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March 23, 2017

SFBT R&D Deal of the Year: Google life sciences spinoff soaks up huge space

San Francisco Business Times

Ron Leuty

There can be a flipside to biotech industry success: When a company wins regulatory approval for a potentially top-selling drug, it becomes a buyout target - and the consequences for the local real estate market can be unexpected.

Take Onyx Pharmaceuticals. Kyprolis, the South San Francisco company's treatment for the blood cancer known as multiple myeloma, won the attention of Amgen Inc., which bought Onyx in 2013 for $10 billion. Amgen laid off 300 Onyx employers and moved others to space it had nearby or at its headquarters in Thousand Oaks. By March 2015, Onyx's three-building, 407,369-square-foot campus had been shuttered.

A year later, that's where Verily, the life sciences spinoff of Alphabet/Google, came in to close the Bay Area's biggest biotech real estate lease deal of 2016. It was a complex, three-way transaction that involved three separate leases and a big biotech landlord in Alexandria Real Estate Equities Inc.

Verily started moving 400 employees into the structures in October, quickly filling two buildings and a single floor of a third structure.

Eventually, Verily, whose mandate ranges from medical devices to drugs, could employ 1,000 people at the old Onyx site.

The deal included transferring leasing rights for a 130,000-square-foot fourth building from Amgen to Verily.

The deal came about though the site never was officially on the market. Google's brokers, Jon Moeller and Todd Frye of CBRE, were quick to bring the site to the attention of executives there.

They eventually worked with James Bennett and Timothy Mason of Kidder Mathews, who represented Amgen.

Verily's lab and office space leases, which extend to 2024, are virtually unchanged from the terms under Onyx.

Onyx had leased the spaces at relatively lower rents coming out of the Great Recession that hit the high-capital, long-timeline biotech industry especially hard. Subleases, too, generally cost less than original leases, pointing toward a Verily rate near $40 per square foot. Lease rates today in South San Francisco run closer to $60 per square foot.

"Everything's a deal in this market," said David Benjamin, head of facilities and real estate operations at Verily.

Benjamin is familiar with the site. He was director of global facilities at Onyx, playing an instrumental role in Onyx's negotiations with Alexandria. He joined Verily in January 2016

"The relationship with Alexandria remains quite good," Benjamin said. "They're a top-notch landlord."

Verily grabbed relatively new space. The first building was completed in 2006 and Onyx's growth led to completion of the second building in 2012 and the third a year later.

The challenge, Benjamin said, was the conversion of labs and offices into a combination of labs, workspaces for a hardware team of mechanical and electrical engineers, a software team and a clinical team, including space for an onsite clinic.

"That was actually a lot of fun, seeing how the past dovetailed into the future," Benjamin said.

Those changes, however, required a tight timeline as Verily was growing on Google's Mountain View campus.

Verily built out the shell of the newest building facing East Grand Avenue, opening the lobby with a skylight and creating a fitness center, a park-like setting and a coffee shop.

The location was key for Verily, Benjamin said. The biotech industry's old-time companies, Genentech Inc. and Amgen, are nearby, and scores of young, innovative device, diagnostic and drug companies are a healthy walk away.

"It's where we needed to be in order to be successful," he said.

Superlative -- Verily Inc. Campus
Location: 249, 259 and 269 E. Grand Ave., South San Francisco

Size: 407,369 square feet in three existing buildings and rights to a potential fourth building of 130,000 square feet

Value: About $150 million over eight years

Sublessee: Verily Life Sciences

Sublessor: Amgen Inc.

Landlord: Alexandria Real Estate Equities Inc.

Sublessee brokers: Jon Moeller and Todd Frye of CBRE

Sublessor brokers: James Bennett and Timothy Mason of Kidder Mathews

Lead architect: DGA

Sublessee lead law firm: Allen Matkins

Sublessor lead law firm: Sheppard Mullin

For the full story, go to San Francisco Business Times.

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