As we continue to see the ripple effects that the COVID-19 pandemic wrought on real estate markets, the life sciences sector is flourishing. Although the sector was on a prominent growth path before the virus, the pandemic only increased its momentum. With the global prescription drug market slated to surpass $1.5 trillion by 2023, demand for life science developments has soared. The life sciences industry is in such high demand, and with only so much available real estate, so the opportunity for life science conversions has made itself known.
The gains in life science conversions aren’t all that surprising. Office landlords, in particular, are grappling with a glut of empty office space that must be put into use, building brand-new life science developments takes quite a bit of time, and time isn’t exactly compatible with the newfound sense of urgency for life science buildings. Conversion projects usually take 1-2 years to finish, whereas ground-up construction can be as long as 3-5 years.
Because of the flagrant market demand, life science conversions are on the rise, but that doesn’t mean that they’re a simple undertaking. There are myriad regulatory hoops, logistical challenges, and hefty financial obligations that come with converting a building into a use for life sciences. With all that in mind, what makes a good life science conversion?
It’s fair to say that the pandemic left markets reeling, especially in the office sector. As the virus persisted and the years marched on, companies began warming to the idea of allowing their employees to continue working remotely in some fashion on a more permanent basis. With fewer people needing to come into the office, many businesses opted to lessen their office footprint, leaving many office buildings to sit vacant. Office vacancies haven’t let up, by the way, according to the Q2 2022 Preliminary Trend Announcement from Moody’s Analytics.
Transforming offices into an entirely different asset class has been a trend for a while, but office-to-life science conversions are becoming more common. As the pandemic put a spotlight on market demand for life sciences, it also left office landlords scratching their heads about what to do with their empty space. Just to provide some context, office vacancy rates are only 1 percent lower than their pandemic high in the second quarter of 2021. Since demand for life science buildings has quickly outpaced supply, many office landlords are finding that life science conversions are a feasible way to optimize their existing real estate.
There’s a sound argument for office landlords in favor of conversions, one that can be distilled into one word: profitability. Life science assets collect more money than standard office leases. Rent growth in the life science sector has outpaced that of office properties since 2016. A recent report from CBRE shows that in the 12 largest U.S. life science markets, lab and life science lease rates across the U.S. increased by an average of 11 percent last year. Meanwhile, office lease rates in those same markets only increased by 2 percent.
Then there’s the fact that life science tenants frequently stay put after they’ve discovered a location that suits their particular requirements, whether it be with regard to specific labs, world-class structures, closeness to research institutes, or experienced industrial partners. Additionally, life sciences is an on-site operation by nature, very few workers have the opportunity to work from home, even part-time. This means that occupancy levels for a life science building will naturally be higher than the post-pandemic office building, which would definitely pique the interest of office landlords as occupancy levels are still less than half of what they were prior to the pandemic’s onset.
There’s a price to this pivot. Repositioning an office into a life science building will take scores of up-front capital investments. Depending on the building, it can cost twice or even three times as much to fit out typical office space to install the necessary plumbing, ventilation, clean rooms, loading docks, and other specialized needs. Costs might be mitigated if the building in question is younger, as the outdated infrastructure of older buildings will need to be gutted and then completely rebuilt from the inside. Devin Bertsch, a senior project manager at Project Management Advisors, said that there’s definitely “a little bit of a surprise at the level of cost, definitely from a non-life science developer,” said Bertsch. “Dollar per square foot to implement can be a little bit of a sticker shock for those not familiar with the industry.”
Not just any building can become a life science building. Life science buildings have specific space requirements and specialized infrastructure that differentiates them from typical commercial construction, which makes the redevelopment process tricky. Building life science facilities is an extremely technical process, and not all structures are appropriate for this asset type.
Adequate space is perhaps the biggest hurdle when it comes to office conversions. In general, life science buildings require more storage than any other commercial counterpart to account for chemical storage and hazardous waste disposal. Labs need ample shipping and loading zones, which many offices may not have. Life science buildings have a more pressing need for backup generators, so they’ll need adequate space for those as well. Not to mention the considerations for things like ventilation and fire suppression systems.
Then there’s the issue of ceiling height. A recent article details key areas of consideration for office-to-life science conversions, and floor-to-floor height was a big one. “In a laboratory space, duct lines, plumbing lines, and wiring all need to be safely tucked behind dropped ceilings to ensure the sterile nature of the environment and to reduce the potential for spark or dust interactions,” the article explains. Most offices don’t have ceilings that go that high, which is one of the many reasons why these types of conversions can get expensive. The properties most suitable (and therefore more cost-effective) for conversion are often those that are lower-rise buildings with smaller floor plates and higher ceilings to allow for ample airflow and HVAC clearance. But once again, these features are fairly uncommon in most office buildings, to begin with.
For a conversion to work, landlords and property owners need to determine what the infrastructure of the current electricity, water, and sewer lines can support. Life science buildings draw more power and have an increased need for water and sewer services. Office design for power may be around 12-14 watts per square foot, but electrical service for life science properties needs twice that much. The wiring in the building will have to change as well since electrical in life science buildings are typically placed on the ceiling to support lab modules. Sewer services will also likely need an upgrade due to the materials used in lab facilities and the associated chemical safety standards.
Yet despite these up-front costs, there’s a (literal) wealth of demand for life science buildings, and that’s enough to convince office landlords and property owners to seize the opportunity to reposition their properties if the circumstances align. The CBRE report showed that by the end of 2021, the total office-to-lab conversions in progress in the 12 largest U.S. life sciences markets amounted to 9.9 million square feet. In fact, conversions shot up a startling 49 percent from the beginning of the year.
What about non-offices?
Office buildings don’t hold a monopoly on conversions, as is the case with the historic Budd plant in Philadelphia. This building that had once been a metal stamping facility for the automotive and transportation sectors, which were crucial to Philadelphia’s economy in the past, is finding new life as a massive biomanufacturing hub. The scale of the Budd plant’s conversion (dubbed the “Budd Bioworks”) is staggering, to say the least. At the time when Plymouth Group, a New York City-based Real Estate and Alternative Investment company, acquired the plant, the property’s size expanded to 30 acres and 2 million feet, but it has since grown to around 50 acres after a series of strategic acquisitions. The full scope of the conversion is conceived as mixed-use development, with six buildings comprising retail space, residences, and restaurants, but the property is primarily dedicated to biomedical research.
I spoke with Michael Davis, founding partner of The Plymouth Group, about the extent of the Budd conversion. “What initially drew us to the site was the sheer scale of it,” he said. “I’d like to pretend that we were these tremendous visionaries who immediately knew that this was going to become a life science space, but our initial thought was to develop a generic industrial space. But the markets have a funny way of telling you what real estate wants to be when it grows up.”
The Plymouth Group may not have understood that they could’ve easily slid into a life science conversion, but it became fairly obvious after the company purchased the plant. The Budd redevelopment is happening alongside Philadelphia’s biopharma industry boom. Philadelphia was ranked seventh on the top 10 list of biopharma clusters by Genetic Engineering & Biotechnology News (GEN). Additionally, the greater Philadelphia region placed ninth in funding from the National Institutes of Health, seventh in jobs and lab space, and sixth overall in venture capital funding. With $4 billion in projects in various phases of planning and construction, Philadelphia is experiencing a building boom in the life sciences sector, which is paving the way for the creation of thousands of new jobs, and the discovery of life-saving medical breakthroughs, and great opportunities for real estate. It seems like the timing is just as much the key to a good life science conversion as space and infrastructure.
The final key to a good life science conversion might be painfully obvious to anyone who’s worked in real estate: location, location, location. In order for life science developments to truly thrive, they need to be in some proximity to a highly specialized workforce. The Budd plant’s positioning in the greater Philadelphia area made it perfect for a life science redevelopment. “The plant is adjacent to two highways, the east 76 and the I-95,” said Davis. “We have by far and away the best sort of car commute and mass transit options of any of the regional plays because we are inches away from some of the nicest residential neighborhoods in Philadelphia, and we’re equally close to a talent pool for manufacturing and skilled labor forces.” Davis also added that Budd Bioworks is close enough to the University of Pennsylvania to reap the benefits of their academic research.
While life science conversions are trending, it’s critical for building owners to consider the unique needs of the life sciences industry and how their facility may best suit those needs if they want to reposition some or all of their property for life science tenants. Not every building can be converted into viable lab space, and long-term success depends on providing a building environment that enables all tenants to innovate. But if you have an empty office building near public transit and residential developments and you’re willing to completely transform your space, with all the dollars and architectural complexities involved, then maybe a conversion is something to consider.