Here Comes the Life Sciences Land Rush
Offices might sit empty, but the Covid-era demand for lab space is strong in many cities. Some building owners are swapping cubicles with centrifuges.
The office, as we’ve been told many times, is over. As the coronavirus pandemic drags on in the U.S., millions of white-collar workers remain homebound, companies are shedding their HQ spaces, and the viability of downtown business districts — and even whole cities — is in doubt due to the ongoing economic devastation of Covid-19.
But most people who work in the life sciences — pharmaceutical, biotech and other medical research fields — can’t do their jobs from their couches or backyard sheds. For them, the pandemic has helped fuel a real estate scramble.
In the last two months, pharmaceutical giant Bristol Myers Squibb announced plans to take over 360,000 square feet in a forthcoming development in Cambridge, Massachusetts, while across the river in downtown Boston, biotech firm CRISPR Therapeutics will be leasing 263,500 square feet of a development dubbed “The 105.” Those deals underscore the bullishness around this sector, which has attracted billions of dollars in institutional investment.
The trend stands in stark contrast to the general softening of the commercial real estate market, which has been rocked by the Covid slowdown and the rush to remote-in. “In March and April, the world was still reacting to a new reality,” says Brendan Carroll, a senior consultant at Cushman & Wakefield, the commercial real estate firm that represented CRISPR in the recent Boston deal. “But after that pause, the velocity around this healthy industry, which needs to take place in a physical space, continued.”
Indeed, if ever there was a virus-proof slice of the commercial real estate business, selling space for medical labs would be it. Covid-era disruptions have sparked a lot of conversations around office conversions, with commercial landlords asking about the potential of swapping out desks and cubicles with test tubes and pipettes.
“We have a lot of commercial and office clients wrestling with the existential question of the future of the office,” says Tom Sieniewicz, a partner at the Boston office of NBBJ, an architecture and design firm that has experience with the life science sector. “Life sciences has a heartbeat and tenants that are still seeking space. So many commercial owners are asking us about conversions projects; it’s something we get asked frequently.”
The life sciences boom predates the pandemic. From 2009 to the end of 2019, the amount of lab space in the United States grew from 17 million to 29 million square feet, buoyed by big technological advances such as the sequencing of the genome and rising computational prowess. CBRE data found that investment in life science real estate averaged $18.7 billion every year between 2014 and 2019. Boston, which boasts extensive medical and tech talent, is at the heart of this boom; in-demand lab space in the region only has a 4.5% vacancy rate, according to Q2 data from Cushman & Wakefield. Add a flood of private venture capital money and new startups, and the industry has set off a race for lab real estate, rippling out from Cambridge and MIT, and to a lesser degree, in other hubs such as San Diego, the Bay Area and Houston.
There’s also significant investment in ramping up lab space amid the race for coronavirus therapies and vaccines. Earlier this year, private equity giant Blackstone invested $2 billion in Alnylam, a life sciences firm working on Covid-19 treatments looking to expand its physical footprint. Nationally, developers were expected to deliver 4.5 million square feet of new space this year, more than double the five-year average, according to a report by Newmark Knight Frank, but most of those facilities will be pushed back to 2021 due to coronavirus-related construction delays. That means demand will be insatiable over the next few years: JLL predicts that domestic pharmaceutical manufacturing will increase by 16% through 2025, boosting the need for lab space.
Especially in markets where the life sciences are thriving, converting empty offices to labs can make sense. But if you’re a building owner, note that the intricacies of making such a renovation aren’t simple. Lab space varies considerably based on the research being conducted, but one requirement that quickly eliminates office conversions is floor height. Labs typically have generous ceilings of 15 feet or more, to allow for substantial ductwork and space to run vents, additional water lines, and other HVAC systems needed for research. They also need generous amounts of space for specialized machines, such as water purifiers. The conversion checklist also includes solid foundations, to protect against vibration, and any site needs to be sure it doesn’t run afoul of numerous zoning and building code issues.
Finally, labs also need the same kinds of amenity and social spaces as any Millennial-friendly startup office; the competition for talent drives firms to put a premium on perks. (See, for example, the IndieBio lab and co-working space in downtown San Francisco, a life-sciences incubator where tenants in lab coats enjoy the same industrial-chic vibes familiar to other Silicon Valley techies.) NBBJ’s Sieniewicz says that clients often put a premium on buildings that focus on wellness and good workflow; if you have spent your life involved in medical science and research, you’re likely very aware of the health drawbacks of stale air and bad filtration.
Those hurdles haven’t kept property owners from looking at the potential to upgrade their buildings, says Jennifer Luoni, director of operations at Dacon, a Boston-area architecture firm that specializes in lab and lab conversions. Despite the significant investment needed for office-to-lab conversions, it’s cheaper to convert a space than build one that’s ground up, Luoni says, but you tend to need to convert a large office to make the costs add up. “We’ve been asked to look at a lot more conversions these days, and of the 10 or so conversations we’ve had, only one or two will come to fruition,” she says.
In Boston, the older, easily convertible warehouse space in places like Cambridge has already been picked through a long time ago, says Cushman & Wakefield’s Carroll, so suburban sites tend to be where conversions are being pitched.
A good example of this demand was ABI-LAB, an incubation site that Dacon designed for a client in suburban Natick. The conversion of an old office space into small labs for startups was so successful, Dacon built a $16 million ground-up ABI-LAB 2 project across the street, which opened in January and is already 70% full.
Boston isn’t the only region where demand for lab space is booming. In addition to San Diego and the Greater Bay Area, life sciences clusters are emerging in Houston, New York City and Washington, D.C. — cities that boast “the brains and the capital,” says NBBJ’s Sieniewicz. In Jersey City, New Jersey, 95 Greene Street, a soon-to-open all-lab space, will give a former Colgate Palmolive soap and toothpaste factory that was most recently a Merrill Lynch office another life.
Office-to-lab conversions are also turning up in cities outside traditional R&D hubs. In Birmingham, Alabama, Amytrx, a startup working on an anti-inflammatory peptide therapy, took over a 3,600-square foot commercial space in the Riverhills Business Park, previously home to a doctor’s office, paving company and insurance firm, in 2017.
“Building a new lab space from scratch is typically out of the budget range of a new company, investors won’t permit it,” says Dr. Matthew Gonda, the company’s CEO. “We were big enough to be beyond the incubator stage, but not big enough to build our own place, so it was important to find a space that would accept all the hazards that go with lab space — people see pipettes and culture dishes and get nervous.”
Similar projects are also happening overseas. In the U.K., an NBBJ project called the Works transformed a 70,000-square-foot industrial shed once used to fix cars into lab and research space, creating a campus for life science and other startups in a prime position in the “Golden Triangle,” the gathering of universities and research talent between London, Oxford and Cambridge.
While the sector is booming, office-to-lab conversions aren’t ever going to be big enough to buoy entire commercial districts suffering from the office slowdown. “There isn’t a massive trend where you’re going to see, like, 10% of all office space get converted,” says John Cunningham, a broker with JLL and co-chair of the firm’s Life Sciences Advisory Council. “But in a market where there’s high demand, it can be a niche situation that makes sense.”
The sector has another key advantage: It’s unlikely to be vulnerable to any future coronavirus real estate crash.“Tech has been boom and bust, but you won’t see that with life science,” says Cunningham. “The space any firms leave will be very useful for the next company.”
The growth of lab real estate will go hand-in-hand with the boom in life sciences. As the budding industry expands its talent base and expands to new markets, it’ll eventually make more and more financial sense to invest in lab space, including office conversions, and the kinds of projects that once only made financial sense in Boston will be seen elsewhere.
“Life science isn’t just a long-term growth engine,” says Cushman’s Carroll. “It’s an industry that could even gain additional momentum during this crisis.”