More and more office buildings are becoming laboratories in major life science cities
Investors are eager to buy life science buildings, which may look like conventional office buildings on the outside, but contain hard-to-find lab space on the inside.
In a dozen large cities with life science companies, demand is high and rents are rising rapidly for laboratory space and life science buildings. Investors are willing to pay high prices, accepting low returns to invest in these hard to find properties.
In response, a growing number of investors are converting conventional office buildings to include laboratory space.
“They are considering converting their properties to meet the immediate demand for life sciences,” says Daniel Littman, associate director of capital markets research for Newmark, working out of the company’s New York offices. “Institutional investors in the largest life sciences markets are actively re-evaluating ‘highest and best utilization’ for their office, flexible and industrial portfolios. “
The prices investors pay for life science real estate keep rising.
“The prices are very aggressive,” says Ian Anderson, senior director of research for CBRE, working out of the company’s offices in Philadelphia. “Cap rates below 5% are not uncommon for laboratory and research and development properties. “
In March 2021, Blackstone BioMed paid $ 3.45 billion for Brookfield’s 2.3 million square feet. portfolio of laboratory properties in Boston and Cambridge, Mass.
This price corresponds to an estimated capitalization rate of 4.5%, according to CBRE. In another recent deal in South San Francisco, undisclosed investors agreed to pay more than $ 400 million for lab properties, at an estimated cap rate of 4.0%, according to Anderson.
The volume of deals that investors enter into to invest in life science properties is still tiny compared to the office building market as a whole or other major property types, although it is growing rapidly.
Investors raised over $ 15 billion in 2020, led by Blackstone, but also emerging players such as IQHQ and Breakthrough Properties, traditional healthcare REITs such as Ventas and institutional groups such as DivcoWest and Clarion Partners, according to Littman of Newmark.
Investors closed more than $ 10 billion in deals to buy life science properties in 2020. This represents 16.4% of dollars invested in all office buildings, a record amount, according to Newmark.
“Investors are clearly increasingly comfortable with the real estate industry, based on its recent performance and strong growth prospects,” said Anderson. “Less attractive choices among certain types of classic properties… which drives up the price of life science properties. “
Life Sciences Looks Good Compared to Office Space Overall
During the pandemic, many office workers have had to stay at home to slow the spread of the coronavirus. More than a year after the start of the pandemic, the number of workers entering offices to work in person in August 2021 was still only a fraction of the normal amount.
In contrast, many life sciences workers counted as essential workers and continued to come to work, even in the worst days of the pandemic. These lab workers generally cannot do their homework. In the long run, life science properties appear likely to retain their value even though large numbers of office workers globally continue to spend part of the work week working remotely.
Demand for life science properties was also high before the pandemic. Average rents for spaces dedicated to life sciences have nearly doubled (increased by more than 90%) in San Francisco in the five years that ended in the first quarter of 2021, according to Newmark. Life sciences rents also rose rapidly in Chicago (over 80%), Raleigh, North Carolina (over 80%) and Boston (over 60%). This is several times the increase in rents for all offices in these markets.
“In Boston, tenants in the life sciences sector looking for space in Cambridge would have to wait almost two years for space available,” says Littman.
Renovate the right buildings to make them a laboratory space
Developers are quickly converting some existing office space into life science properties, but not all office buildings are suitable for including lab space.
“Adding lab space to a conventional office building is certainly possible, but there can be several obstacles,” says Anderson of CBRE.
Ceilings should be at least 13 feet high – more established companies like Novatis or Pfizer expect ceilings that are 18 feet high. Laboratories requiring extensive ventilation or power systems may need even higher ceilings. Wet lab space also needs floors that can support 100 to 150 pounds per square foot, compared to just 80 to 100 pounds per square foot for conventional office space, and a powerful, uninterrupted power supply.
“Assuming the structural elements can support the conversion, I would say it takes around $ 100 to $ 150 per square foot of base construction costs,” says Liz Berthelette, research manager at Newmark in Boston. These renovations often include pH neutralization, chemical storage, MEP upgrades, and cargo upgrades including freight elevators. Life science tenants often make another $ 250 to $ 300 per square foot in leasehold improvements.
The building should also be located in a zoned area for the types of activities undertaken in a laboratory. More broadly, the property must be in a location with a demand for life science real estate
Companies that need lab space tend to locate near other life science companies and major research universities. There are about a dozen metropolitan areas where life science companies can hire enough skilled scientists and technicians to thrive. This includes established life science markets like Boston, San Francisco, San Diego, North Carolina, Seattle, Philadelphia, Maryland, and Los Angeles, in addition to metropolitan areas where life science hubs are thriving.
“Markets such as New York, Chicago, Houston, Denver and Austin, these places have the potential to become major life science hubs,” says Littman of Newmark.