lot of demand — some 20 plus offers. Medical office is a market with strong underlying fundamentals.  

“The institutional interest in medical has only grown. Health care is driven by location — proximity to strong health care systems,” Shaffer said. “You tend to see longer lease terms and tenant retention with medical. This is ideal if you’re a core buyer and you’re looking for a long, safer investment.

According to CBRE research, Los Angeles’s medical office vacancy in the first half of 2021 stabilized at 10.5 percent — well-below the overall office market vacancy. Burbank had one of the tightest medical office vacancies in the market at 4.9 percent.

In adjacent Glendale last August, a multi-tenant medical office building on the campus of Glendale Memorial Hospital and Health Center traded for $24.8 million to MedProperties Realty Advisors, a Dallas-based health care-focused private equity firm. Brokerage Kidder Mathews transacted the deal.

The six-story, 67,060-square-foot medical office building at 1510 S. Central Ave. is located on the campus of the 241-bed Glendale Memorial Hospital.

Built in the 1980s, the building has undergone extensive renovations over the past couple of years. The facility was 89 percent leased to a diverse mix of long-term health care tenants across ophthalmology, dialysis, orthopedic, podiatry, bariatrics, dermatology and hematology.

“The on-campus location and the stability of the tenant base, we felt, combined to offer an excellent investment opportunity for our firm,” said MedProperties Director of Acquisitions Jon Foulger in a statement.

William Boyd at Kidder Mathews, who helped transact 1510 S. Central Ave., said that medical buildings are a solid investment in the Tri-Cities.

“The investment market is still strong for medical product,” Boyd said. “There are buildings in escrow right now that cost $225 to $250 per square foot but the medical buildings will trade for over $300 per square foot. The economics of a medical building are achieving higher rates than office.”

Boyd doesn’t believe that the Covid period has added significant value to medical buildings because during that time with distancing, doctors were practicing telemedicine.

“It didn’t translate to a landlord charging higher rent,” Boyd said. “That would’ve been the only way (a medical building) would’ve been worth more. So there was no spike in values during Covid. It did support that medical tenancies were growing or were stable versus the office space, which was churning.”

Dana Nialis, a broker who heads the healthcare services group of CBRE, transacted the building at 7345 Medical Center Drive in West Hills for $20.5 million.

“It was an existing medical office building right next to the West Hills Hospital campus,” Nialis said. “We had tremendous interest. The building sold to Healthcare Realty Trust, a healthcare REIT.”

Nialis sees much investment being spent in the medical space. Leasing has also been an incredibly active sector. 

“It’s been pretty busy for several years now,” she said. “It’s definitely picking up in the last year or two, but we’ve seen more activity now.”

With a lot of private equity capital being spent in this space, “we’re seeing more velocity,” Nialis said.

While there are individual investors making offer, Nialis said that “it’s increasingly hard to compete with these institutional groups who are very well-capitalized.”

Expanded corridor

Even in the face of the pandemic, the Conejo Valley’s life science corridor— originally launched by Amgen — continues to thrive and has seen its boundaries expand beyond Thousand Oaks, Newbury Park and Westlake Village.

“The boom predates the pandemic,” said Mike Tingus, industrial broker at Lee and Associates North Los Angeles-Ventura. “From 2009 to 2018, the amount of lab space in the U.S. grew from 17 million square feet to 29 million square feet.”

Tingus said of the life science expansion, “It’s not just in Conejo Valley, you’re seeing it in Pasadena and in the San Fernando Valley.” 

Shadd Walker, senior vice president at Colliers who specializes in the sales and leasing of office and R&D properties, said that the Conejo Valley continues to be ideal for life science and the venture capitalists who invest in them.

“We’re seeing requirements in the marketplace and then matching up buildings that could work for lab space,” Walker said.

Alexandria Real Estate Equities just purchased 19 acres of land from Amgen in Newbury Park. 

“They’re going to be developing a 300,000 square foot life science campus,” Walker said. “We are seeing that but that will take years to develop.”

Walker describes Alexandria as the largest life science operator in the U.S. 

“They’re headquartered in Pasadena, yet this will be there first campus in Los Angeles,” Walker said. They’re huge in Seattle, San Jose, San Diego and Boston.”

They chose Newbury Park, Walker said, because “there’s a cluster out there with Amgen and everyone wants to be near Amgen. That’s where the labor is to hire.”

In Pasadena, Angelo Gordon and Lincoln Properties purchased a property at 465 N. Haltstead to be converted to life science. They’ve signed a lease with Xencor for 250,000 square feet.

“The root of the demand has been there’s much more emphasis on gene therapy,” Walker said. “That seems to be the industry that’s driving it. We’re seeing venture capital on a never-before-seen scale.”

“The venture capitalists are looking to take their research, take their technology and commercialize it on a much larger scale,” Walker said. “As these smaller companies get an investment of $60 million, they’ll be growing and ramping up their research and development. So they’re looking for larger facilities.”

In March, Agoura Hills Business Park sold in an off-market transaction for $29.7 million.

Built in 1987, the 6-acre campus, which consists of a pair of two-story office buildings around a central plaza with surface parking for 193 vehicles, fronts the 101 freeway at 30401-30501 Agoura Road. Harbor Associates and Gemdale USA’s joint-venture acquisition of the 113,991-square-foot office campus is typical of the demand for properties spilling outside of the Thousand Oaks biotech corridor — in this case into Agoura Hills — as the two firms see a continuation of life science expansion in the Conejo Valley, according to Gemdale Executive Director and Head of Acquisitions Tim Nguyen.

“A portion of the property has been successfully converted into lab space, which plays well into our bullish view on the growing life science demand in this emerging submarket,” said Nguyen in a statement. “Despite the Covid-19 headwinds, Harbor has increased occupancy to 94 percent by attracting the life science groups who have been actively expanding in the Conejo Valley.”  

Another biotech cluster outside of Conejo Valley can be found in Santa Clarita — such as at Southern California Innovation Park at 25101-25161 Rye Canyon Loop. Oxford Properties paid $134 million last September for the asset. Tenants at the 14 buildings across 118.5 acres also include Bioness, Animal Behavior, Quallion and Boston Scientific, which occupies in 162,000 square feet.

“Now you’re seeing an investment into that neighborhood as more companies want to be near them,” Walker said.

Even before the pandemic, interest in the Conejo Valley’s biotech sector had been running high.

In August 2019, a joint venture between Chicago-based Singerman Real Estate and Los Angeles-based HATCHspaces acquired the 160,980-square-foot Think Here campus located in Thousand Oaks at the Conejo Spectrum Business Park from Harbor Associates. 

The acquisition was rebranded as part of the growing HATCHspaces portfolio of purpose-built life science facilities. The new HATCHcampus @Conejo Spectrum built upon the current roster of science-based companies to foster a much-needed center of life science activity in the Conejo Valley. 

“We are very enthusiastic about the science industry’s momentum over the past 12 months in the Conejo Valley,” said HATCHspaces Co-Founder Allan S. Glass at the time. “It feels a lot like San Diego’s early years when Hybritech alumni began spinning out new companies, like seeds in a biotech forest. Amgen’s headquarters presence is having that same impact in the region.”

“The Los Angeles region is experiencing its moment in the life sciences,” added HATCHspaces Co-Founder Howard Kozloff. “Over $1 billion of annual investment from the (National Institutes of Health) alone flows into the hands of extraordinary researchers and supporting institutions in the Los Angeles region.” 

“The Conejo Valley checks all of the boxes for us,” said SRE principal Kiley Stevenson. It’s home to several mature life science companies and the quality of life in Thousand Oaks is really second to none.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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