Rising demand for research and development facilities and a sharp increase in construction of life sciences space throughout the country are driving big gains in a premium category: conversions of office buildings to labs.
Lab vacancy in many top markets sits at 4 percent or less, according to a recent first quarter report by CBRE, and life sciences lease rates increased by an average of 11 percent last year in the 12 largest U.S. hubs.
Converting to lab and R&D space is both costly and challenging, but investors are realizing strong returns on freshly built life sciences properties. Life sciences facilities have a stronger prospect for greater occupancy levels compared to standard office buildings because remote working arrangements are significantly limited for life sciences tenants.
“Life science real estate investors are beginning to see that the demand for lab space is here and are making efforts to deliver that space to the market as soon as possible,” CBRE’s Andrew Riley said. “This is a trend we expect to continue to see.”
Office-to-lab conversions underway in the 12 largest life sciences markets at the end of 2021 amounted to 9.9 million square feet, which was up 49 percent from the beginning of 2021, according to CBRE’s report. In comparison, ground-up lab construction increased 42 percent to nearly 18.8 million square feet by the end of 2021.
The jump in conversions underscores the challenges in building enough lab space to meet demand in recent years. Indeed, the cost to fit out lab space with necessary plumbing, ventilation and other specialized considerations can be double to triple that of fitting out standard office space. But developers and investors are willing to cover those costs to capture the potential rent growth of lab space in comparison to office.
Boston had 3.3 million square feet of office-to-lab conversions, enough for an estimated increase of 264 percent compared to last year. San Francisco had 640,347 square feet of conversions underway, which was a 266 percent jump.
Los Angeles had notably the biggest increase in conversions, relative to its total, up 339 percent in the first quarter of 2022 from a year ago with 667,104 square feet. Additionally, Washington, D.C., had 665,394 square feet of conversions for a 78 percent jump.
“Conversions are an easier option as compared with ground-up development in a high barrier-to-entry market such as Los Angeles, especially in dense population centers where many of these are happening, such as Culver City and Pasadena, among others,” Riley said.
The cost to construct a new laboratory building in the top three U.S. life sciences markets — Boston/Cambridge, San Diego and the San Francisco Bay Area — ranged from $675 to $1,200 per square foot at the end of 2021, compared with $600 to $850 per square foot for standard office building construction. Laboratory fit-out costs ranged from $300 to $650 per square foot compared with $110 to $315 for standard office fit-outs.
Gregory Cornfield can be reached at email@example.com.