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Life Sciences Resurgence Buffers Office Market Woes

While there have been some signs that the office market is turning a corner, the sector is still facing a lot of challenges. Remote work and high interest rates have put a damper on a stronger rebound, and a lot of major markets are still struggling with empty offices. The life sciences sector, which boomed during the pandemic, has been touted as a niche that could help lift some of those struggling office markets by converting vacant office space into biotech and lab space. Life science real estate is a segment that has seen considerable growth recently. The total inventory of lab and R&D space in the U.S. shot up 50 percent between 2017 and 2022, according to CBRE. But can life sciences alone help save suffering office markets? To find out, we looked at the share of lab space under construction to total office space under construction in major life sciences markets around the country.

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Source: CommercialEdge data as of July 2023; Q2 2023 Colliers data

So far in 2023, the life sciences sector certainly hasn’t reached the record highs the market experienced in 2021. A slowdown in venture capital funding driven by high interest rates, the collapse of Silicon Valley Bank, and worsening economic conditions have caused a lot of uncertainty in the industry. Still, the construction of life science developments has grown dramatically. Between 2010 and 2020, life science made up less than 5 percent of all office construction in the U.S., according to a report from CommercialEdge. In that decade, 23.9 million square feet of life science space was completed. But since 2021, 16.3 million square feet of new life science facilities have been completed. Over the last two years, one out of four new projects is a life science property, and since 2022, more than 23 million square feet of lab space has broken ground. 

Of the cities with the most ongoing lab space construction, Boston has the most volume by a landslide, with 12.4 million square feet, according to the report. San Francisco is second on the list with 5.6 million square feet, followed by San Diego (4.5 million), Philadelphia (2.2 million), Houston (1.4 million), and Seattle (1.1 million). For most of these cities, life sciences projects under construction account for almost all the office space being built at the moment. In San Francisco, in particular, 5.6 million of the 5.9 million square feet of office space under construction is lab space. Across the entire country, there are 108 million square feet of office space under construction, and 33.5 million of that is life science projects. Aside from the cities with the most projects planned, the industry is growing in emerging markets like Atlanta, Dallas/Fort Worth, and Nashville, according to a CBRE report. All of this new construction is expected to expand the country’s supply of life science space by 20 percent over the next two years.

The life sciences sector has not been immune to the slowdown in office sales, but sales prices for lab properties have remained high. Life science assets that have sold so far this year traded at an average of $770 per square foot, almost four times higher than the per-square-foot national average for all office buildings. Growth in the life science sector due to advances in CRISPR, a gene editing technology, and mRNA vaccines is expected to continue for the foreseeable future, which will fuel the need for more space. While oversupply likely won’t be an issue on a national level, it could be an issue in cities where development is at its highest.

Converting vacant office space into lab space has been on a sharp rise since 2021. In 2022, 42 conversions were completed in the U.S., and 21 more projects were underway, according to a CBRE report. As of the end of 2022, 85 office-to-lab conversions were underway, and 14 more were announced or planned. Nearly 80 projects are planned for 2024, 2025, and beyond. Despite the growth in this kind of conversion, even if all the planned projects are completed, along with the conversions delivered since 2016, it would still only take 91.1 million square feet from the market, or about 2 percent of the nation’s total office stock. Elected officials in San Francisco have touted converting empty downtown offices into lab space as a way to revitalize the office market, but the entire Bay Area currently has 34.1 million square feet of empty office space and just 5.6 million square feet of lab space currently under construction. Nevertheless, it stands to reason that conversions could make a serious difference in some life sciences markets. For example, in Boston, the total downtown office vacancy rate is 21.1 percent, equating to 14.2 million square feet of empty space. Ongoing lab space construction in the city totals 12.4 million square feet, though it’s unclear what share of that construction accounts for office-to-lab conversions. In San Diego, the downtown office vacancy is 29.4 percent, or 3.2 million square feet, while the city currently has 4.5 million square feet of lab space being built. 

For some cities where the life sciences industry is a major part of the office market, lab space construction is playing a major role in tempering vacancy figures. Growth, while not as blistering as it was a couple of years ago, is still strong in life sciences and could mean that biotech and lab space will eventually make up a higher percentage of an office market’s overall inventory. At the same time, some cities, like San Francisco, are looking to revitalize empty office districts by converting vacant offices into lab space, which could help stabilize markets even further. After the pandemic upended the office sector, the rapidly expanding life sciences segment was looked at as a saving grace for wounded office markets. And despite a slowdown in development, the niche sector has indeed helped buoy some of the country’s largest life science markets. But among the many other office markets where the life science industry is not concentrated, the life science effect will likely not make a real difference anytime soon.

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