While most commercial office landlords are still hunting for post‑pandemic tenants, there's a sector of the real estate industry that's breeding breakout growth: life sciences. Global biotech spending is projected to triple from roughly $1.7 trillion in 2025 to more than $5 trillion by 2034. All that R&D cash needs purpose‑built laboratory space.
That's what makes Alexandria Real Estate Equities (ARE 0.34%) such a standout real estate investment trust (REIT). It owns the largest portfolio of labs and life-science properties in the United States and has a client base of approximately 750 high-quality tenants, including Eli Lilly, Moderna, and Bristol-Myers Squibb. With this strong tenant base, Alexandria is poised to generate returns that could replicate like stem cells.
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Tenants engineered for long-term occupancy
With occupancy rates of 92% and the majority of their space leased to biotech, pharmaceutical, and agricultural technology (AgTech), Alexandria is in a league of its own in comparison to other REITs. Given the highly specialized nature of their business, laboratory tenants require customized spaces, so they sign longer leases and rarely move. Thanks to this, last quarter, ARE locked in rent increases of 18.5% on average when tenants renewed and 7.5% when new ones signed, a strong sign of pricing power even during a period of lower leasing demand.
The company also has a weighted-average remaining lease term of 7.6 years, indicating strong tenant commitment and predictable long-term cash flow, boosting the company's overall income stability. With a lease portfolio this stable, you could call it genetically engineered for sizable returns.
Rebuilding the balance sheet with surgical precision
Instead of chasing growth for growth's sake, management has been smartly recycling capital. During 2024, it focused on selling noncore assets to free up cash, reduce debt exposure, and reinvest funds into higher-yielding developments, an approach that improves returns while lowering long-term risk.
For 2025, it plans another $2 billion of dispositions and minority‑interest sales, roughly one third of which is already closed or under contract. Proceeds are being funneled into its high‑margin mega‑campus developments that have consistently proven profitable for ARE, further strengthening the company's financial position. Only 13 % of outstanding debt matures before 2028, and the average term is now over 12 years, which is longer than any other REIT in the S&P 500 (^GSPC 0.40%).
Incubating tomorrow's rent roll
Even with occupancy not at full capacity, Alexandria has roughly 4 million square feet of Class A lab projects under construction in Boston, San Diego, and the Bay Area. Much of that space is pre‑leased, and the rest should command premium rents once biotech funding rebounds. Combined with contractually built-in rent escalators that will boost revenue annually even without new leases, that pipeline points to rising cash flow in the near future. After paying dividends, the company still expects to retain roughly $475 million of operating cash this year, enough to self‑fund a good chunk of its expansion.
Potential side effects to monitor
Investors should keep in mind that, while the long-term outlook for the life sciences industry is favorable, demand can be cyclical. If the biotech funding window slams shut due to larger macroeconomic trends, leasing of ARE's new projects could slow.
Rising interest rates are another wild card. Alexandria's current interest‑rate swaps shield it for now, but costs will climb when that protection rolls off.
Additionally, biotech companies operate on long R&D cycles. If a wave of Alexandria's tenants hit clinical trial setbacks or fail to bring products to market, they may downsize or go out of business, reducing demand for space.
Management already trimmed its 2025 adjusted funds from operations (AFFO) guidance after a small dip in occupancy and higher interest expense. As AFFO is a key metric used to assess a REIT's true operating performance and its ability to support dividends, any downward revision can signal slower growth or pressure on dividend safety if trends persist.
The company also missed its Q1 2025 earnings per share (EPS) forecast, reporting a $0.07 loss per share versus the $0.76 expected. While EPS isn't as relevant as FFO for REITs, the miss still raised questions about timing of asset sales, operating expenses, and lease activity. Investors should watch closely to make sure management follows through on its efficiency and disposition goals in upcoming quarters.
A prescription for income and upside
Alexandria currently trades around $71 a share and yields a 7.27% dividend, far above the 4% average REIT payout. More importantly, last quarter's dividend used just 57% of FFO. That's considered a conservative payout ratio for a REIT, suggesting that the company isn't stretching itself to pay investors.
ARE also appears to be extremely undervalued right now. It trades approximately 7x forward FFO, lower than many other high-quality REITs, especially those with stable tenants and strong growth prospects. Shares still trade more than 65% below their 2021 peak, meaning ARE offers both attractive yield today and potential upside tomorrow. For income seekers willing to stomach a bit of volatility, Alexandria Real Estate Equities looks like a REIT worth implanting into a diversified portfolio.
