How An Office Space Shortage Is An Opportunity For Lab Developers

Developers in the largest U.S. life sciences markets are increasingly leasing pricey speculative lab and lap-capable projects to office users in pursuit of the same brain power as would-be lab tenants.

“In markets where lab demand has been both robust and prolonged, the conditions that attract lab users implicate the same conditions and demographics that many of today’s office users seek,” Perry Brokerage Director of Intelligence Brendan Carroll said. “It may be a little indirect but highly effective, somewhat like following the seals to find the sharks.”

Boston and San Francisco are the top life sciences clusters in the country, but both cities are also host to thriving technology industries competing for coveted space and labor. Lab developments can’t go up quickly enough in places like South San Francisco and Greater Boston’s East Cambridge submarket, one of the tightest lab markets in the country. But potential life sciences tenants are now competing with tech firms that have no other space options but to take pricier, lab-capable product to remain close to the desired talent pipeline of nearby universities.

Office-to-lab conversions have catered to Greater Boston’s growing life science industry, with 2.7M SF of today’s lab space in Cambridge originally being developed as office. The city became a lab-dominant market for the first time in 2017, forcing some active office tenants to swallow higher rents if they want more space. While Kendall Square in East Cambridge commands office rents averaging $75/SF, newer speculative lab-capable product is in the lower $90s, according to Perry data.

“The Cambridge office supply has decreased in size over the last five years because any building with the possibility of converting into lab space has done so,” Cushman & Wakefield Executive Vice Chair Bob Richards said. “If you’re a large tech user and want to be in the Kendall Square action and have access to the best and brightest coming out of MIT/Harvard, you have to pay lab rents for your office product.”

Lab-capable projects are popular, as spaces are built with larger floor plates and higher ceilings to handle potential lab tenants and their utility requirements. Costly lab build-outs are not incurred until a lease with a life science tenant has been signed. Cambridge’s tech sector isn’t avoiding buildings like these. Instead, it is moving in, incentivizing developers to build nearly everything lab-capable.

“The more a developer can set themselves up for a broad audience for their product, the better it is for them,” SmithGroupJJR Director Adam Denmark said. “There is definitely a blurring between office and lab space for certain types of spaces.”

“It may be designed for lab, but that doesn’t mean it has to be used that way if you have someone willing to pay the rent,” Scheer Partners Senior Vice President Matthew Brady said. “It’s still a trophy product.”

In Boston, Facebook leased 130K SF at 100 Binney St., a development by Alexandria Real Estate Equities otherwise filled by biotech startups and Bristol-Myers Squibb. Health technology company Philips will move its North American headquarters from suburban Boston to Cambridge Crossing in East Cambridge in 2020. The moves are among several in Greater Boston by office tenants taking big blocks of space that could have either accommodated or were envisioned as labs.

Tech tenants are also filling up space widely marketed to life sciences firms in San Francisco. Dropbox leased close to 750K SF at Kilroy Realty Corp.’s The Exchange, a development in the California city’s Mission Bay neighborhood. Some say that is a result of the Bay Area having some of the lowest office vacancy rates in the country and there being nowhere else to go. Downtown Oakland had a 5.3% office vacancy rate at the end of Q1, compared to downtown San Francisco’s 5.7%.

“Dropbox likely couldn’t find a block of space that large in the existing office building inventory,” CoStar Group Market Economist Jesse Gundersheim said to Bisnow via email. “Dropbox, as well as Uber and the Warriors, have taken over development sites in Mission Bay that were suitable for biotech, due to the market’s dwindling supply of traditional office buildings offering large-block availability and limited development pipeline.”

Back in Boston, the fight for space in East Cambridge, which sustains a less than 1% lab vacancy rate, has fanned space wars elsewhere in the city. Life sciences companies are now responsible for more lab space at Boston Landing, a transit-oriented development west of downtown. The complex is developed by NB Development Group, a real estate arm of New Balance, and was initially pitched as a sports-and-innovation-centric development.

But commercial space above training facilities for the Boston Celtics and Boston Bruins has since attracted a mix of office and lab tenants, changing the development plan going forward for NB Development to enable a wider possibility of tenants in a competitive market.

“Frankly, it’s a function of lab tenants not being able to wait for projects to be developed and not being large enough a tenant to kick off a development,” NB Development Managing Director Jim Halliday said. “When we make the decision to start the one remaining commercial office/lab development site, we’re designing that to be lab-ready. Whether it gets tenanted by a lab tenant or not remains to be seen, but the whole building will be lab-ready.”