The recent spate of converting existing offices into space that can accommodate the needs of life science companies has made the media sit up and take notice. For example, an October 2021 article in Commercial Property Executive entitled, “Are Office to Life Science Conversions the Answer to Occupancy Woes?” noted that, “a clearer view is emerging, and, for many owners, the future involves white coats and Bunsen burners.“
This demand for biotech space, coupled with a rise in office vacancy, is driving many office property owners to consider converting their buildings into life science facilities.
The life science industry is keenly aware as well, with a record $70 billion of private and public capital investments in North America last year swooping in to claim that empty space, according to The New York Times in a July 27, 2021, article entitled “A ‘Wild 15 Months’: Pandemic Spurs Conversion of Offices to Labs.”
Across the six largest U.S. life sciences markets, the Times noted “more than 20% of the laboratory spaces being built are conversions from offices. In San Francisco, Chicago, Boston, and Raleigh, N.C., asking rents for lab space have increased more than 60% since the beginning of 2016, while office rents have crept up only 15% to 30%.”
And for several SIORs, this may only be the beginning.
“It is a significant trend in this market,” notes Robert Cleary, SIOR, senior vice president at Colliers in Boston. He cites 4 million square feet of downtown office space (Class A and B) converted to labs, and 8.1 million square feet across the greater Boston markets (urban and suburban).
In a market that features Kendall Square, which he says is “perhaps the largest life sciences cluster in the domestic U.S.,” Cleary says that “demand is off the charts—two times the pre-COVID level.” He adds there was more than 7 million square feet of demand per month last year.
"The only place today’s demand is satisfied is in the conversions, until new construction deliveries hit the market."
“The only place today’s demand is satisfied is in the conversions, until new construction deliveries hit the market,” notes Cleary, “And by that time those properties will have been pre-leased.”
Of course, not all SIORs work in one of those major markets identified by the Times as hubs for life science activity. Still, the demand for this type of space is beginning to be felt in areas like Alachua County (Gainesville, Fla.). The county has had a thriving incubator market, says Dan Drotos, SIOR, executive director at Colliers, “but from a real estate perspective, that market has now matured enough with lab space; we’re seeing some conversion from existing office space, flex warehouse-industrial, into the life sciences sector.” While noting that markets such as Silicon Valley, the Research Triangle, and Boston are much more active in this area, he adds that “we are going to have to convert existing space.”
In the university town of Columbia, Mo., the last five to 10 years have seen “a changing of the ‘old guard’ office space,” notes Mike Grellner, SIOR, of Plaza Commercial Realty. “The landlords that own it renovate it to suit the perception of the tenants who occupy it.” That’s true, he notes, “not just for biotech, but for all office occupants.”
He points out that while life science companies are not dominating his market as they are in some others, “there is plenty of medical office space, biotech, finance, insurance, and emerging tech companies; we see the disruption in all of those,” he shares.
“The greater demand is life science that needs, maybe stage II—to have production and some office space. They look for high-quality industrial space that has the required zoning that allows for light manufacturing, advanced manufacturing R&D to occur. I call that stage II of maturation for a life science company; they’ve grown from a little wet lab on campus.”
COVID-19-related office vacancies are not the only driver for this trend—at least not in Boston—notes Cleary. He points to $15 billion in venture capital funding, and $2.5 billion from the NIH, for example. “Including Initial Public Offerings, nearly $40 billion was invested in Boston’s Life Sciences industries,” he adds. In addition, he says, “MIT, Harvard, BU, UMass, The Broad Institute, CIC Labs and other incubator locations are significant drivers of life science research and development and intellectual innovation.”
Drotos also points to the aging population and gene therapy as key drivers. “As people live longer, many companies are working with cutting edge medicines,” he observes. “I had one company that was working directly on vaccines.” ADAPTING THE SPACE
How hard is it to retrofit office space into space that is appropriate for a life science company? What are the key elements of retrofitting?
“Usually they have an office component, which is pretty easy to convert, and a lab component,” says Drotos. “Some also have light manufacturing; you need some flex space if there’s a product you’re distributing.”
The lab, he continues, is more of a challenge—especially in multi-story buildings. Hoods, for example, are one aspect that needs to be attended to. “Some of these companies work with chemicals or produce waste that needs be handled correctly, so you have to build a setup that’s vented correctly to contain fumes and any waste,” he explains. “In bigger markets you see purpose-built life science buildings that take account of that. Also, there’s ceiling heights—depending on what kind of science is involved. For some, their machinery requires the highest ceilings. Then there’s increased power usage; you’ve got to account for all of that.”
It's easier, he adds, to start with a big industrial box if you have the required ceiling heights. “If you need office space or clean rooms, you can do that in a modular way,” he offers.
Cleary points to air intake, exhaust, clean air filtration, a utilities boost, and plumbing. “Typically, a more than $1,200 per square foot investment can make that happen—even in an aged-out office property with previously insufficient slab to slab (10 feet),” he adds.
In pure office space, says Grellner, “What you will do is put in some cool, shared elements—oversized break areas, recreation areas, outside walking paths, or some catered meals,” he shares. He adds, however, that while there was a time these companies were content to move into older, remodeled space, in his market that’s changed.
Despite that shift in demand, he continues, “There’s not a whole lot of institutional investment other than the university; they are the only ones who can afford to do it. We’ve just finished a facility in our market in the advanced medicine technology center on campus. I tell people it’s built like a spaceship on a foundation.” The buildout requirements that must be adhered to, he shares, “make private investment nearly impossible.” What’s more, he says, “very rarely can you retrofit existing space; the post-COVID air systems most people want—the duct work and filtration systems—are very difficult.”GETTING LANDLORDS ONBOARD
Despite the strong demand for such space, some landlords might be a little nervous about the expense of retrofitting. Grellner says that typically the tenants end up paying for it. “They are dormant in activity—older, maybe bigger box retail or office space that is past its shelf life—second generation B, B-, or C space,” he notes.
“Owners will say they do not want to invest a lot of money, but they will take a very aggressive lease rate structure—a very low lease rate for a three- to five-year term, especially in years one and two—for someone to fix it up real cool so they can re-sell it.”
In Boston, says Cleary, “Market conditions prompt swift decisions and conversions in order to secure active tenancies; timing to deliver a converted office property beats new construction deliveries every time with sophisticated and experienced life sciences developers, owners, and operators.”
The Boston market, he adds, will bear $110-$115 triple-net lease rates, “And that allows this behavior.”
Supply and demand are key, adds Drotos. “These buildouts are usually extremely expensive, however ours are half that of Boston or Silicon Valley,” he notes. “In Gainesville you can do it for $500 a foot, and usually longer-term leases—10 years on base term, or longer based on what goes into the space.”
Accordingly, he says, “We have to coach our clients on an exit strategy—are they so specialized you’ll have to gut it, or if the tenant leaves in 10 years can you retrofit it?”
A lot of the decision, he continues, is based on the value generated from the tenant. “You do a financial analysis to show what their return would be over base term,” says Drotos, who adds that he has a couple of projects in the works in the Innovation District of downtown Gainesville. A FAD, OR A LONG-TERM TREND?
What is the long-term outlook for these retrofitted buildings? Is the space flexible enough to attract other types of tenants? Can it be designed in such a way that it will be attractive to a wider audience? “Our supply-demand is so out of balance now and there are enough companies in incubators I don’t think we’ll ever not have demand for true life science space moving forward; this is for the long term,” Drotos predicts. “A lot of these companies like to stay close to the ‘mother ship’ university and its science and support. It’s going to be around forever.”
"A lot of the decision is based on the value generated from the tenant."
“It should be done in such a way as to be attractive to future tenants as well,” Grellner advises. “Do not overload it with private offices. With a mostly open configuration, it will merchandise well to the next generation of occupant.”
For Cleary, this trend has only just begun. “The current consensus is that we are in the second inning of a 9-inning baseball game,” he concludes.
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
Robert Cleary, SIOR
Dan Drotos, SIOR
Mike Grellner, SIOR