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

Despite a relatively tight labor market, we are starting to see big tech companies announce layoffs. Elon Musk’s acquisition of social media site Twitter garnered a lot of press, but we are seeing an uptick in announcements from companies like MetaPlatforms other Amazon.com. With layoffs and people working from home, are office real estate investment trusts (REITs) like Alexandria Real Estate Equities (ARE -0.96%) in trouble?

Image source: Getty Images.

Alexandria is a leader in life sciences office space

Alexandria Real Estate Equities is an office REIT that focuses on life sciences and tech space. The company owns about 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 known primarily 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 biggest. Building laboratory spaces requires an in-depth knowledge of regulations along with experience in the sector. Alexandria’s biggest tenants include Bristol Myers Squibb, Moderna, Eli Lilly, Sanofiand takeda. These companies are all giants in the pharmaceutical sector.

Remote working is not ideal for life sciences companies

The work-from-home model is not particularly well-suited for life sciences. Laboratory work has to be done on site; the company believes this gives them an advantage over other office REITs, which are struggling 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 like SL Green (SLG -0.90%) had an occupancy level of 90.9%.

Alexandria has a pretty diverse tenant base, with no one tenant accounting for more than 3% of annual revenue. Meta used to be a big 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 tech tenants, such as About Technologies, Maxar Technologiesand SAP. However, only SAP has made recent layoff announcements, and it looks like most of the layoffs will be overseas. So far, it doesn’t appear that Alexandria’s tenant base is experiencing financial difficulties.

The entire 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 out of the week will still need a desk, which means the square footage required probably won’t change much. While many investors are still sour on the office REIT space, Alexandria is one of the top performers in the space.

Alexandria has guided for 2022 funds from operations (FFO) to come in around $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 is continuing to invest in its business, which could spur future growth. REITs in general underperform when interest rates are rising, but if the Fed signals at its December meeting that rate hikes are largely finished, we could see investors return to the REIT space in general.

John Mackey, CEO of Whole Foods Market, at an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to 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 stocks mentioned. 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. The Motley Fool has a disclosure policy