Rising Construction Tide Lifts Office-To-Lab Conversions

A sharp increase in construction of life sciences labs in the U.S. has included big gains in a premium category: conversions of office buildings to labs.

According to a new report from CBRE, San Diego was the second busiest market for office-to-lab conversions in progress with 1.6 million sq. ft. under construction at the first quarter of 2022.

“San Diego continues to dominate the life sciences industry due to our mature ecosystem consisting of scalable inventory, robust capital investment, and industry leading universities, institutes and health systems,” said CBRE’s Matthew Carlson.

Nationally, office-to-lab conversions in progress in the 12 largest U.S. life sciences markets at the end of 2021 amounted to 9.9 million sq. ft., up 49 percent from the beginning of the year. In comparison, ground-up lab construction increased 42 percent to nearly 18.8 million sq. ft. by the end of 2021.

While both measures increased greatly, the jump in conversions underscores the challenges in building enough lab space to meet demand in recent years. Lab vacancy in many top markets sits at 4 percent or less.

The cost to fit out lab space with necessary plumbing, ventilation, clean rooms and other specialized considerations can be double to triple that of fitting out standard office space. Even so, the increase in conversion activity last year indicates developers and investors are willing to cover those costs to capture the potential rent growth of San Diego lab space in comparison to office.

Specifically, San Diego lab lease rates increased approximately 25 percent in 2021. Comparatively, lease rates among the 12 largest U.S. life sciences markets increased by an average of 11 percent. Meanwhile, standard office lease rates increased two percent.

“Converting an office building for life sciences use often can be done more quickly than building labs from the ground up,” said Matt Gardner, CBRE Americas Life Sciences Leader. “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.”

                                                      Busiest Markets for Office-to-Lab Conversions

Market	In-Progress Conversions at Q1 2022*	Percentage gain from Q1 2021
Boston	3.3 million	264%
San Diego	1.6 million	-9%
Raleigh-Durham	1.1 million	8%
Los Angeles	667,104	339%
Washington, D.C.-Baltimore	665,394	78%
New York City	660,403	-53%
San Francisco Bay Area	640,347	266%

* In square feet.
To read the full report, click here.