Laboratory Space

Are Tech Layoffs Going to Be a Headache for Alexandria Real Estate Equities?

Despite a relatively tight labor market, we’re starting to see big tech companies announce layoffs. Elon Musk’s acquisition of social media site Twitter has gotten a lot of press, but we’re seeing an increase in announcements from companies like Meta platforms and Amazon.com. With layoffs and people working from home, office real estate investment trusts (REITs) love it Alexandria Real Estate Shares (IS -0.84%) in trouble?

A laboratory with various equipment.

Image source: Getty Images.

Alexandria is a leader in life sciences office space

Alexandria Real Estate Equities is an office REIT focused on the life sciences and technology space. The company owns approximately 74.5 million square feet of office space in Boston, the San Francisco Bay Area, New York City, San Diego and other locations. The company is primarily known for catering to the life sciences industry, which includes pharmaceuticals, agtech and biotech.

The life sciences office space is dominated by specialists, and Alexandria is by far the largest. Building laboratory spaces requires a deep knowledge of regulations along with experience in the sector. Alexandria’s largest tenants include Bristol-Myers Squibb, Modern, Eli Lilly, Sanofiand Takeda. These companies are all giants in the pharmaceutical sector.

Remote work is not ideal for life sciences companies

The work-from-home model is not particularly well suited to life sciences. Laboratory work must be done on site; the company believes this gives them an edge over other office REITs, which struggle to maintain occupancy. For example, at the end of the third quarter of 2022, Alexandria had an occupancy level of 94.3%. A non-life sciences office REIT such as SL Green (SLG -1.39%) had an occupancy level of 90.9%.

Alexandria has a fairly diverse tenant base, with no tenant accounting for more than 3% of annual revenue. Meta used to be a major tenant, but Alexandria sold the building that housed the company, and it is no longer a significant tenant. There have been some layoffs in the pharma space, but nothing like the 10,000-plus announcements at Meta or Amazon.

Alexandria does have some technical tenants, such as Uber Technology, Maxar Technologiesand JUICE. However, only SAP has made recent layoff announcements, and it looks like most of the layoffs will be overseas. So far, Alexandria’s tenant base does not appear to be experiencing financial difficulties.

The whole sector is under a cloud

Office REITs have been under a cloud since the COVID-19 pandemic proved that many companies can operate effectively with a fully remote workforce. The open question is whether companies can actually reduce space. A person who works from home three days a week will still need a desk, which means the square footage required probably won’t change much. While many investors remain sour on the office REIT space, Alexandria is one of the top performers in the space.

Alexandria guided for 2022 to obtain funds from operations (FFO) to obtain about $8.41 per share. This gives the company a multiple of 18.3 times 2022 FFO per share, which is a reasonable multiple for a market leader. The company also has a dividend yield of 3.1%, which is low for a REIT. However, Alexandria continues to invest in its business, which could spur future growth. REITs generally underperform when interest rates rise, but if the Fed signals at its December meeting that rate hikes are largely over, we could see investors return to the REIT space in general.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Brent Nyitray, CFA has no position in any of the listed stocks. The Motley Fool has positions in and recommends Alexandria Real Estate Equities, Amazon, Bristol Myers Squibb, Meta Platforms, Inc., and Uber Technologies. The Motley Fool recommends Moderna Inc. and SAP SE on. The Motley Fool has a disclosure policy

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