Developers Look To Office-To-Lab Conversions To Meet Life Sciences Demand

As demand for lab space among life sciences companies continues to skyrocket, developers are increasingly looking to a new category of construction to meet that ongoing need.

Enter office-to-lab conversions, which logged the steepest gains in construction last year. Such projects accounted for nearly 10 million square feet of new construction in the top 12 US life sciences markets at the end of last year, according to CBRE, up from 49% at the beginning of 2021. Ground-up lab construction increased 42% in comparison.

Boston led the charge in terms of square footage under conversion as of the first quarter, followed by San Diego, Raleigh-Durham, Los Angeles, and the Washington DC-Baltimore metro.

The continuing uptick in conversion activity underscores the challenge the sector is facing in building enough space to meet demand, especially as lab vacancy in many markets is now clocking it at under 4%. While the costs associated with fitting out lab space can often be double to triple that of standard office fit-outs, CBRE analysts say the increase in conversion activity in 2021 shows that developers and investors are willing to front those costs in an effort to capture the potential rent growth for lab space versus general office. CBRE data shows that lab lease rates increased by an average of 11% last year in the 12 largest life sciences hubs, compared with a 2% uptick for general office rates in those markets. 

“Converting an office building for life sciences use often can be done more quickly than building labs from the ground up,” Matt Gardner, CBRE Americas Life Sciences Leader, says. “In addition, investors see advantages in lab rent growth and the scant vacancy rates for labs in comparison to offices. Still, many lab uses have extensive and significant requirements of facilities, so not every office building is a candidate for conversion.”

CBRE’s capital markets team predicts that investment in US life sciences real estate will to grow another 10% minimum this year, on top of a whopping 62% increase last year. Investment in life sciences real estate has grown by 111% since 2018.   

“The surge in investment in the US life sciences market is underpinned by strong supply and demand fundamentals,” said Chris Bodnar, Vice Chairman and Co-Head of Healthcare & Life Sciences Capital Markets at CBRE. “A shortage of existing life sciences space available for purchase, coupled with robust and soaring property prices, have led most real estate investors focused on this sector to pursue development opportunities.”