Life Sciences Investment Blamed for OZK’s Downgrade

Citigroup analyst estimates 1.7 million-square-foot lab development in San Diego is still looking for its first tenant.

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The drop in U.S. laboratory leasing is raising more red flags in light of a generational spike in life sciences construction.

As a result, analysts, most notably Citigroup (C)’s Benjamin Gerlinger, have downgraded its rating of commercial real estate lender Bank OZK (OZK) and recommended selling stock in the company. Bloomberg said that the Arkansas-based firm’s share price declined by about 17 percent to its lowest point since March 2020 following the downgrade.

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Gerlinger called out the high level of risk and “substantial concern” involved in OZK’s investments in construction projects, specifically including $915 million tied to IQHQ’s massive Research and Development District (RaDD) underway on San Diego’s waterfront, as well as an office mixed-use project in Atlanta, and in life sciences construction financing in general.

“[OZK] has had its name associated with skyline-altering commercial development projects, with minimal total loss content,” Gerlinger wrote. “RaDD has been in development for more than four years and we believe 0 percent of the 1.7 million square feet is leased — indicative of a difficult life science construction lending market.”

OZK did not immediately return a request for comment.

Gerlinger also pointed to the overall decline and lack of life sciences leasing the past year, but conceded that a turnaround in activity would prove his latest valuations to be too conservative.

After the pandemic, demand for and investment in life sciences real estate surged, and the alternative asset type stood apart when compared to unused traditional office space or even the now-plateauing industrial warehouse market.

CommercialEdge previously projected nearly 22 million square feet of life sciences space would be completed in 2024, which is 50 percent more than last year and six times as much as in 2019. CBRE separately found that 79 percent of the construction that’s set to be completed this year is heavily concentrated in the three largest biotech hubs, including San Diego County.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.