Despite the Cost, Construction of Life Sciences Properties Brings Strong Returns

Although a costly proposition, investors are realizing strong returns on newly built life sciences properties or those that are converted from other uses. Under-construction projects in the top 12 U.S. life sciences markets increased by 44% overall last year. Ground-up development increased by nearly 42% and lab and R&D conversions increased by 49%. As demand continues to rise, developers are getting creative in converting underutilized office properties to life sciences space.

Figure 1: Change in Life Sciences New & Conversion Construction, Q1 vs. Q4 2021

Source: CBRE Research, Q1 2022.

Converting other property types to lab and R&D space is both costly and challenging. The infrastructure needed to support life sciences tenants is more robust than that in standard office or even most industrial buildings. Many require more specialized amenities, including but not limited to clean rooms, vivariums and negative-pressure rooms.

Figure 2: Laboratory Building Requirements

Source: NAIOP, SGA, PharmExec.com, WBDG, University Lab Partners, GSA, CBRE Research, Q1 2022.

The cost to construct a new laboratory building in the top three U.S. life sciences markets—Boston/Cambridge, San Diego and the San Francisco Bay Area—ranges from $675 to $1,200 per sq. ft., compared with $600 to $850 per sq. ft. for standard office building construction. Laboratory fit-out costs range from $300 to $650 per sq. ft. compared with $110 to $315 for standard office fit-outs. A large portion of this cost differential comes from the increased mechanical, electrical and plumbing engineering (MEP) needed for a life sciences facility.

Figure 3: Fit-out & Construction Costs per Sq. Ft. for Life Sciences vs. Office Properties in the Top Three Life Sciences Markets

Note: Laboratory fit-out is for space with basic services already in place and building cost is for core/shell only. Costs are averages for basic laboratories with no special requirements and for standard Class A office buildings.
Source: CBRE Research, Q1 2022.

The prospect of greater occupancy levels in life sciences facilities vs. standard office buildings is attracting more investors. Remote working arrangements are rather limited for most life sciences tenants, meaning laboratory space is not seeing the same short- and long-term effects of the COVID pandemic as office space. Additionally, the pandemic has fueled tremendous growth of the life sciences sector. Life sciences IPOs doubled from 2019 to 2020 and hit a record high of $11.2 billion in 2021. With low vacancy and rising demand, rental rates increased by 11% last year across the top 12 U.S. life sciences markets, compared with just 2% growth for their office markets. The top three U.S. life sciences markets had vacancy rates of just 4% or less at year-end 2021.

In the large metros, conversion opportunities are becoming increasingly attractive as available land for new construction becomes sparse and tenants are in need of more space. The faster turn-around time of conversions over new construction is an added incentive. With growing acceptance of remote working arrangements, conversions of some office buildings to life sciences use is on the rise.

Figure 4: Change in Average Asking Lease Rate in Top 12 U.S. Life Sciences Markets, 2021

Note: Seattle laboratory rates fluctuate due to limited vacancy and an influx of new Class A space in the urban market.
Source: CBRE Research, Q1 2022.