‘A Crazy 15 Months’: Pandemic Spurs Transforming Offices into Labs

The epidemic has taken a big punch to the owners of office buildings. Realizing that working with home-based workers could continue, businesses across the country have narrowed their space or eliminated them altogether, resulting in lower construction and office rents.

The collateral damage to this teleworking revolution has been millions of square feet of empty office space. NS vacancy rate for office buildings in the city center According to Cushman & Wakefield, it rose to 16.4 percent nationwide last year.

But there is hope for worried homeowners: The life sciences industry is flooded with cash from a bank. $70 billion record Private and public equity investments in North America last year are moving fast to claim this vacant space.

In the US’s six largest life sciences markets, more than 20 percent of the lab spaces built are conversions from offices. In San Francisco, Chicago, Boston, and Raleigh, NC, demanded rents for lab space have increased more than 60 percent since the beginning of 2016, while office rents have increased only 15 to 30 percent.

As in a number of industries, the pandemic has accelerated an already moving trend.

“It’s been a crazy 15 months,” said Austin Barrett, head of the life sciences division at consulting firm Savills. “The office market and the laboratory market are now a tale of two cities.”

The numbers reflect a classic supply-demand case: life sciences fueled by record-breaking financing and a pandemic-driven focus on biotechnology hit a record high in April with more than 1.9 million workers, according to CBRE, a commercial real estate services firm. company. And unlike most office workers, lab scientists cannot complete their tasks via Zoom.

In all major markets, the industry’s staggering growth is creating the need for 34 percent more lab space than a year ago. statement Newmark is from a commercial real estate consulting firm.

“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, Newmark’s director of research and co-author of the report.

But transforming an office building is no more cost-effective than creating a lab space from scratch. Life sciences tenants often need more electricity and water, a higher ground-to-floor bed, certain shipping and loading zones, and even improved structural capacity for equipment loads.

Developers should consider numerous potential headaches, including changing or upgrading building codes; installation of special service elevators; elevation systems for power, exhaust and fire protection; and overhauling electrical systems, which may require cooperation from local electricity grids and utilities. They should also consider installing dedicated ventilation, especially in biology and chemistry labs that require all air to be evacuated rather than recirculated.

Still, when calculating construction costs, developers must consider other factors, said Ms. Berthelette. Time is money too.

“Basic development could take much longer, especially in markets like Boston and the Bay Area,” he said. “While it may take several years, a transformation project may only take 18 months.”

Many life sciences companies are turning to commercial real estate agents to help them navigate the turmoil.

Mr. Barrett of Savills has worked with companies such as Outset Medical, Senti Bio and Affinia Therapeutics. In a rush to capitalize on inflated rents for life sciences, he said, many homeowners are purchasing office buildings for conversion without considering the highly specialized needs of their potential tenants.

Affinia, which closed its $110 million Series B funding round in May, recently converted a building in Lexington, Mass. that was once owned by defense contractor Raytheon. Mr. Barrett helped the owners decipher key details of construction, such as Affinia’s HVAC requirements.

“There is a war for space and the hosts are taking advantage of it,” said Mr Barrett. “None of these buildings are created equal. There are lots of exciting brokers, but an office building may not be suitable for a gene therapy or cell therapy company.”

Special needs forced 10x Genomics, a biotech company with 1,000 employees in Pleasanton, California, 45 percent of whom were hired during the pandemic, to renovate an office building and build another campus from scratch.

The company announced an expansion for two new properties in March. The office building is in the same complex as its headquarters. The site, formerly used by cloud software company Workday, will now be a site for 10x Genomics’ research and development team. At the same time, the company is building a special site for the production team on the site of a former retail complex.

“As a company like 10x grows very quickly and the complexity of its labs changes, you start to need more,” said Michele Hodge, senior director of real estate and facilities at 10x Genomics. “And not every building can work.”

For the research and development site, a conversion made financial sense. But for production, managers could not find a property with suitable parameters, including enough space on the roof for electrical equipment, sufficiently high ceilings and pipes that can process the processed gases.

“It takes a lot of analysis and a lot of care into it, because when you’re doing labs you need some things that office buildings don’t always provide,” said Ms. Hodge.

Boston, San Francisco and San Diego, three biotech centers for several years, have been leading the way in office-to-lab transformations, but Seattle, Philadelphia, New York and Chicago are also seeing a number of projects. Thirty percent of laboratory inventory in Boston—equivalent to 7.8 million square feet—is current or planned office conversions, while in New York one Significant leap in life sciences real estate since the pandemic, has nearly two million square feet of conversion projects, according to Newmark.

And in San Diego, home to about 16 percent of California’s biotech companies, lab space is now priced at $44 to $58 per square foot, on average. Office space, on the other hand, goes to an average of $36.36 per square foot.

One of the major factors driving these costs up is the oldest real estate adage in the book: Location, location, location.

“It’s an area that’s really growing in clusters, not just in specific cities, but also in specific locations within cities,” said Tara Mulrooney, partner at the law firm Zetlin & De Chiara, which focuses on construction law. “Proximity to talent is vital.”