The pandemic has dealt a blow to landlords of office buildings. Aware that work can continue with employees logging in from home, companies across the country have downsized or eliminated their space, resulting in a cascade of reduced construction work and falling office rents.
The collateral damage of this remote working revolution was millions of square feet of empty office space. According to Cushman & Wakefield, the vacancy rate for downtown office buildings across the country rose to 16.4 percent over the past year.
But there is hope for worried landlords: the life science industry, crammed with records of $ 70 billion in private and public capital investments in North America last year, is rushing into this empty space.
In the six largest US life sciences markets, more than 20 percent of the built laboratory space is office conversions. In San Francisco, Chicago, Boston, and Raleigh, NC, asking rents for laboratory space have increased more than 60 percent since early 2016, while office rents have only increased 15 to 30 percent.
As with a number of industries, the pandemic accelerated a trend that was already under way.
“It’s been a wild 15 months,” said Austin Barrett, head of life sciences at consulting firm Savills. “The office market and the laboratory market are currently a story of two cities.”
The numbers reflect a classic case of supply and demand: Driven by record-breaking financing and a pandemic-induced focus on biotechnology, the life sciences hit a record high of more than 1.9 million permanent employees in April, according to CBRE, a commercial real estate services company. And unlike most office workers, laboratory scientists can’t do their jobs through Zoom.
In all major markets, the industry’s rapid growth requires 34 percent more lab space than a year ago, according to a report from Newmark, a commercial real estate consultancy.
“The pandemic has put the industry in a brighter light and the global community is now looking at life sciences and healthcare differently,” said Liz Berthelette, Newmark’s director of research and co-author of the report.
However, converting an office building is not necessarily more cost-effective than building new laboratory space from scratch. Life science tenants often need more electricity and water, higher floor-to-floor berth, dedicated shipping and loading zones, and even improved structural capacity for equipment loads.
Developers must consider numerous potential issues, including changing or updating building codes; Installation of special service elevators; Retrofit systems for electricity, exhaust gas and fire protection; and overhaul of electrical systems – which may require cooperation between local power grids and utility services. You also need to consider installing special ventilation, especially in biology and chemistry laboratories where all air needs to be vented rather than recirculated.
Still, developers need to consider other factors when calculating construction costs, Ms. Berthelette said. Time is money too.
Daily business briefing
Updated
July 27, 2021 at 9:47 a.m. ET
“Developing from the ground up, especially in markets like Boston and the Bay Area, can take a lot longer,” she said. “They can take a few years while a remodeling project can only take 18 months.”
Many life sciences companies turn to commercial real estate consultants to help them orientate themselves.
Mr. Barrett from Savills has worked with companies such as Outset Medical, Senti Bio and Affinia Therapeutics. In a rush to capitalize on inflated rents for the life sciences, many landlords are buying office buildings for renovation without considering the highly specialized needs of their potential tenants.
Affinia, which closed a $ 110 million Series B funding round in May, recently remodeled a building in Waltham, Massachusetts that once belonged to defense company Raytheon. Mr. Barrett helped the owners decipher the details of the construction, such as Affinia’s HVAC requirements.
“There is a battle for space and the landlords are taking advantage of it,” Barrett said. “None of these buildings are the same. There are a lot of real estate agents creating hype, but an office building may not be suitable for a gene therapy or cell therapy company. “
Specialized needs have forced 10x Genomics, a biotechnology company in Pleasanton, California, of 1,000 employees – 45 percent of whom were hired during the pandemic – to renovate an office building while building another campus from scratch.
The company announced an expansion of the two new properties in March. The office building is in the same complex as the headquarters. The site previously used by Workday, the cloud software company, will now be a site for the research and development team at 10x Genomics. At the same time, the company is building its own location for its production team on the site of a former retail complex.
“When a company like 10x is growing very quickly and the complexity of its laboratories changes, you need something more,” said Michele Hodge, Senior Director of Real Estate and Facilities at 10x Genomics. “And not every building can work.”
A renovation made financial sense for the research and development site. But for manufacturing, executives couldn’t find a property with the right parameters, including enough rooftop space for electrical equipment, high enough ceilings, and piping to handle processed gases.
“It has to do a lot of analysis and a lot of due diligence because there are things that you need in laboratories that are not always available in office buildings,” said Ms. Hodge.
Boston, San Francisco, and San Diego, three biotechnology centers for several years, are leading the way in office-to-laboratory conversions, but Seattle, Philadelphia, New York, and Chicago are also seeing a flurry of projects. Thirty percent of Boston laboratory inventory – that’s 7.8 million square feet – is current or planned office conversions, while New York, which has seen a significant increase in life science real estate since the pandemic, has about two million square feet of conversion projects, so Newmark.
And in San Diego, home to about 16 percent of California’s biotech companies, lab space now costs an average of $ 44 to $ 58 per square foot. Office space, on the other hand, costs an average of $ 36.36 per square meter.
One of the most important factors driving these costs up is the oldest real estate adage in the book: location, location, location.
“This is an area that is really growing in clusters, not just in specific cities, but also in specific locations within cities,” says Tara Mulrooney, partner at Zetlin & De Chiara law firm specializing in construction law. “Proximity to talent is crucial.”
