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, 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.

To be sure, both measures increased greatly. But 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.

Greater Seattle has two office-to-lab conversion projects underway. At 405,000 cumulative sq. ft., the projects represent 43 percent of the life sciences space under construction in Seattle. Two new, ground-up developments make up the rest of the 942,000-sq.-ft. pipeline under construction. Additionally, there is just shy of 2.4 million sq. ft. of planned life sciences projects, projected to deliver in the next two to four years. The vacancy rate for lab and R&D space in greater Seattle, including Bothell, was 8.6 percent in the first quarter of 2022, according to CBRE research. In comparison, total office vacancy in the Puget Sound region was 16.6 percent.

“When the vacancy rates of lab space are about half that of office, investors start to seriously consider the idea of an office-to-lab conversion. But not every office building is a good candidate. Life sciences companies have very specific facility needs that can be expensive to build out,” said Marcus Yamamoto, senior vice president with CBRE specializing in life sciences and healthcare real estate.

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 lab space in comparison to office.

Specifically, lab lease rates increased by an average of 11 percent last year in the 12 largest life sciences hubs. Meanwhile, office lease rates in those markets increased by 2 percent. Asking lab lease rates spiked in Seattle in 2021, influenced by new Class A space delivered last year.

“Overall, asking rates for Class A lab space are up 25 to 30 percent over the past 18 months, which places Seattle among the top life sciences hubs for rental rate growth,” added Mr. Yamamoto.

To read the full report, click here.