Offices Converted To Labs Might 'Backtrack' To Prior Use After Demand Shift
The life sciences market has lost so much steam that office buildings converted to meet the needs of a once-booming lab market may now be better off reverting back.
When the life sciences market was surging, tight vacancy rates in Cambridge and the Seaport forced companies to look into secondary and tertiary markets in the suburbs. Meanwhile, the office market was struggling and landlords seized the opportunity to convert office space into labs.
Now, with a slowdown in the lab sector, developers and investors are looking at their options for underperforming conversions, executives said at Bisnow's Boston Biotech Summit, held Dec. 10 at The Westin Copley Place hotel.
Meanwhile, the office market has begun to recover, with Boston-area leasing reaching 1.3M SF in the third quarter, according to CBRE.
"These new developments that may have to backtrack to office, they're really going to fill a need," Anchor Line Partners Executive Director of Asset Management DeAnna Murphy said. "Three years ago, every Class-B project out there was looking for its highest and best use … and it converted to lab. Well, that ended up leaving us a little short on good office space in the suburbs."
At the height of the life sciences boom, developers were drawn to these conversion projects because they did two things: created new uses for underperforming office buildings and added supply to a rapidly growing sector.
In 2022, research and development conversions increased by 49% across the top 12 U.S. life sciences markets to 9.9M SF, especially in major life sciences hubs San Diego, Boston and San Francisco, according to CBRE. However, these conversions were costly, ranging from $675 to $1,200 per SF in Boston alone.
Distress has already begun to emerge in the life sciences market in the suburbs. In November, the 109K SF Burlington BioCenter, an office-to-lab conversion, sold for a third of the $103M price tag it fetched in 2022, the Boston Business Journal reported.
Now the market has begun to correct itself, developers aren't seeing the same returns that they did two years ago, leading them to look for other types of tenants, including in the office market.
"You'll see some space maybe transition back to office space," Berkeley Investments Director of Asset Management Dan McGrath said. "You'll see some space transition to cleantech. But it's going to take a few years, but eventually, we'll get back to the norm that we had 8M SF of space constructed in '24. It's going to drop to about a million next year."
Greater Boston's 1.3M SF of office leasing activity in the third quarter represented a 500K SF increase from Q2, according to CBRE. Of the new leases signed, 80% of them were larger than 15K SF, helping keep vacancy steady at 19.2%.
Lab conversions and ground-up construction have pushed vacancy to a 20-year high, according to CBRE. In Q3, vacancy stood at 19.4%, a 2.9% increase from the previous quarter and triple that of the same quarter last year, according to CBRE.
BioMed Realty's 492K SF office-to-lab conversion at 601 Congress St. in the Seaport hasn't announced any tenants after delivering almost two years ago. In April 2023, life sciences REIT Alexandria Real Estate Equities sold off its 227 Grove St. campus in Newton for $117.5M and dropped plans to convert the 512K SF property into lab space.
Some developers are still moving forward with lab conversions, including Nan Fung Life Sciences, which received approval Thursday for a 21K SF lab conversion project at Two Financial Center in Boston's Leather District. California-based Phase 3's partial lab conversion at 55 Summer St. was approved in June 2023.
But for some developers, the conversion back could be a difficult financial decision, as there is a wide gap between average lab rents and office rents in the suburban market. In Q3, average triple-net lab rents across the suburbs stood at $80.97 per SF, while offices went for $29.41 per SF.
"Lab rents and office rents are not the same, no matter how much we want them to be," Murphy said. "There's always this kind of fancy dance that happens between both parties to get the right product for people at the right price, but is also kind of benefiting the people who developed it over numerous years to get it there."
As the market continues to correct itself, experts in the industry believe there will be a move to consolidate space closer to bigger hubs like Kendall Square and the Seaport, leaving behind tertiary suburban markets that lack a sense of community.
"I think that there is a divergence between the Seaport, Cambridge kind of areas, and then I'm just going to lump everywhere else into a bucket," Abi-Lab principal David Pratt said. "There's going to be a real resistance to a company taking 10K SF to 20K SF if they're the only life science tenant in a building. It's just a natural problem that needs to be addressed."
