The coronavirus pandemic has dealt a massive blow to office buildings and the people who invest in them. Now that many companies have had their staff working remotely for 18 months and counting, it's clear that productivity does not have to hinge on employees gathering under the same roof. And so many companies are making plans to shed office space to enjoy the cost savings involved.
Remote work also allows companies to widen their talent pools. With proximity to a specific office location no longer being a requirement, employers can hire with greater flexibility and ease.
As a result of this shift, there are millions of square feet of office building space just sitting empty across the country. In fact, the vacancy rate for downtown office buildings has risen to 16.4% over the past year on a national level, reports Cushman & Wakefield. But office building landlords may have a new option for generating revenue: turning office space into laboratories.
Why office building conversions make sense
Across the six largest U.S. life sciences markets, more than 20% of the laboratory spaces being built to service those markets are conversions from offices. Asking rents for lab space have risen more than 60% since early 2016 in key markets like San Francisco, Chicago, Boston and Raleigh. Office rents in these cities, by contrast, have risen just 15% to 30%.
Right now, there's a huge need for laboratory space as funding has been coming in at a rapid clip for biotech and life sciences companies (a pandemic will do that). In fact, as of April, the life sciences sector had a record high 1.9 million employees, according to CBRE. And unlike so many workers today, laboratory employees cannot do their jobs remotely -- hence the need for more space. In fact, demand for lab space is up 34% compared to a year ago, according to commercial real estate advisory firm Newmark.
Of course, some might argue that converting office space to lab space isn't worth the hassle. Laboratories commonly have different needs than your typical office, like upgraded electrical systems, better ventilation, enhanced fire protection, and even, in some cases, higher levels of structural capacity to house the right equipment. But constructing laboratories from the ground up can take a lot longer than converting existing buildings to lab space, and so going the latter route still makes a lot of financial and logistical sense.
Where office-to-lab conversions are booming
Boston, San Francisco and San Diego are seeing the most office-to-lab conversions. A good 30% of lab inventory in Boston stems from existing or planned conversions. And in San Diego, laboratory space is now priced at $44 to $58 per square foot on average. Office space, by contrast, is commanding an average of $36.36 per square foot.
In the coming months, more companies should begin firming up their return-to-office plans and making decisions about how much space they want to retain or sign up for. The good news for office building landlords is that they no longer have to be as reliant on their typical tenants to get leases signed. If traditional companies aren't looking for office space, those in need of lab space may be more than willing to pay a premium to take up residence in office buildings instead.