Given a marked flight-to-quality and declining demand for office space overall, older office assets are increasingly being converted to other uses. And of the 125 office conversion projects currently underway, half are being adapted for life-science use, according to Jessica Morin, CBRE Americas head of office research.
The high percentage of office conversions to life science compared with other product types is understandable considering the overlap in these two uses, suggests Devin Bertsch, project director for San Francisco-based Project Management Advisors. Bertsch, who specializes in life science development and construction management, notes that the amount of floor space converted to lab use is usually 50 percent or less of the project, but conversions generate rents comparable to new ground-up life science projects.
The first quarter of 2021 saw a peak in life science conversion projects, accounting for 41.5 percent of lab product created, says CBRE associate research director for life sciences Taylor Stucky. Another 31 percent of the life science space delivered in the fourth quarter of 2022 was also conversions.
Located at 120 Via Merida and built in 1998, this two-story office building sits on 6.7 acres (2.71 ha) and was previously the corporate headquarters for Wellpoint Health Networks. Gray Matter, the life sciences initiative of Graymark Capital, has engaged architect BAM Creative to develop a phased conversion plan. Upon completion, the property will feature 60 percent lab-ready space with upgraded mechanical, electrical and plumbing, and 40 percent newly built creative office space to support the lab. (CBRE)
“Where conversions are now happening seems to depend a lot on the density of the metro,” Stucky says. New York City, with 77 percent of product in the pipeline attributable to conversions, has the highest percentage of these projects, followed by Washington, D.C./Baltimore, Denver-Boulder, and Boston-Cambridge.
Jason Utah, a senior project manager at Chicago-based commercial construction firm Skender, concurs, pointing out that cost advantages of converting office buildings to life science space saves at least 50 percent over the cost of new development. Most office buildings already have high floor-to-ceiling height and an existing building envelope. And while electrical and other utilities usually need to be upgraded to more robust systems, the fact that they are already in the building provides a big advantage in timing and costs.
The increase in conversion activity can be attributed to historically high lab vacancy rates, given that at the peak of the current real estate cycle in 2021 and 2022, vacancy was approaching zero, according to Matt Gardner, CBRE Americas head of Life Sciences Advisory. “Pressure to convert vacant office buildings rose in correlation to the lengthening timeframe for new construction to reach completion,” he says. However, this pressure has eased in 2023 in light of the slowing lab market and condition of the overall economy.
Even so, medical breakthroughs over the last decade, along with a gear-up in pharmaceutical development triggered by the pandemic, have ushered in an era of unprecedented growth in both public and private funding for life science research and thus, demand for lab space. In fact, a recent whitepaper from researchers at Houston-based Hines forecasts a 33 to 50 percent increase in demand for life science properties over the next decade. This would equate to a total of 45 million to 65 million square feet (41.8 million to 633.3 million square meters) of new demand over current life science inventory of 131 million square feet (131.4 million sq m)
Conversion Drivers
Two primary drivers behind conversion of existing buildings to new uses are concerns about ESG and time to deliver, contends architect Tim Mustard, a principal and director of business development at Orange County, California-based architectural firm TCA Architects, which specializes in redesigning various types of real estate assets to residential use.
“Conversions promote sustainability because we are using existing building materials and reducing waste and carbon by averting construction materials from landfills,” he says. “They also are much quicker to bring to market, especially in high-barrier markets like in Southern California and the San Francisco-Bay Area. With existing structures, there are so many over-the-counter discretionary approvals that time to secure approvals goes from two to three years to a few months and delivery from five to seven years to two to three years,” Mustard adds.
Building owners and developers are repurposing whole office buildings, as well as creating pre-built lab space within multi-tenant, vertical office buildings, usually on one or two floors. Architect Brooks Slocum, a principal at the full-service design-build firm SGA who oversees all projects in the firm’s New York office, notes that the amount of life science space in vertical buildings is limited by ventilation capacity, which is sometimes achieved using abandoned shafts or finding locations where vertical areas can be created with the least disruption to the building.
Costs and Rents
According to a 2022 CBRE report, the cost for ground-up construction in the top three life-science markets—San Diego, San Francisco, and Boston-Cambridge—ranges from $675 per square foot to $1,200 per square foot with an additional $300 to $650 per square foot for tenant lab fit-outs.
Office-to-lab conversions, on the other hand, cost on average about $300 per square foot for conversion and tenant improvements, according to Boston-based Robert Richards, who leads the Cambridge/Urban team at real estate services firm Cushman & Wakefield.
Jon Wright, JLL vice president and life sciences and lead for project and development services, says that costs vary depending on existing attributes of the building being repurposed and the type of lab the owner intends to build. For example, costs start to go up if the plan is to build a specialized laboratory or vivarium, an enclosed area where animals or plants are kept for observation or research purposes.
Costs also vary by the office-to-lab ratio, says SGA’s Slocum. Some life science conversions are 40/60 office-to-lab, while others are 60/40 office-to-lab. In calculating costs, however, it’s common practice to make assumptions based on a 50/50 office-lab configuration, but in recent years the amount of lab space has been trending slightly upward, notes CBRE’s Morin.
Bertsch of Project Management Advisors, says that poor condition of the building, including maintenance, code noncompliance, and other unforeseen physical problems can also add significant dollars to the cost metrics.
A rent premium and longer lease deals associated with research and development transactions, coupled with a pipeline of steady demand, are other incentives for transitioning office properties to lab space. Joseph Fetterman, executive vice president and member of the healthcare and life sciences national steering committee of Colliers’ life sciences practice group, notes that lab space provides rents one and a half to two and a half times greater than office space depending on the location.
Right Location, Right Building
Jon Wright, vice president and life sciences lead for project and development services at JLL, says that rent premiums are greatest in markets with a concentration of life science companies and low inventory, such as the Bay Area in California and Denver/Boulder. But even in these markets, location is key, as the real estate needs to be proximate to desirable amenities and universities where the talent resides.
Location within or nearby existing life science clusters is important for both life science companies and scientists, as it provides companies access to talent and gives researchers opportunities to collaborate with like-minded professionals, according to San Diego-based architect Darrel Fullbright, LEED Green associate and global practice leader for developer practice buildings at global architectural firm Gensler.
Aside from location, selecting the right building is critical to the success of a conversion, says Timothy Martin, managing director and national lead for life science property management at JLL, who stresses that a building’s physical attributes must be able to perform adequately for the tenants who will ultimately occupy it. “We have seen successful conversions take place in a wide range of sizes, locations, and what the buildings were originally designed for,” he says. “Ultimately, conversions are successful because they are designed, built, and operated by experienced teams who understand their end users’ needs.”
Rent for lab space in the Boston area, for example, is $100 per square feet, and converted buildings are trading tor $1,700 to $1,800 per square foot, according to Richards of Cushman & Wakefield. Due to the high cost of lab buildouts, life science leases generally are for seven to 15 years. Another positive dynamic for this sector is that life science companies grow at a rapid pace, commonly doubling or tripling in size within 24 to 36 months and so eventually require more space.
Gensler’s Fullbright also notes that while most office employers are embracing a hybrid work environment where staff is only in the office three days a week, there is more certainty around occupancy for life science companies. “The thinking here is that you can’t remote work in a laboratory.”
Colliers’ Fetterman explains that investors in conversions fall into two categories: (1) developers/investors with experience developing life science projects that want to enter or expand in the top life science clusters and (2) owners/investors with office buildings negatively impacted by changes in the office market seeking a way to improve occupancy.
Projects by an experienced group are usually low risk, as these developers are typically well capitalized and seek fair-priced assets with the right structural characteristics for conversion, Fetterman suggests.
According to a Gensler report, the most desirable structural characteristics include:
- Column spacing, ideally 11 feet apart
- Floor-to-roof load capacity to support 125 to 150 pounds per square foot
- Floor vibration stability to accommodate use of sensitive microscopy equipment
- Large floor penetrations capable of accommodating powerful HVAC infrastructure to meet exhaust and fresh air ventilation requirements of R&D labs
- Floor-to-ceiling height clearance of 14 to 16 feet to accommodate special equipment used in research
Bertsch of Project Management Advisors maintains that office landlords want to convert their buildings to life science use because it is resistant to future epidemics or pandemics. Unfortunately, landlords often don’t understand the high cost for upgrading building mechanicals, electrical, and plumbing infrastructure to meet code and functionality requirements.
- Office building infrastructure upgrades include: High-efficiency HVAC and ventilation and exhaust systems to provide environmental safety; cleanliness, and 100 percent fresh air
- Electrical service that provides twice the power of a typical office building, 4,000 watts versus 2,000 watts in office buildings
- A standby power generator and alternative-energy storage system capable of providing uninterrupted power 24-7 to protect critical infrastructure systems, research, and temperature-sensitive products
