Rent Premiums on New Lab Space Beckon Office-to-Lab Conversions
These projects are also an opportunity for asset owners to reposition aging properties.
Lab space is becoming more appealing to investors as attractive returns and rent growth surge says a new report from Newmark.
Asking rents for lab space in the San Francisco Bay Area, Chicago, Raleigh and Boston have increased by more than 60% since the first quarter of 2016 while office rents increased by only 15–30% during the same period with similar trends in Philadelphia, New Jersey and Los Angeles, the real estate firm notes.
Demand for lab space has intensified during the last year, particularly in biotech hubs such as Boston/Cambridge, the San Francisco Bay Area and San Diego.
“Rent premiums on new space in mature life science markets are 20-40% above current average asking rents,” says Newmark.
With first-quarter US venture capital investments soaring to historic heights, life science companies raised a record $12.2 billion during the first three months of 2021, says Newmark, citing data from Pitchbook.
Such strong capital flows are bolstering novel scientific research and therapeutic targets, which provide a solid base of tenant demand for commercial real estate, Newmark explains.
To meet this growing demand, many developers are turning to office-to-lab conversions, a process that is sometimes challenging.
“The 7.8 million square feet of current and planned office-to-lab conversions throughout Greater Boston represents nearly 30% of the metro’s current lab inventory while New York City’s 2.0 million square feet in conversion projects would almost double that market’s lab stock,” the report says.
As the number of asset owners exploring potential lab conversions continues to grow, speed to market remains vital and Newmark stresses experienced life science developers that move quickly will benefit the most.
“While the cost of conversion is substantial and land use/zoning challenges could prove problematic in some jurisdictions, demand for high-quality lab space is solidly outstripping existing supply,” Newmark asserts.
“Still, office-to-lab conversions could be an opportunity for asset owners to reposition aging properties, particularly in high-demand markets such as Boston/Cambridge, Philadelphia, and San Diego,” it concluded.