BX Blackstone Inc

By Craig Karmin 

Blackstone Group Inc. is extending its big bet on biotechnology and other life-science buildings, a hot field in the real-estate world that is heating up even more as scientists pursue a vaccine for Covid-19.

The New York investment firm said it looked at selling or taking public BioMed Realty Trust, the second-largest U.S. owner of life-science buildings with 93 properties, which Blackstone acquired in 2016. The Blackstone fund that owns the company eventually needs to exit all holdings and return money to investors.

But fund investors said they wanted to continue owning BioMed rather than cashing out, the investment firm said. So the fund has agreed to sell BioMed to another Blackstone fund that can hold it indefinitely and enable investors to stay in, according to firm executives.

The sale price of $14.6 billion amounts to about a $6.5 billion gain in value from the 2016 purchase, Blackstone said. To ensure this represented a fair price for buyer and seller, Blackstone added, it consulted outside advisers to determine the value. Morgan Stanley will also solicit bids on BioMed to determine whether a higher offer exists.

That $6.5 billion profit is the third highest achieved by any Blackstone fund, behind only dispositions of Hilton Hotels Worldwide Inc. and Equity Office Properties Trust.

Blackstone and its investors' resolve to hold on to the company -- the first time Blackstone real-estate funds have executed this kind of transaction -- is the latest sign of intensifying demand for the fast-growing real estate niche.

The business of providing lab space has taken off in recent years as new drugs, treatments and devices are increasingly developed at startup firms, rather than in-house at large pharmaceutical companies.

"Interest in the life-sciences sector from developers, investors and financial backers already was strong in recent years, and the unfortunate arrival of Covid-19 brought even more attention and capital into the sector," said Steve Purpura, a vice chairman in real-estate firm CBRE Group Inc.'s life-sciences group.

The average vacancy rate for the 13 largest life-sciences markets was 6.1% at the end of the second quarter, compared with an office-vacancy rate nearly double that in those markets, CBRE said. With the industry moving some overseas operational facilities back to the U.S., that could generate even more demand, the firm added.

Divisions of JPMorgan Chase & Co. and Related Cos. have also been owners of life-science properties, while venture-capital money continues to pour into life-science startups -- $17.8 billion for the year ended in the second quarter, a record for a four-quarter period, according to data in a CBRE report.

The BioMed transaction also reflects how Blackstone continues to shift its $329 billion global real-estate portfolio away from many traditional bricks-and-mortar investments in favor of properties serving new businesses and industries.

"We look at what is happening in the world," said Kathleen McCarthy, global co-head of Blackstone's real estate group, "and ask if there is a way to put what we see into a real estate context."

For Blackstone, that has meant ramping up purchases of industrial warehouses that service e-commerce and acquiring stakes in production facilities where companies like Netflix Inc. and Walt Disney Co. are creating content.

Life-science buildings are also part of this emerging vision. Blackstone brought in a new leadership team for BioMed shortly after the 2016 acquisition. It sold and bought properties so that the portfolio would be concentrated in the top markets for life science, including the Boston area, San Francisco and San Diego. Blackstone also boosted the occupancy levels at the properties, which was 91% when it acquired BioMed and now stands at 97%, Ms. McCarthy said.

The life-science sector isn't without risk. Building owners face the high cost of building and maintaining lab space that often requires ventilation, chemical storage and disposal, and increased power requirements. Startups also can take years to develop drugs or devices to sell to the public.

But Ms. McCarthy said BioMed has been doing well this year, with 100% of its space occupied and operational. It has collected full rent from nearly every tenant during the pandemic, and nearly half are working on Covid-19 testing or vaccines.

She said that fund investors had the chance to cash out during the sale but that the majority of the money elected to stay in BioMed, and some investors put more cash into the company.

Write to Craig Karmin at craig.karmin@wsj.com

(END) Dow Jones Newswires

October 15, 2020 17:43 ET (21:43 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.