‘A Wild 15 Months’: Pandemic Spurs Conversion of Offices to Labs
The pandemic has hit owners of office buildings. Realizing that work can continue with employees logging in from their homes, businesses across the country have reduced their spaces or eliminated them altogether, creating a cascade of reduced construction and plummeting office rents.
The collateral damage of this remote working revolution has been millions of square feet of vacant office space. The vacancy rate for downtown office buildings across the country has hit 16.4% in the past year, according to Cushman & Wakefield.
But there is hope for anxious homeowners: the life sciences industry, teeming with money from a record $ 70 billion in private and public investment in North America last year , rushes to claim this empty space.
In America’s six largest life science markets, more than 20% of lab space under construction is office conversions. In San Francisco, Chicago, Boston and Raleigh, North Carolina, asking rents for lab space have risen by more than 60% since the start of 2016, while office rents have only increased by 15-30. %.
As it has done in a number of industries, the pandemic accelerated a trend that was already underway.
“It’s been a crazy 15 months,” said Austin Barrett, head of the life sciences division for consulting firm Savills. “The office market and the laboratory market are a tale of two cities right now. “
The numbers reflect a classic case of supply versus demand: Fueled by record funding and a focus on biotechnology due to a pandemic, life sciences reached a record high of over 1.9 million workers in April, according to CBRE, a solidifying commercial real estate department. And unlike most office workers, laboratory scientists cannot accomplish their tasks through Zoom.
Across all major markets, the industry’s meteoric growth creates a need for 34% more lab space than a year ago, according to a report from Newmark, a commercial real estate consultancy.
“The pandemic has shed a brighter light on the industry, and the global community is now looking at life sciences and healthcare in a different way,” said Liz Berthelette, director of research at Newmark and co. -author of the report.
But converting an office building isn’t necessarily more cost effective than building lab space from scratch. Life science tenants often need more electricity and water, a bunk from one floor to the next, specific shipping and loading areas, and even improved structural capacity. for equipment loads.
There are many potential headaches that developers need to consider, including changing or upgrading building codes; the installation of dedicated service elevators; upgrading of fuel, exhaust and fire protection systems; and overhaul of electrical systems, which may require the cooperation of local electrical grids and utilities. They should also consider installing specialized ventilation, especially in biology and chemistry labs that require all air to be exhausted rather than recycled.
Still, when calculating construction costs, developers must take other factors into account, Ms. Berthelette said. Time is also money.
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“Basic development, especially in markets like Boston and the Bay Area, can take a lot longer,” she said. “They can take a few years, while a conversion project can only take 18 months. “
Many life science companies turn to commercial real estate advisors to help them navigate the fray.
Mr. Barrett of Savills has worked with companies like Outset Medical, Senti Bio and Affinia Therapeutics. In the rush to capitalize on inflated rents for 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 was once owned by defense contractor Raytheon. Mr. Barrett helped homeowners decipher construction details, such as Affinia’s HVAC requirements.
“There is a battle for space, and the owners are profiting from it,” Barrett said. “None of these buildings are created equal. You have a lot of brokers who create the hype, but an office building may not be a good fit for a gene therapy or cell therapy business.
Specialized needs have forced 10x Genomics, a Pleasanton, Calif., Biotech company with 1,000 employees – 45% 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 located in the same complex as its head office. Previously used by Workday, the cloud-based software company, the site will now be a site for the 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 shopping complex.
“As a business like 10x grows very quickly and the complexity of its labs changes, you start to need something more,” said Michele Hodge, senior director of real estate and facilities at 10x Genomics. “And not all buildings can function.”
For its research and development site, a reconversion made financial sense. But for manufacturing, executives couldn’t find a property with the proper parameters, including sufficient rooftop space for electrical equipment, sufficiently high ceilings, and piping that could handle the treated gases.
“It takes a lot of testing and a lot of due diligence because there are things you need when doing labs that office buildings don’t always provide,” Ms. Hodge said.
Boston, San Francisco and San Diego, three biotech hubs for several years, are leading the pack in office-to-laboratory conversions, but Seattle, Philadelphia, New York and Chicago are also experiencing a flurry of projects. Thirty percent of Boston lab inventory – equivalent to 7.8 million square feet – is underway or planned office conversions, while New York City, which has seen a significant increase in science real estate life since the pandemic, has approximately two million square feet of conversion. projects, according to Newmark.
And in San Diego, home to about 16% of California’s biotech companies, the average price for lab space is now $ 44 to $ 58 per square foot. Office space, on the other hand, costs an average of $ 36.36 per square foot.
One of the biggest factors driving these costs up is the book’s oldest real estate adage: location, location, location.
“This is an area that really thrives in clusters, not only in specific cities but also in specific places within cities,” said Tara Mulrooney, partner at Zetlin & De Chiara law firm, specializing in construction law. “Proximity to talent is vital.
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