In Philly, A Hospital-Turned-Lab Conversion Shows Appeal Of Low-Cost Space
Philadelphia’s Hahnemann University Hospital campus — a teaching and research center that closed before the pandemic — was empty for years, an institution in search of a new role.
Its recent revitalization and reopening as a new source of affordable lab space offers a case study in new adaptive reuse opportunities and evidence of a dearth of budget-friendly workspaces for biotech startups.
Iron Stone Real Estate Investments, a private equity firm focused on acquiring and redeveloping antiquated healthcare infrastructure, including disused hospitals, purchased the campus in 2021.
The Hahnemann facility, near Drexel University, offered a unique chance to fill a void in the market, Iron Stone Director of Operations Jason Friedland said. Race Street Labs, as Hahnemann is now known, is a turnkey lab offering meant to appeal to more cost-conscious biotech firms.
“If you start over, you’re losing a lot of the existing value, and not using the existing infrastructure on-site,” Friedland said.
Converting the hospital, which included 200K SF of lab space, would be less expensive due to existing medical and building infrastructure. He estimates roughly $400 per SF of preexisting value in the form of HVAC systems and electrical was already built into the space, making conversion quicker and cheaper.
Iron Stone theorized startups clamoring for some rental relief would flock to the new graduate lab spaces. They can offer space at $43 per SF, significantly less than the going rate of $57 in the city core and even competitive with some suburban markets.
Friedland said the lab amenity race, including outdoor spaces, high-end dining and better office facilities, was mimicking the race found in apartments.
“Who can build the fanciest, most expensive lab building to attract tenants?” Friedland said. “We recognized if we kept the existing layout, we could turn it into a modern research building for a fraction of the cost of what competitor developers were spending to create new lab space.”
Philadelphia’s life sciences market doesn’t suffer from a supply glut as severe as other markets, said Cushman & Wakefield Executive Managing Director Paul Garvey, who’s helping lease the space. Vacancy rates hover around 5%, although that is expected to rise in coming quarters as new buildings are delivered. But like many markets, the current fundraising and venture capital situation is leaving smaller, younger startups focused on their run rates and conserving cash.
Iron Stone believes Race Street Labs can thrive in a market with depressed demand. While unused hospitals near life sciences hubs aren’t just sitting on the market waiting for developers, Friedland does believe there’s a big market for developers focused on more affordable options.
Race Street has finished two floors of converted lab space and signed one tenant, Zahav Biosciences, with another undisclosed tenant in the works. Friedland said Zahav was dissuaded from looking for space in the city due to cost until the firm found out about Race Street.
“I think as the market comes back everyone will be much more focused on the amount they’re spending on rent,” he said. “I think this is going to be a wider repricing of research space.”
