Vacancies could surge as pharma firms merge

//October 15, 2009//

Vacancies could surge as pharma firms merge

//October 15, 2009//

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But insiders label small drug makers a salve to help absorb excess spaceWith the mega-mergers between Pfizer and Wyeth, and Merck and Schering-Plough expected to close this quarter, New Jersey’s commercial real estate industry is bracing for consolidations to put sizable blocks of space on the market, but insiders expect growth from smaller pharma firms to soften the blow.

“There’s an obvious consolidation going on in the pharmaceutical world,” said Dan Loughlin, managing director of the Parsippany office of Jones Lang LaSalle, the commercial real estate brokerage that represents all four companies. Although the real estate market has yet to see the fallout of the two mergers, “the overlap of facilities and operations … as it pertains to New Jersey is a real issue.”

In March, Merck, based in the Whitehouse Station section of Readington, announced it would merge with Schering-Plough, in Kenilworth, for $41 billion. The news came on the heels of New York-based Pfizer’s announcement in January that it would acquire Madison-based Wyeth for $68 billion. The Merck merger calls for a 15 percent reduction in the work force of the combined company, which would occupy about 9.5 million square feet of space in New Jersey, according to Cushman & Wakefield Research Services.

The blockbuster mergers are due to close amid the industry’s declining employment and real estate occupancy in the state. The pharmaceutical industry has long been a dominant economic sector in New Jersey: Fourteen of the 22 largest drug companies in the world have major facilities here, including 11 national or worldwide headquarters, according to the HealthCare Institute of New Jersey, which represents the state’s pharmaceutical and medical technology industry.

But the number of life sciences jobs in the state slipped in 2008 to 59,948, from 61,347 the year before, according to HINJ — the first time industry employment retreated below 60,000 in nearly a decade.

About 180 pharmaceutical companies currently occupy about 18 million square feet of office, industrial and flex space in the state, compared to some 200 firms occupying about 21.4 million square feet in 2008, according to Grubb & Ellis, a commercial real estate services firm.

“There’s just excess capacity in the industry,” with most of it in manufacturing, said Tim Bender, chair of the New Jersey chapter of CoreNet Global, a corporate real estate executive association. Greater efficiencies in the production process, as well as pharmaceutical companies producing less of the basic materials they used to make, have reduced the need for manufacturing and distribution facilities, he said.

Also, “when products go off patent, then a lot of times you have excess manufacturing, so once generics come into the market, you don’t need as much,” Bender said.

Bender, who also is director of real estate at Merck, declined to comment on the merger with Schering-Plough.

While it’s unclear which properties will be shed post-merger in either deal, “the ones that are going to remain are the ones most valuable for growth,” said Annette Kreuger, a pharmaceutical and biotech analyst at Industrial Info Resources, a Sugarland, Texas-based industrial market information provider.

One property that will likely remain is Schering-Plough’s 88-acre site in Summit, said Kreuger, because of the $65 million investment the company is making to renovate and expand the 1.7-million-square-foot complex into a major R&D campus.

But David Houston, president of Colliers Houston & Co., a Teaneck-based commercial real estate brokerage firm, said the impact may be minimal: “The pharmaceutical industry does not have that many enormous complexes that they’re going to get rid of in these mergers.”

Each combined company will have only one headquarters, but “will they be able to concentrate everything in one spot? I really doubt it,” he said. Pfizer, for example, has a limited presence in New Jersey, while Wyeth’s headquarters facility, at 489,000 square feet, is relatively small, he said.

Roche, which closed on its $46.8 billion acquisition of California-based Genentech earlier this year, is moving its U.S. headquarters to South San Francisco. The company will keep its corporate campus in Nutley, but “if you drive by there, the parking lot used to be chock full of cars, and now it’s about half full,” Houston said.

But smaller pharmaceutical firms have been stepping in to fill some of the void left by the giants, said Christopher Kinum, executive director of commercial brokerage firm Cushman & Wakefield’s life science practice: “The reason they come is there is a highly skilled, highly trained labor force” in New Jersey.

Mylan Laboratories, the second-largest generic pharmaceutical company in the United States, signed a 53,517-square-foot office lease in Bernards during the second quarter, he said. In one of the largest new office leases in the state this year, Otsuka America Pharmaceutical leased 67,531 square feet of space at One University Square, in West Windsor.

And according to a statement, the Econimic Development Authority this week expects to consider a grant application from Watson Pharmaceuticals to expand the company’s New Jersey operations by 175 jobs.

“When the big boys leave town and the big plants get sold off,” Kreuger said, “that gives small companies the opportunity to purchase or lease a state-of-the-art facility that [they] most likely would never be able to afford under normal circumstances.”

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