The pandemic dealt a gut punch to landlords of office buildings. Aware that work can go on with employees logging in from home, businesses across the country shrank their spaces or eliminated them entirely, creating a cascade of reduced construction and plummeting office rents.
The collateral damage of this remote work revolution has been millions of square feet of vacant office space. The vacancy rate for downtown office buildings across the nation has risen to 16.4 percent over the past year, according to Cushman & Wakefield.
But there is hope for anxious landlords: The life sciences industry, flush with cash from a record $70 billion of private and public capital investments in North America last year, is swooping in to claim that empty space.
Across the six largest U.S. life sciences markets, more than 20 percent of the laboratory spaces being built are conversions from offices. In San Francisco, Chicago, Boston and Raleigh, N.C., asking rents for lab space have increased more than 60 percent since the beginning of 2016, while office rents have crept up only 15 to 30 percent.
As it has across a number of industries, the pandemic accelerated a trend that was already in motion.
“It’s been a wild 15 months,” said Austin Barrett, head of the life sciences division for the advisory firm Savills. “The office market and the lab market are a tale of two cities right now.”
The numbers reflect a classic case of supply versus demand: Fueled by record-breaking funding and a pandemic-driven focus on biotechnology, life sciences hit a record high of more than 1.9 million workers in April, according to CBRE, a commercial real estate services firm. And unlike most office workers, laboratory scientists cannot complete their tasks via Zoom.
Across all major markets, the industry’s breakneck growth is creating a need for 34 percent more laboratory space than a year ago, according to a report from Newmark, a commercial real estate advisory firm.
“The pandemic shone a brighter light upon the industry, and the global community is now looking at life sciences and health care in a different way,” said Liz Berthelette, Newmark’s director of research and a co-author of the report.
But converting an office building isn’t necessarily more cost effective than building lab space from the ground up. Life sciences tenants often require more electricity and water, a higher floor-to-floor berth, specific shipping and loading zones, and even enhanced structural capacity for equipment loads.
Developers must consider numerous potential headaches, including changing or upgrading building codes; installing dedicated service elevators; upgrading systems for power, exhaust and fire protection; and overhauling electrical systems — which can require the cooperation of local power grids and utility services. They also must consider installing specialized ventilation, particularly in biology and chemistry labs that require all air to be exhausted rather than recirculated.
Still, when calculating construction costs, developers must consider other factors, said Ms. Berthelette. Time is money, too.
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“Ground-up development, particularly in markets like Boston and the Bay Area, can take a lot longer,” she said. “They might take a couple of years, whereas a conversion project can take only 18 months.”
Many life sciences companies are turning to commercial real estate advisers to help them navigate the scrum.
Mr. Barrett of Savills has worked with companies including Outset Medical, Senti Bio and Affinia Therapeutics. In the rush to capitalize on inflated rents for the life sciences, he said, many landlords are buying office buildings for conversion without considering the highly specialized needs of their potential tenants.
Affinia, which closed a $110 million Series B funding round in May, recently converted a building in Waltham, Mass., that once belonged to the defense contractor Raytheon. Mr. Barrett helped the owners decipher the construction nitty-gritty, such as Affinia’s HVAC requirements.
“There is a battle for space, and the landlords are taking advantage of it,” Mr. Barrett said. “None of these buildings are created equal. You’ve got a lot of brokers creating hype, but an office building may not be suitable for a gene therapy or a cell therapy company.”
Specialized needs have forced 10x Genomics, a biotechnology company in Pleasanton, Calif., with 1,000 employees — 45 percent of them hired during the pandemic — to renovate one office building while building another campus from the ground up.
The company announced an expansion to the two new properties in March. The office building is in the same complex as its headquarters. Previously used by Workday, the cloud software company, the site will now be a site for 10x Genomics’ research and development team. At the same time, the company is building a custom site for its manufacturing team on the site of a former retail complex.
“As a company like 10x grows, very quickly, and the complexities of their labs change, you start to need something more,” said Michele Hodge, 10x Genomics’ senior director of real estate and facilities. “And not every building can work.”
For its research and development site, a conversion made financial sense. But for manufacturing, executives could not find a property with the proper parameters, including sufficient space on the roof for electrical equipment, high enough ceilings and piping that can handle processed gases.
“A lot of analysis has to go into it, and a lot of due diligence, because there are things you need when you’re doing labs that office buildings don’t always provide,” Ms. Hodge said.
Boston, San Francisco and San Diego, three biotechnology hubs for several years, are leading the pack in office-to-lab conversions, but Seattle, Philadelphia, New York and Chicago are also seeing a flurry of projects. Thirty percent of the lab inventory in Boston — equivalent to 7.8 million square feet — is current or planned office conversions, while New York, which has seen a significant jump in life science real estate since the pandemic, has about two million square feet of conversion projects, according to Newmark.
And in San Diego, home to about 16 percent of California’s biotech companies, lab space is now priced on average at $44 to $58 per square foot. Office space, on the other hand, is going for an average of $36.36 per square foot.
One of the key factors driving up those costs is the oldest real estate adage in the book: Location, location, location.
“This is one area that really grows in clusters, not just in specific cities but also specific locations within cities,” said Tara Mulrooney, a partner at the law firm Zetlin & De Chiara, which focuses on construction law. “Proximity to talent is vital.”